System Contracts
Add specific performance guarantees to avoid problems
by Dick Friedman
One impact of software "aggregators" buying system providers is that the contracts of the survivors now offer fewer protections to distributors buying systems – not that they really offered many before they bulked up on rivals. Worse, with fewer vendors in the marketplace, some vendors are just about saying "take it or leave it" when it comes to contract negotiations. The process of negotiating is important because it can result in the vendor favorably "adjusting" their quote before signing – thereby enabling a distributor to avoid some unpleasant surprises during installation.
Here are some of the issues that must be addressed in any system contract that protects a distributor. Addressing them involves adding specific performance guarantees to the vendor's agreement.
Viability. No software company can afford to market, support and enhance several different software packages. Sooner or later, the stable will contain only a few packages. But, it's not safe to assume that the package with the most user companies will be one of the survivors; nor is it safe to assume that the most feature-rich package will survive. Even the continued release of enhancements does not guarantee that a package will remain viable.
License transfer. Long before software companies started buying up other ones, distributors started buying up other distributors. This trend is likely to continue, but some system contracts give the system provider the right to deny or restrict the transfer of licenses to an acquiring distributor. Such preclusion could result in a potential buyer walking away from the deal to buy a distributor who wants to sell.
Installation services. People who use on-line auction sites like eBay know that sellers get more money by selling at a low price but over-charging for shipping. Some software companies play a similar game by underestimating the number of hours needed to assist a distributor in changing from the old system to the new one. It's like handing the vendor a blank check. Similarly, some software companies excessively increase their annual support fees.
Third-party software. Even though the large software companies own many software packages, there are some functions not found in any of the owned packages. These functions are handled by third-party software packages that a software company provides. Some of the third-party packages work well with some of the owned packages, and
others don't work so well. Some of the third-party software packages were not designed specifically for distributors, and may not address the needs of distributors. And because third-party software was not created by a system vendor, what would happen if a distributor is sued for misuse by the author of a third-party software package?
Help with problems. When the system is down, or some critical function stops working properly, what kind of help would be provided? If the vendor's people accidentally corrupt the data in the system, who pays for restoring it to its proper form? How quickly would the problem be resolved? How can business be conducted if the system is down or corrupted for a week? Do you want to stake your business on best efforts promises?
Dick Friedman is an authority on ERP and WMS system contracts for fastener, tool, industrial and MROP distributors. His firm does not sell systems – it adds specific performance guarantees to contracts, and negotiates on behalf of distributors. Dick has spent 26-plus years helping distributors obtain technical contracts that avoided problems and that saved money. He is a contributing author to Industrial Supply, and consults with industry distributors and manufacturers. Call his computer hotline (847) 256-3260 for a FREE consultation, or visit his Web Site (www.GenBusCon.com) for more information or to send e-mail.
This article originally appeared in the Jan./Feb. 2011 issue of Industrial Supply magazine. Copyright 2011, Direct Business Media.
INDUSTRIAL SUPPLY MAGAZINE
The November/December issue of Industrial Supply magazine features an in-depth cover story about Kimball Midwest. Plus, we're featuring articles by contributing writers Dirk Beveridge, Frank Hurtte, and Mike Marks, as well as interviews with numerous product and distribution industry experts.
