SHARE



ABOUT THE AUTHOR


Hank Levine
Henry D. ("Hank") Levine is a partner in the firm of Levine, Blaszak, Block & Boothby, LLP, where he specializes...
Read Full Bio >>
SHARE



Hank Levine | March 24, 2008 |

 
   

Challenging Issues in IT Equipment Purchase & Maintenance/Support Agreements

Challenging Issues in IT Equipment Purchase & Maintenance/Support Agreements This article, part 1 of a 3-part series, was written by Kevin DiLallo, a partner at Levine, Blaszak, Block & Boothby, LLP. Enterprise IT buyers face a number of legal and operational challenges when negotiating equipment purchase and maintenance/support agreements with the leading original equipment manufacturers (OEMs) - like Cisco Systems, Avaya, Nortel, Siemens, and Lucent-Alcatel - and their resellers, such as Getronics, Dimension Data, AT&T, and Verizon Business. Many enterprises choose to buy through resellers because they can get larger discounts that way than they can negotiate directly with the manufacturers; but buying through a reseller introduces a host of issues that might be avoided in direct sales. This article offers a sampling of the problems that our clients have found particularly vexing. The next two installments will discuss other issues that commonly arise in enterprise equipment purchase and maintenance/support agreements.

This article, part 1 of a 3-part series, was written by Kevin DiLallo, a partner at Levine, Blaszak, Block & Boothby, LLP. Enterprise IT buyers face a number of legal and operational challenges when negotiating equipment purchase and maintenance/support agreements with the leading original equipment manufacturers (OEMs) - like Cisco Systems, Avaya, Nortel, Siemens, and Lucent-Alcatel - and their resellers, such as Getronics, Dimension Data, AT&T, and Verizon Business. Many enterprises choose to buy through resellers because they can get larger discounts that way than they can negotiate directly with the manufacturers; but buying through a reseller introduces a host of issues that might be avoided in direct sales. This article offers a sampling of the problems that our clients have found particularly vexing. The next two installments will discuss other issues that commonly arise in enterprise equipment purchase and maintenance/support agreements.

This article, part 1 of a 3-part series, was written by Kevin DiLallo, a partner at Levine, Blaszak, Block & Boothby, LLP. Enterprise IT buyers face a number of legal and operational challenges when negotiating equipment purchase and maintenance/support agreements with the leading original equipment manufacturers (OEMs) - like Cisco Systems, Avaya, Nortel, Siemens, and Lucent-Alcatel - and their resellers, such as Getronics, Dimension Data, AT&T, and Verizon Business. Many enterprises choose to buy through resellers because they can get larger discounts that way than they can negotiate directly with the manufacturers; but buying through a reseller introduces a host of issues that might be avoided in direct sales. This article offers a sampling of the problems that our clients have found particularly vexing. The next two installments will discuss other issues that commonly arise in enterprise equipment purchase and maintenance/support agreements.Purchase Commitments and Waivers The quid pro quo for discounted prices on equipment and maintenance/support is usually some form of commitment from the customer, which may take the form of an annual volume purchase commitment, exclusivity or "preferred vendor" status, a commitment to pre-pay for a year or more of maintenance/support, and/or a commitment to buy maintenance from the vendor on equipment purchased from the vendor, among others. Purchase commitments in multi-year agreements may come with annual true-ups to adjust the discount to reflect actual purchases in the prior 12-month period.

Obviously, commitments of these types raise questions as to whether (and if so when) the customer should be excused from failing to meet a commitment without losing the associated discounts, such as for circumstances outside the customer's control or where the vendor has defaulted on material obligations and failed to cure the default. Take, for example, a customer that has an annual spend commitment and who returns a piece of high-dollar equipment for a refund because of unremediable defects. This customer should not lose his/her discount if the customer falls short of its commitment by an amount equal to or less than the price of the returned equipment.

Similarly, a customer should not be penalized by loss of discount if its commitment was in the form or a multi-year maintenance contract, but the customer terminated maintenance at one or more locations because the vendor had failed to perform its contractual obligations (for example, chronically missing SLAs) and failed to cure the problem after notice. A thornier issue is whether the customer should be excused from its commitments (without loss of discounts) for reasons that are beyond the control of both the customer and the vendor, such as a general business downturn, a site closing, or legal/regulatory issues such as an injunction against use of a product due to a patent infringement claim.

Pricing Anomalies The usual approach to pricing in equipment and maintenance/support contracts is to state discounts that will apply to the manufacturer's or reseller's list prices in effect at the time an order is placed, rather than to fix unit prices in the contract. This practice is less common for maintenance than equipment, but many vendors will try to price maintenance in the same way. Equipment prices can change frequently, and maintenance fees may change annually when maintenance contracts are renewed. While many enterprise customers try to avoid such uncertainty, the discount-off-list approach is so ingrained in the industry that it is virtually impossible to fix unit prices for the term of a multi-year agreement.

Where the vendor is a reseller, the situation is even more uncertain, as both the list prices and the discounts stated in the contract are subject to change, depending on the relationship between the reseller and the OEM. If a customer agrees to allow the reseller to decrease discounts or raise prices as the OEM changes them, it should at least insist that the reseller also pass through increases in discounts and decreases in list prices.

Moreover, there may be a trade-off between equipment discounts and maintenance prices, as vendors tend to offer better discounts to customers who buy maintenance from them, while customers can procure the same or better maintenance from third parties for less. Another area of uncertainty is the pricing of "projects" or "professional services," which are often set on a time-and-materials basis. It is important to define up front what is and is not a 'project" or a "professional service" so that routine support functions are not billed as add-ons.

Remote Monitoring and Data Security Many software vendors and equipment support providers require remote access to their software and supported equipment to monitor performance, identify (and possibly diagnose and remedy) troubles, and spot breaches of software licenses. Software vendors may also reserve the right to remotely disable software or equipment features for a variety of reasons, including the customer's breach of an applicable license or failure to renew a maintenance agreement. Enterprise customers cannot usually avoid giving vendors remote access, but they may be able to negotiate away the vendors' right to interfere with their use of the software or equipment, at least for long enough to allow the customer to cure an alleged breach or non-payment.

Giving a third party access to equipment through which a customer transmits confidential and proprietary data raises numerous confidentiality, privacy, and data security issues. A customer who is negotiating an agreement through which a third party will gain access to company data should involve the company's security or privacy group, as well as the legal department, early in the process. Taking steps to protect the security of the company's (and its employees' and customers') confidential information is important to all enterprises, but particularly to government agencies; financial institutions subject to the Gramm-Leach-Bliley Act; health care institutions, insurers, and providers subject to the Health Insurance Portability and Accountability Act; and merchants who accept credit or debit cards and are subject to the Payment Card Industry Data Security Standard. These issues are among the most challenging to negotiate and are often among the last to be resolved.

Acceptance Testing Vendors will want to limit the types of equipment that will be subject to acceptance testing, as testing imposes additional obligations on them and delays the due date for final payment. The customer's IT staff does not have time to test every item of new equipment upon installation, but wants some role in selecting the equipment that the vendor must test after installation and before the equipment is deemed accepted by the customer. One approach is to agree on a purchase price threshold above which equipment is subject to acceptance testing, and below which the equipment will not be subject to testing unless the customer specifically requests otherwise. SLAs and warranties should be required, of course, but they can not offset the disruption that may occur if important equipment does not perform as promised.

Third-Party Products OEMs are eager to sell third-party products to be used in conjunction with their own lines of equipment, but they resist taking responsibility for those products. For example, they may not agree to provide interface specifications for such equipment or may charge the customer for such specifications, even though the customer needs them to combine third-party equipment with the manufacturer's own products. OEMs may also disclaim any responsibility for the performance or non-performance of combinations of their equipment with products manufactured by others, even if they sell those third-party products. In addition, such combinations frequently void any indemnification by an OEM for intellectual property infringement claims arising from such combinations -- again, even where the OEM sold the products that the customer combined, leading to the infringement claim.

Issues in Reseller Agreements In addition to creating complications with respect to pricing and discounts, interposing a middleman between the customer and the OEM can lead to operational hurdles for the customer. For example, a customer's right to cancel or modify orders or to return products will likely be subject to the policies and charges imposed by the OEMs, not the reseller. The agreement between the customer and the reseller seldom articulates those policies and fees, which creates uncertainty. Moreover, the OEM may change its policies and fees without notice to the customer. Sophisticated, large customers may be able to negotiate these matters directly with the manufacturer - in our experience the manufacturers prefer to exclude the reseller from those side discussions or agreements.

* * *

As noted at the top of this piece, this is just a sample of the challenges enterprise customers face in negotiating equipment purchase and maintenance agreements. In the next two installments, we will discuss other issues of concern, including unique issues in global procurements, end-of-life support, exclusivity of remedies for breach, maintenance provider and coverage options, software licenses and warranties, and intellectual property indemnities.





COMMENTS



Enterprise Connect Orlando 2018
March 12-15 | Orlando, FL

Connect with the Entire Enterprise Communications & Collaboration Ecosystem


Stay Up-to-Date: Hear industry visionaries in Keynotes and General Sessions delivering the latest insight on UC, mobility, collaboration and cloud

Grow Your Network: Connect with the largest gathering of enterprise IT and business leaders and influencers

Learn From Industry Leaders: Attend a full range of Conference Sessions, Free Programs and Special Events

Evaluate All Your Options: Engage with 190+ of the leading equipment, software and service providers

Have Fun! Mingle with sponsors, exhibitors, attendees, guest speakers and industry players during evening receptions

Register now with code NOJITTEREB to save $200 Off Advance Rates or get a FREE Expo Pass!

November 1, 2017

Your customers (internal and external) demand that you offer them the ability to connect by any means. With the adoption of cloud communications tools you now have access to an expanded portfolio o

October 18, 2017

Microsofts recent Ignite event had some critically important announcements for enterprise communications. Namely, Microsofts new Team Collaboration offering, Teams, will be its primary communicatio

September 20, 2017

Customer experience can make or break your business. But how do you achieve outstanding customer service when you're dealing with outdated organizational structure, lagging technology, dated proces

October 23, 2017
Wondering which Office 365 collaboration tool to use when? Get quick pointers from CBT Nuggets instructor Simona Millham.
September 22, 2017
In this podcast, we explore the future of work with Robert Brown, AVP of the Cognizant Center for the Future of Work, who helps us answer the question, "What do we do when machines do everything?"
September 8, 2017
Greg Collins, a technology analyst and strategist with Exact Ventures, delivers a status report on 5G implementation plans and tells enterprises why they shouldn't wait to move ahead on potential use ....
August 25, 2017
Find out what business considerations are driving the SIP trunking market today, and learn a bit about how satisfied enterprises are with their providers. We talk with John Malone, president of The Ea....
August 16, 2017
World Vision U.S. is finding lots of goodness in RingCentral's cloud communications service, but as Randy Boyd, infrastructure architect at the global humanitarian nonprofit, tells us, he and his team....
August 11, 2017
Alicia Gee, director of unified communications at Sutter Physician Services, oversees the technical team supporting a 1,000-agent contact center running on Genesys PureConnect. She catches us up on th....
August 4, 2017
Andrew Prokop, communications evangelist with Arrow Systems Integration, has lately been working on integrating enterprise communications into Internet of Things ecosystems. He shares examples and off....
July 27, 2017
Industry watcher Elka Popova, a Frost & Sullivan program director, shares her perspective on this acquisition, discussing Mitel's market positioning, why the move makes sense, and more.
July 14, 2017
Lantre Barr, founder and CEO of Blacc Spot Media, urges any enterprise that's been on the fence about integrating real-time communications into business workflows to jump off and get started. Tune and....
June 28, 2017
Communications expert Tsahi Levent-Levi, author of the popular BlogGeek.me blog, keeps a running tally and comprehensive overview of communications platform-as-a-service offerings in his "Choosing a W....
June 9, 2017
If you think telecom expense management applies to nothing more than business phone lines, think again. Hyoun Park, founder and principal investigator with technology advisory Amalgam Insights, tells ....
June 2, 2017
Enterprises strategizing on mobility today, including for internal collaboration, don't have the luxury of learning as they go. Tony Rizzo, enterprise mobility specialist with Blue Hill Research, expl....
May 24, 2017
Mark Winther, head of IDC's global telecom consulting practice, gives us his take on how CPaaS providers evolve beyond the basic building blocks and address maturing enterprise needs.
May 18, 2017
Diane Myers, senior research director at IHS Markit, walks us through her 2017 UC-as-a-service report... and shares what might be to come in 2018.
April 28, 2017
Change isn't easy, but it is necessary. Tune in for advice and perspective from Zeus Kerravala, co-author of a "Digital Transformation for Dummies" special edition.
April 20, 2017
Robin Gareiss, president of Nemertes Research, shares insight gleaned from the firm's 12th annual UCC Total Cost of Operations study.
March 23, 2017
Tim Banting, of Current Analysis, gives us a peek into what the next three years will bring in advance of his Enterprise Connect session exploring the question: Will there be a new model for enterpris....
March 15, 2017
Andrew Prokop, communications evangelist with Arrow Systems Integration, discusses the evolving role of the all-important session border controller.
March 9, 2017
Organizer Alan Quayle gives us the lowdown on programmable communications and all you need to know about participating in this pre-Enterprise Connect hackathon.
March 3, 2017
From protecting against new vulnerabilities to keeping security assessments up to date, security consultant Mark Collier shares tips on how best to protect your UC systems.
February 24, 2017
UC analyst Blair Pleasant sorts through the myriad cloud architectural models underlying UCaaS and CCaaS offerings, and explains why knowing the differences matter.
February 17, 2017
From the most basics of basics to the hidden gotchas, UC consultant Melissa Swartz helps demystify the complex world of SIP trunking.
February 7, 2017
UC&C consultant Kevin Kieller, a partner at enableUC, shares pointers for making the right architectural choices for your Skype for Business deployment.
February 1, 2017
Elka Popova, a Frost & Sullivan program director, shares a status report on the UCaaS market today and offers her perspective on what large enterprises need before committing to UC in the cloud.
January 26, 2017
Andrew Davis, co-founder of Wainhouse Research and chair of the Video track at Enterprise Connect 2017, sorts through the myriad cloud video service options and shares how to tell if your choice is en....
January 23, 2017
Sheila McGee-Smith, Contact Center/Customer Experience track chair for Enterprise Connect 2017, tells us what we need to know about the role cloud software is playing in contact centers today.