Contract specialists urge protection for software

With so many technology vendors struggling to keep pace in a sluggish economy, some savvy IT executives are adding new protection clauses into licensing and outsourcing agreements to ensure smooth operations should a key technology or service provider go belly-up.

“We’re asking for protections, like lifting restrictions on hiring their staff and putting the software code into an escrow account,” said Roland Salvato, manager of contract and vendor relationships at Blue Shield of California.

Salvato, an attendee at International Computer Negotiations Inc.’s Technology Procurement Conference held in New York this week, said three of the San Francisco-based health care provider’s technology vendors failed in the past year.

“We didn’t have those provisions in our contracts before, because these companies looked like they were stable,” he said. “There’s a payoff between getting unique services from a vendor to whom you represent a big piece of business and the risk of working with a start-up.”

It’s not just start-ups and dot-coms facing the effects of hard economic times. A number of IT executives say they’re concerned about the viability of large firms as well.

For example, Columbus, Ohio-based Nationwide Corp. regularly monitors the financial performance of its largest technology suppliers, said Patrick Campbell, IT procurement officer at Nationwide Services Co., the company’s IT services arm. Nationwide recently conducted a risk analysis on one of its telecommunications providers to address concerns about the struggling company. It also maintains relationships with alternate suppliers, Campbell said. “We try to mitigate risk by having options with our supplier base.”

The economic downturn is also causing more companies to take a closer look at their outsourcing arrangements, said Sharon Horton, a senior consultant at Winter Park, Fla.-based ICN. Horton recommends that users put stipulations into contracts to buy back equipment from the outsourcer as a backup plan, given the degree of cutbacks at many of these firms.

Even careful monitoring can’t always ensure that a user company will detect the impending shutdown of one of its vendors.

“Ongoing contract administration is probably the weakest part of contracting,” said Jeff Hessenius, business manager at the Phoenix-based Government Information Technology Agency for the state of Arizona. “You can look at financial statements all day long and not see these things coming.”

Hessenius said the state requires multi-vendor support for large contracts. The state of Arizona’s PC fulfillment and support services, for example, are divided among two PC manufacturers and four services companies. Though one of those computer service companies recently went out of business, there was no breach in service.

“The other three companies were glad to make up the difference,” Hessenius said.