What Vendors Do Not Want You to Know About Escrow

WHAT IS SOFTWARE ESCROW?

by Ron Scruggs, CTPE

Software escrow is an agreement whereby a software supplier and its customer agree that the supplier will deposit the source code and related materials of a licensed software product with a third party (an escrow agent). This escrow agreement provides the customer access to the escrowed materials in the event defined conditions (triggering events) occur such as the supplier is no longer able or willing to provide support of the software.

A Source Escrow Agreement is usually a three party agreement between customer, software supplier and the escrow agent. Often master escrow agreements are put in place between the supplier and the escrow agent or the customer and the escrow agent.  This allows customers or suppliers to be added to the terms of the agreement in a simple manner – usually a one page form. As a party to be added a precaution is added to review the agreement since it was negotiated with the escrow agent and the other party with the terms favoring those parties.

An escrow provision is often used in ASP, outsourcing and software license agreements for critical software.

CONTRACT CLAUSE – THEN ESCROW AGREEMENT

After getting a clause agreeing to agree to escrow, the next step is to enter into an Agreement with an Escrow Agent, the vendor and you incorporating the elements in the escrow provision.  Some contracts have a simple statement that the parties will mutually enter into an agreement for escrow of sources when requested by the buyer. That delays negotiation of the key clauses and is not recommended when an escrow agreement is an absolute necessity. Have an escrow agreement as an exhibit to the agreement in order to avoid negotiation after selection – negotiation with little leverage for the customer.

EXPLANATION – DEMAND or QUICK RELEASE (Vendors hope you don’t know this)

The demand release provision in escrow agreements provides that the escrow agent turn over the source material promptly when you, the customer declare there is a release condition.This is known as a ‘demand release’ or ‘quick release’ provision. The escrow agent would turn the material over to you but the vendor can use arbitration to appeal after the material is released. General escrow clauses give the vendor a process to appeal before the escrow material is released delaying the source release.

These demand or quick release provisions can be inserted into any contract where escrow is deemed necessary.  Do use them if you are involved in SaaS in the Cloud.

IDEAL SCENARIO – YOUR EXISTING ESCROW AGREEMENT (Vendors hope you don’t do this)

In the ideal scenario you would have a negotiated agreement with an Escrow agent containing the desired escrow language including the demand release (aka quick release). Then the contract clause would just require the vendor to be part of the existing agreement between you and the escrow agent.

I have negotiated agreements with escrow companies on behalf of customers.  These escrow agreements were in place when an escrow situation arose with a vendor.  The purpose of having your own escrow agreement is to avoid having the vendor’s negotiated agreement with the escrow agent govern the escrow.  The vendor negotiated agreement generally contains provisions that delay getting the escrowed materials and other provisions protecting the vendor – not you.

SUMMARY

In summary the best scenario is to have your own agreement with an escrow agent where you can add vendors to your escrow agreement.  You can have the demand release in your agreement.

Absent that have a provision in your agreement (SW, ASP, SaaS) that commits the vendor to enter an escrow agreement with a demand release provision. It is generally a good practice to avoid being added to the vendor’s escrow agreement for the reasons noted but many firms do it since (1) it is easy (2) escrow need is low probability and (3) it is likely cheaper. The downside is that it is written to favor the vendor rather than you – the customer.

If escrow is really a necessity consider having your own agreement with the escrow agent permitting vendors to be added.  In your escrow agreement have a demand or quick release provision.

 Another option is to have a party such as your law department be the recipient of the source materials under seal. That is another subject for another day.

 

Ron Scruggs is a Senior Consultant at International Computer Negotiations, Inc. (www.dobetterdeals.com), a Winter Park, Fla., consultancy that educates Professionals on IT Procurement, Sourcing, and Vendor Management. ICN sponsors CAUCUS: The Association of Technology Procurement Professionals. Contact him at ron@dobetterdeals.com .

Advertisements

One Bite at a Time

By Joe Auer

Here’s a strategy you can use to help gain and maintain negotiating strength. The key to this – called the “salami” strategy – is to disclose your goals to prospective vendors a few slices of information at a time, rather than give them the whole salami when they ask what it takes to do a deal.

Force the prospective vendors to fully address a few selected negotiation points without disclosing your entire position. Then negotiate only the set of issues you’ve selected and resolve those issues before discussing any of your other objectives.

Many vendors will press you to tell them everything you want before they concede anything. Tell them that they don’t need to worry about the rest of the things you want because if they don’t meet your initial issues, they’ll never hear your other points, but some other vendor will.

This technique has several advantages:

It helps put you in control of the negotiations. Only you are aware of your full shopping list, so the vendor is far less able to map a comprehensive strategy to gain control of the negotiations. On the other hand, you can disclose, withhold or compromise on points as necessary.

For instance, if you win or lose some points early in negotiations, it may change the importance of subsequent issues. And later, you can add points that may accomplish the same goal as the points you conceded earlier.

It permits you to add new considerations at virtually any point in the negotiations without being subject to the criticism of dealing in bad faith. A vendor might make such a charge if you said, “This is everything we want,” but then added other points after the original demands were negotiated.

It puts pressure on the vendor to concede the previous two advantages. The vendor is prevented from being able to control your negotiating position. You’re in control of where and when certain points will be addressed.

It allows you to assess and react to the vendor’s negotiating position with maximum flexibility. You can analyze a vendor’s reaction to various issues and adjust your negotiating tactics in response to the vendor’s reaction.

It maximizes the likelihood that the vendor will agree to your specific negotiating points. If the vendor is aware that you will continue negotiations only if agreement is reached on the subjects under consideration, The vendor is more likely to reach agreement. In addition, if early agreement is reached on some issues, it sets the stage and chemistry for further agreement on other points.

This approach also lets the vendor know that you take the negotiations seriously and plan to pursue each point vigorously.

There are a few techniques that help to maximize the effectiveness of this negotiating strategy. First, you can simply explain that the entire purpose of focusing on a few issues at a time is to determine whether there is any rationale for continuing negotiations. As one customer negotiator explained to a vendor recently, “Look, your time is valuable; our time is valuable. Before we clutter up the session with a lot of issues or waste time working through the contract, we want to know if you’re willing to reach agreement on a number of issues we think are critical to the entire deal.”

Second, recognize in advance that the vendor may do everything possible to avoid the “few slices at a time” approach. You should reject out of hand any vendor representatives’ comments reflecting their desire to go to management only once with the whole package. Simply refuse to accept the idea, or ask the sales reps why your account isn’t worth the trouble of going to corporate headquarters more than once. Better yet, ask them to bring someone to the table who has final negotiating authority.

Knowledge – especially of your opponent – is power when it comes to negotiating a deal. Vendors count on gaining as much knowledge of their customers as possible to boost their negotiating power and try to control the talks. But using the salami strategy can help prevent that.

JOE AUER is president of International Computer Negotiations, Inc. (www.dobetterdeals.com), a Winter Park, Fla., consultancy that educates Professionals on IT Procurement, Sourcing, and Vendor Management. ICN sponsors CAUCUS: The Association of Technology Procurement Professionals. Contact him at joea@dobetterdeals.com.

Looking Beyond ‘Needs’

By Joe Auer

If you look at a large IT procurement deal comprehensively and objectively, its most crucial factors go far beyond a specific set of a given department’s needs. Yet vendors’ sales representatives are highly trained to identify these needs and to sell “solutions.” And to the detriment of their bottom lines, flexibility or sanity in contracting issues, many customers believe that the needs of their departments or functional areas are the only important factors.

To do the best deal for your organization, you must consider that whatever you want to buy is just one part of a package. For example, a vendor’s representative says, “Our equipment can handle your problems by providing these solutions, and it’s within your budgetary constraints. We can deliver the entire system, within your time frame, and the system will provide a more than adequate performance level. Can we do business?”

If these are your main concerns, your response will most probably be yes. The vendor’s representative then hands you a letter of intent and says: “Great! Sign here and we can get going.” You sign because your primary concerns at that time are the four or five areas that the vendor has so carefully targeted. Good deal? Many times, the answer is no.

Although a given department’s needs are important, they’re often only a subset of a wide range of issues involving contractual, financial, operational, technical, procurement, end-user and senior management requirements.

Unfortunately, department heads, project leaders and end users often find out later that in their haste to satisfy only their needs, they overlooked some extremely important enterprise wide issues. For example, they may have paid more than they needed to, neglected to secure adequate contractual protection or done something that’s incompatible with technical standards or long-term corporate goals. In essence, the customers may find they were sidetracked by a bad case of tunnel vision, compliments of a great sales job by the vendor’s representative.

This micro view of the acquisition has a number of variations. The speed-of-doing-the-deal obsession during the Internet craze played right into this problem. A noticeable number of customers suffered vendor performance shortfalls – stern reminders that haste makes waste. They didn’t get what they paid for because contractual assurances “took too much time” in the rush to get Web deals done.In some situations, a vendor uses a financial concern to persuade the customer to sign up. The customer’s CFO is searching for some impact to the bottom-line profit. So, an astute vendor structures an outsourcing or lease deal to provide massive, short-term financial benefits with very inflexible terms that lock the customer in for a very long time. In doing so, the customer surrenders future technological agility and options.

The solutions ploy is easy to overcome if the customer can resist buying on impulse. As any retailer will readily acknowledge, impulse buying is an important factor in retail consumer sales. Regardless of whether impulse buying is an appropriate justification for purchasing a new tie or a hanging plant, it shouldn’t apply to the acquisition of a multimillion-dollar system. I’ve seen too many deals done too quickly with too little thought or analysis.

Most important, a broad-based negotiating team should be used to collect and prioritize a comprehensive set of negotiating objectives that represents the entire range of necessary professional disciplines mentioned above. Documenting these sometimes diverse prioritized objectives in a position paper for all team members and senior managers to sign off on is a key step in the process. Then, and only then, does your team have a consensus and a realistic set of needs to use as negotiating points.

Don’t let the bells and whistles that you believe you so desperately need divert your attention from other considerations, such as cost, contractual assurances and flexibility. If you refuse to buy on impulse, and instead use a comprehensive set of negotiation objectives, this ploy should not be a problem to overcome. 

JOE AUER is president of International Computer Negotiations, Inc. (www.dobetterdeals.com), a Winter Park, Fla., consultancy that educates Professionals on IT Procurement, Sourcing, and Vendor Management. ICN sponsors CAUCUS: The Association of Technology Procurement Professionals. Contact him at joea@dobetterdeals.com.

Manage The Contract

by Joe Auer

Let’s look at another of the truths of technology deal-making that can help you wind up with the best possible terms. The goal is not only to negotiate a great deal, but also to ensure that what you negotiated is what you get when the ink is dry. Contract management is essential, even critical, in pulling this off.

You’re wasting your time negotiating with a vendor if you don’t plan on assertively managing the contract and the relationship. If you don’t focus on the ongoing vendor-management process, you’ll have rights that go unrealized and get waived, because, as lawyers tell us, “rights that aren’t assertively enforced can end up being waived by the courts.” You’ll have people in your organization who aren’t even aware of the specific results the vendor is obligated to produce, so you won’t get what you’re paying for, and you’ll have endlessly unpleasant surprises.

Some say, “I’ll be so glad when we’ve finished negotiating this contract. I never want to see it again.” And in many cases, that contract is never seen again. In fact, sometimes the contract can’t even be found when it’s needed.

Experience has taught us that contract management begins during contract development and negotiations. That’s when you build in the metrics and the hooks and handles for effective relationship management. That’s when you need to decide how you’re going to manage the vendor.

You should think beyond just closing the deal; you have to anticipate the whole relationship and how to manage it.

There are three high-level objectives when you manage a contract: vendor compliance, customer compliance and evidence of the status of each. Let’s look at a few things that go a long way to ensuring that what’s supposed to happen really happens.

For instance, some suggest, “How about a deal summary for the end users once the contract is completed?” That’s a great idea, but you need more than a written summary. Not everyone learns well through reading. And not everyone will even take the time to read the summary. So hold briefing sessions. Present the end users their rights and obligations and say, “You’re on the front line, the first tier of relationship management. Here are the service levels and how we monitor compliance.” Let them know how to determine specific performance deficiencies and log their occurrences, how and when to report them and which manager to report them to. Educating and interacting with people on what the contract says and on their roles are necessary parts of a contract management process.

At a recent seminar, the asset manager of a major insurance company stated that his contract management group regularly saves his organization more than $300,000 a month. A manager with one of the country’s leading telecommunications suppliers asserted that her department’s contract management team is responsible for monthly savings of more than $1 million. Both attributed their success to the fact that they assertively manage the contracts and vendor payments within their authority. They both find most of the savings by carefully monitoring vendor invoices against contract terms and conditions (like caps on price increases).

Overall vendor relationship management is a topic for another day. But some major organizations are beginning to include “relationship” specifications, along with a host of initiatives that encourage and monitor contract compliance, in their requests for proposals, terms and conditions, and statements of work.

Incidentally, do you know why we’re not good at contract management? Because the IT industry grew up on vendor form contracts, so we never got experience managing contracts. There’s nothing for a customer to manage in a vendor form contract because it doesn’t say the vendor is obligated to do anything.

But when you negotiate contracts full of specific vendor obligations, it’s more than necessary to be ready to manage the vendor’s compliance in completing the tasks in a contract.

JOE AUER is president of International Computer Negotiations Inc. (www.dobetterdeals.com), a Winter Park, Fla., consultancy that educates users on high-tech procurement. ICN sponsors CAUCUS: The Association of Technology Procurement Professionals. Contact him at joea@dobetterdeals.com.

Get Better Deals by Listening

by Ron Scruggs

Within the Managed Acquisition Process, the deliverables are measurable results. The RFI, the RFP, the contract, the proposals…all can be read and re-read. These are visible core skill results. However, to get better deals, there are times when one has to use soft skills such as questioning and listening. These are key negotiation skills and their absence may create a situation from which recovery is difficult, if not impossible. Let’s take a closer look at listening and questioning as mandatory skills that can help you do better deals!

Listening effectively

Much information is lost (or never attained) because people don’t listen well. Generally, people listen with only 25% effectiveness. That means that only about one quarter of what is said is retained.

For those of us involved in high tech procurement and negotiation, it is heartening to learn that studies have shown that skilled negotiators listen twice as effectively and ask four times as many questions as average negotiators. It comes as no surprise then that, as a result of superior listening skills; the skilled negotiator’s retention level is higher.

Because people often don’t say what they mean, listening with understanding is difficult. For example, feelings are difficult to put into words. Words and expressions often have diverse meanings to different people. And, people aren’t always in touch with their feelings, making expression difficult. Therefore, when you encourage people to talk, an atmosphere is created that will allow you to further increase your depth of understanding as you probe for information and answers.

It is important to listen for clues to determine the speaker’s intent and underlying motive, particularly in business situations. Then, in the right environment and with appropriate questions, the real meaning of a specific communication can evolve and true understanding can occur.

The basic listening problem is a failure to focus on the other person—the words, the body language, the tone. Frequently the reason for this is that the listener is focused on him/herself.

Such things as conflicts at home or in the office can detract from focus on the here and now, on what is being said. Or, preconceived ideas and assumptions block listening, i.e., “I already know all of this.” Some people are so concerned with their intended response that they stop paying attention to what is being said at the moment. Or, one’s interest may wander as a result of myriad “outside” distractions. And, there are times when a person would rather not understand; to understand may mean to risk conflict in the interest of clarity.

In the words of Carl Rogers, a noted psychologist and teacher, best known for his role in client-centered therapy and the development of counseling, “man’s inability to communicate is a result of his failure to listen effectively, skillfully and with understanding to another person.”

Active listening: involved, engaged and focused

A root cause of not listening is failure to focus on the other person. How then can we become focussed and let people know that we’re focusing? The answer is active listening, or perhaps more accurately—“reactive listening.” Reactive listening is not silence but a form of activity. Reactive listening involves eye contact, body language, reflective responses and summarizing, all of which show that you’re engaged with the speaker. With reactive listening, you’re trying to gather information by encouraging the other person to speak. Your mind is decoding the words, the tone and the body gestures; your mind is reacting to the speaker.

Reactive responses include verbal acknowledgements such as “I see,” “interesting,” “ah-ha,” “right” and other positive or neutral replies. A good, probing response may be “help me to understand that better.” In this mode of reactive listening, you don’t give responses that will antagonize or discourage the person speaking. Negative responses may make the speaker defensive, thereby becoming roadblocks to gathering information. “Not true,” “I don’t buy that,” “you’re incorrect” and such comments constitute negative responses. Reactive listening can help test assumptions, check understanding, show concern and uncover problems.

An important part of reactive listening is summarizing. Here the listener may say, “let me summarize what I heard” or “Then you’re telling me that…” Summarizing helps the speaker know that you’re engaged and focused. It gives the speaker tangible evidence of how the message was received. It communicates “I’m aware now of your viewpoint” or “I understand your position.” 

Tools and traits of the reactive listener

Reactive listening results in effective listening! You obtain and retain more information when you’re listening in a reactive mode. You gain the speaker’s respect as you focus on her/him and demonstrate attention and sincerity.

Here are some characteristics of the reactive listener.

  • Uses open, non-threatening questions: “how;” “why”
  • Provides reflective responses: “oh;” “I see”
  • Uses summary statements: “Do I understand correctly that this is your position?”
  • Uses good eye contact and positive body language
  • Shows patience and openness to speaker’s viewpoint     
  • Encourages information flow
  • Avoids roadblock statements

A reactive listener does not create conflict or ask threatening questions. People do not problem-solve when feeling threatened. Threats create defensiveness, resistance to change, communicates non-acceptance and slows or prevents the information flow.

Auxiliary listening skills

For most people, seventy percent of learning is through the eyes. That’s why we took notes in school. Hearing the lesson was good; using the eyes to study instilled and reinforced the learning. When listening to a person, maintain good eye contact. Observe the person’s gestures to see if they match the words and tone.

Body language is an effective communication tool. A speaker can be his/her own number one visual aid. Reading the body language of others can be difficult; sending the message that you’re listening is easy. This is done with eye contact, perhaps a smile, open (uncrossed) arms, a nodding of the head and other positive gestures.

Check the body language of others to see if it tracks the verbal message. If there is a discrepancy, listen reactively and/or question politely to determine why. Your goal is to get accurate information that you can rely on to help you in future discussions.

Note that interpretation of body language requires assumptions. Body language is easy to fake, ambiguous, easily misinterpreted and highly subjective. Most negotiators don’t rely on a speaker’s body language but do look to it for clues. Test any assumptions including the assumptions regarding your perception of body language. The most important use of body language is for people to provide clear communication, using body messages that are consistent with verbal messages.

Use your eyes to help capture the total communication scenario.

Indirect speak

People don’t always say what they mean. Listeners who haven’t played or watched baseball may, not understand the use of learned phrases or slang, such as “touch all the bases”. This is an example of “indirect speak,” using language that isn’t what is meant, is only a clue to what is meant. An American may speak of an end result as the “bottom line;” an Englishman may refer to the same scenario as “at the end of the day.” This may be an easy nuance to interpret; other slang may not be. Consider the statement “It would be extremely difficult to give you a better price.” This says that a better price can probably be obtained…with some effort. The issue…whose effort?

Silence: a negotiation tactic

Silence is not always an indication that one is listening. Silence is sometimes a response to potential conflict. Silence can be a negotiation tactic. If somebody is being obnoxious or presenting a hard line, silence (or not giving verbal responses) can be used as a counter tactic, communicating the end of current discussions. Most of us dislike silence when we’re seeking a reaction.

However if you’re establishing a relationship and/or problem solving, silence is not the tactic to use to “communicate” because openness is required for these scenarios to effectively move forward. But silence is a legitimate status while waiting for a response to a question you have asked, especially a very good question. 

Questioning as a tactic

Questioning is an information gathering technique that generally reveals little about you but can provide – not only answers but also – insights about the other party. Ask open-ended questions…why? how? Questioning gives you control over the discussion, both the topic and the direction. When you ask a question, use reactive listening skills; in other words, ask and then listen.

Questions can be used as an alternative to disagreement. Ask the reasons why the other party has a particular position. Such a line of questioning provides an alternative to confrontation. It also provides information to which you can tailor your response, when you’re ready to respond.

Questions test assumptions. Sometimes your assumptions preclude your pursuit of certain goals or arriving at a good solution. Use questioning to explore whether or not your assumptions are correct. Of course, much of the secret is to plan your questions. Be clear about what you want to know…and the questions that will elicit that information. To confirm your understanding, ask a question such as “is that a correct summary of what you said?” When asking a question that may trigger an emotional response, explain the reason for the question.

Earlier we noted that skilled negotiators listen twice as effectively and ask four times as many questions as average negotiators. These are skills that enable one to understand opposing interests and positions, test assumptions and gather information to tailor solutions. The next time you’re at the negotiating table, keep your focus on reactive listening and perceptive questioning. It will help you to do better deals.

If you want to get in contact with Ron Scruggs or any other ICN Consultant, please contact 407-551-2766.

Technology Lease Economics 101

by Deb Mogensen

I recently concluded a consulting engagement with a client that has several leases in place for its technology equipment.  It is its CFO’s business policy to lease all equipment over a certain dollar amount in order to preserve cash.  Makes sense, right?  This policy would make great business sense, if only the client also implements a strong leased asset management program to support the CFO’s intent.

Let me explain.  First of all, the Master Lease Agreements (MLAs) were not ideal in that the terms and conditions were not negotiated to be favorable to the Lessee, or at least balance the favorability between the Lessor and Lessee.  Just to provide some examples, the T&Cs were favorable to the Lessor in the following ways:

1)         Notice was required 90 days in advance.

2)         End of lease (EOL) terms only offered a Fair Market Value (FMV) buyout, no extension (other than 90-days at the original lease rate), and no opportunity to make multiple choices (extend, buyout, etc.).

3)         Lessor chooses the return location for all the equipment (this leaves the option open to anywhere in the world or multiple locations).

4)         No cap on FMV.

5)         No notice to Lessee that EOL was approaching

These are just a few of the provisions that I recommend caring for in the MLA up front.

Secondly, the client did not have en effective EOL management strategy in place.  The client was returning equipment when it was done using it; sometimes before the EOL and sometimes well after.  No analysis was being done to determine if it made sense to buyout the equipment and/or negotiate a FMV extension as opposed to continuing to lease at the original lease charge.

I think you get the picture.  Leasing was costing this client a bundle of extra money and the leasing companies loved them.  I know this was not the CFO’s intent, but he needed to take the policy a step further and implement an effective and strategic leased asset management policy to manage the leases.  This is the only way to make leasing effective for the Lessee.

If you want to get in contact with Deb Mogensen or any other ICN Consultant, please contact 407-551-2766.