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Challenging Issues in IT Equipment Purchase & Maintenance/Support Agreements
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 Alcatel-Lucent-–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 by negotiating 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 failure. For example, a customer with an annual spend commitment who returns a piece of high-dollar equipment for a refund because of unremediable defects should not lose its discount if it 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 of 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.
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.