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Buying a computer system - the smart way.

buying a computer system - the smart way

Most computer systems acquisitions start haphazardly and, not surprisingly, that poor start often comes back to haunt the buyer. The classic early error is to focus on what kind of computer hardware to buy.

To start smart, conduct a requirements analysis to determine information and data-processing needs. Try to answer the question: What does our association need a system to do in the immediate and not-so-immediate future? Include requirements for computing speed, number of users, types of users, and so forth.

The association's staff can conduct the requirements analysis with the supervision and review of an independent consultant. If lack of time or expertise is an issue, delegate the project to a consultant.

Assembling the team

As the requirements analysis approaches completion, thoughtfully assemble the all-important acquisitions team.

For associations, this team generally consists of the chief financial officer, the chief data-processing officer (if there is one), major users of the system, and the independent consultant involved with the requirements analysis. It's also recommended to assign legal counsel.

Assign one staff person as team leader. Establish at the outset whether the team leader is also acting in the capacity of "ultimate decision maker" - the person who has the final authority to sign a contract. If it is not the same person, coordination between the team leader and decision maker becomes necessary.

A lawyer experienced with computer systems contracts can play a key role in preliminary planning, contract drafting, negotiating, and system implementation. Associations, however, commonly make two mistakes when involving legal counsel in computer acquisitions.

They either consult a lawyer solely for planning advice - planning without drafting - or they ask a lawyer to review a contract after a deal has been negotiated - drafting without planning. Both approaches result in ineffective legal representation.

Planning without drafting leaves * little likelihood that the lawyer's upfront advice will be implemented as intended; * no opportunity for legal input in the negotiations; * no opportunity for the lawyer to modify advice based on subsequent developments in the law or in the acquisition process; and * no opportunity for the lawyer to advise the association on the vendor's "standard form" contract.

Drafting without planning leaves * no opportunity for the lawyer to advise the association on the many business and legal planning issues in the acquisition process; * no opportunity for the association to advise the lawyer about its needs and expectations in the system acquisition; * no opportunity for the lawyer to influence the selection of the starting point for the contract document; and * no opportunity for the lawyer to influence the substance of the contractual terms.

In general, the earlier the business and legal issues in the contract are identified, the greater the association's opportunity to achieve its goals.

The request for proposal (RFP) is usually the first official document distributed in the contracting process. This document is important because it sets the stage for many aspects of the acquisition. A well-done RFP can greatly increase the chances of receiving attractive, responsive proposals from vendors, which, in turn, increases the chances of a good acquisition.

The RFP should generally include detailed consideration of the results of the requirements analysis and a selective treatment of significant contract issues based on legal input.

A business mind-set

Too often, associations and other purchasers view a computer systems contract solely as a legal document. The more practical view is that the contract is a business document designed to maximize the association's business effectiveness and minimize business risk by structuring a balanced transaction allocating the economic rights and risks fairly between vendor and client.

There are many business reasons to conduct computer system contracting carefully. First of all, most organizations have not acquired major systems frequently enough to have a previously defined acquisitions process in place.

Second, the true cost of a major acquisitions mistake is not the cost of the hardware and software. It's the cost of not being able to conduct business - whether it be mail-order publication sales or the planning of major trade shows - in a normal fashion for as long as it takes to correct the error.

A mistake like this can have disastrous effects. One organization, whose accounting department lost track of payroll tax payments due to the government when its system failed, found out that even the Internal Revenue Service can get interested.

The staff neither made the payments nor realized they had missed them until IRS interceded. By that time, the missed payments had accumulated to quite a large sum, and the organization did not have the liquid resources to pay the back taxes plus interest and penalties. IRS threatened to close down the organization and seek a court-ordered asset sale to get its tax money.

Finally, the miniaturization of hardware, proliferation of software, networking of different departments and functions, and decentralized purchasing of computers within an organization make the contracting process and the related legal input even more important as a business planning tool.

At a disadvantage

Despite proper planning, most associations enter computer negotiations at a disadvantage for several reasons: 1. They have not recently negotiated such a contract and have no standard form; the vendor does it all the time and has carefully structured such forms with legal advice. 2. They have only a limited understanding of the vendor's product and the competition's products; the vendor knows much more about both. 3. They have little knowledge of how well the vendor's product has worked in comparable environments. 4. They have limited information on which to evaluate how well-equipped, financed, and staffed the vendor is to successfully install a system. 5. They have no idea how easy it would be to obtain compensation from the vendor if all does not go well.

From the vendor's viewpoint, the association is only one of many clients it deals with. It believes the association has a need that can be satisfied by its equipment and that the transaction can be profitable if it is consummated carefully. Frequently, vendors enter negotiations wanting to complete the transaction quickly and use their standard form contracts without changes. However, most vendors will make reasonable adjustments, because one of their primary goals is to build a base of satisfied customers.

Rights and risks

Moreover, as the supply of vendors proliferates, competitive forces will help create an environment in which more and more users can negotiate a fair contract. It makes sense, then, for associations to familiarize themselves with the ways in which contracts can allocate economic rights and risks.

No standard solutions exist, because each transaction becomes a series of negotiated solutions tailored to the particular needs of the vendor and the association. Discuss each of the following issues with legal counsel before you prepare an RFP. 1. Contractual security for vendor performance. Not many acquisitions will turn out to be trouble-free. The closer an association gets to custom installations, the more likely it is that problems will occur.

The association's best security for problem resolution is contractual security, which provides an incentive for vendor resolution and economic protection if such resolution is not forthcoming.

There are many paths to contractual security, including deferred payments, letters of credit, performance bonds, and (for smaller vendors) personal guarantees. Each option has its pros and cons. 2. Verbal versus written representations. Major discrepancies often exist between the verbal and written representations on which the user or association relies in deciding to hire a particular vendor and the contract provisions initially offered by that vendor. It's the association's responsibility to reduce or eliminate those discrepancies.

This can be accomplished in several ways. For example, you can incorporate all written material received from the vendor - proposal, letters, brochures, and so forth - into the contract as contract exhibits. State this in your RFP.

In addition, incorporate verbal representations as to relevant vendor experience into contract clauses. Similarly, include representations as to the vendor's equipment capacity, staff, and financial resources to successfully complete the job in the contract. 3. Source codes and source code escrows. Software comes in two languages: the "object" code written in English and the "source" code written in computer language. Without the source code, the user cannot proceed if the vendor has difficulty, such as bankruptcy. With the source code in the association's possession or in the possession of a fiduciary company serving as an escrow agent, the user can be protected from such difficulty.

Vendors generally do not like to make the source code available because it is proprietary, part of a valuable business asset it sells to make money. Whether the vendor owns the code or licenses it from the owner, it hardly wants copies freely available to others. Contracts should therefore provide for source code escrows to be released to the user under specified circumstances in the contract.

Major vendors increasingly have such national arrangements in place, facilitating user requests for such escrows. Smaller vendors may opt instead to grant users the actual source code to be held under specific terms, rather than setting up escrows for individual users. Associations that fail to secure access to the source code put themselves at substantial economic risk because they will be unable to maintain, modify, or troubleshoot the software without the code, if and when the vendor fails to do so because of disagreements or its own business priorities or difficulties. 4. Acceptance testing. Will it work, is, of course, the main question. It's important to most users that the system work from the outset without the expenditure of substantial unanticipated money or staff time.

To ensure this, you need a detailed section for acceptance testing in your contract, including testing standards and procedures worked out in advance with the help of an independent consultant.

Acceptance testing should be performed on the user's site with the acquired hardware and software installed, and in a "real world" environment performing the tasks that will be required of it after the association accepts the system. This process, in combination with fair deferred payments, is often the user's best bet for a successful acquisition. 5. Warranties. Vendors often have warranty disclaimers that state the vendor does not promise the hardware or software will work, satisfy the user's requirements, or meet any other requirements except for the technical and functional specifications.

This is an area in which the gap between the vendor's representations about everything the system will do and the vendor's contractual provisions is most glaring. One prominent national vendor even goes so far as to include in one of its standard forms a "non-negotiable" clause in which the user provides a warranty to the vendor that the vendor's system satisfies the user's needs.

An effective negotiation, however, should result in middle ground that includes some warranties for a reasonable period. A contract with no warranties and with broad warranty disclaimers may obviously not be worth the paper on which it is written because it may not provide the user with any legal claim for breach of warranty.

A user might be able to convince a court that such a contract is unenforceable. Some statutory warranties may, in this case, supersede the contract. But this approach is an expensive and risky way to obtain warranty protection. 6. Liability limitations. Most standard form contracts contain severe limitations on the vendor's liability. For example, if the system doesn't work, the contract may limit the vendor's liability to some portion of the contract cost.

As stated above, however, the user's economic risks may far exceed even the total contract cost. One goal in this process is to arrive at liability limitations that provide reasonable user protection, while enhancing vendor incentive to install a responsive, working system. 7. Proprietary rights. Generally, users end up owning hardware that they buy rather than lease. Software, however, is another story. It is commonly licensed, not sold outright, when the vendor wants to continue selling it to others and to prohibit users from selling the program to other users. Custom software may be subject to an outright purchase.

Many details of ownership and use of software need contractual attention. If software is licensed to an association, can the association copy it for its affiliates to use, for disaster recovery backup use, or for the use of a limited (or unlimited) number of additional staff people to use as the organization grows?

In the case of custom software, can the association purchase it outright? What rights may the vendor retain to market it to others? Can the user do its own software modifications? Must the vendor do such modifications for the user without charge? For how long? Will the vendor reimburse the association for its costs from charges by third parties that the software infringes on proprietary rights under copyright or patent laws?

The above examples barely scratch the surface in discussing ways in which contract negotiations should allocate risks and rights to the association and the vendor. These allocations, much more than the contract price, can ultimately determine how much the system really costs the association.

Off to a good start

Vendors, especially large ones, traditionally request or require that users sign their standard contract form. As competition among vendors increases, the size of acquisitions becomes larger, and associations become more sophisticated, however, users will be able to exert more leverage in this area. This may include, for example, the ability to use the user's standard form, which most likely represents its lawyer's starting point.

Don't overlook the early opportunity to influence the contractual starting point. The party drafting the first contract draft and subsequent drafts generally obtains a significant advantage.

Together with its lawyer, an association can prepare a list of prioritized contractual needs, realizing that it cannot get everything it would like to have in a balanced contract. The acquisitions team should agree in advance on which items are negotiable, which aren't, and which are more important than others.

Armed with the priority list, the association's lawyer can negotiate with the vendor's lawyer to reach agreement on a comprehensive set of contract provisions before drafting or reviewing a draft contract.

This approach can help identify issues early on; prevent multiple redrafts of a contract; establish a cooperative, collaborative negotiating environment; and save the drafting party from the embarassment of having the other party prepare an exhaustive set of objections to the first draft of the contract.

Based on what makes more sense in each circumstance, this early negotiating session should result in either a set of contract points agreed upon and initialed by both sides or a letter of intent covering such points and signed by both sides.

Strategies for associations

No one strategy works best for all users all the time. However, users should seriously consider incorporating some general rules gleaned from past practice into their overall strategy. Pick and choose as you would at a cafeteria. 1. Always have an alternative. One of the most effective vendor strategies is to let a user know, in a courteous and tactful way, that although the vendor would very much like the sale, there are other users to whom the vendor can sell.

An association should adopt the reciprocal position, namely that the proposed acquisition is its first, but not only, choice. Narrow your selection to two or three vendors, but never to only one.

Establish a time frame by which you will either complete negotiations with the vendor of choice or move on to the next, and communicate your position tactfully to the first-choice vendor. 2. Never get emotionally committed. If an acquisition team gets too committed to a particular deal, that loyalty will color its judgment on contract negotiations and result in a substantially eroded set of contract rights and risks.

Associations can avoid this situation by giving their lawyer substantial negotiating leeway and giving the lawyer's advice on major contract issues substantial weight. This position communicates to the vendor that there is no emotional commitment.

What can an association do if it is already, or almost, emotionally committed? Reduce direct contact with the vendor and increase reliance on legal counsel as a buffer against that commitment preventing a fair contract.

Even in this situation, the association should remain personally involved - in the background - in making the final decision on provisions that could be "deal breakers," as identified in the advance list of contract needs. 3. Allow sufficient time. Associations often ask, "How long will the contract take?" The truthful answer is, "It depends." Among other factors, the time period depends on the * amount of advance planning; * existence of an agreed-upon letter of intent or list of contractual provisions initialed by both sides; * importance of the transaction to the user and the vendor; and * relative consequences to the user if the transaction is delayed a little longer versus consummated immediately but without some of the key provisions that could be negotiated if time permitted.

An association is generally better off allowing a little extra time than rushing into contract execution based on a desire to get on with it. Compared to the life of the system and its importance to the success and survival of the organization, the additional weeks between when the parties would like to finish and when they actually do are typically not critical.

A working tool

Too many contracts are put away forever as soon as they are executed. A better approach is to use the contract as a working tool.

Properly prepared, the contract specifies a schedule for performance and a related schedule for testing, payment, and so forth. Scrupulously follow those provisions for best results. This approach uses the contract to administer the acquisition and assures both parties of the negotiated benefits. It enhances the chances for successful implementation and for successful dispute resolution should problems arise.

Joseph Greif, an attorney and certified public accountant, is with the Washington, D.C., law firm of McNeily & Rosenfeld.
COPYRIGHT 1991 American Society of Association Executives
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:includes related article
Author:Greif, Joseph
Publication:Association Management
Date:Apr 1, 1991
Previous Article:Associations in the information age.
Next Article:ASAE software vendor.

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