Users look for protection against vendor flameouts

With so many technology vendors struggling financially as corporate users hold the line on spending, some savvy IT managers are adding new clauses into licensing and outsourcing contracts to ensure smooth operations should a key supplier go belly-up.

Roland Salvato, manager of contract and vendor relationships at Blue Shield of California, said three technology vendors used by the San Francisco-based medical insurer have bitten the dust during the past 12 months. That has prompted some new thinking on IT contracts, Salvato said at a technology procurement conference held here by International Computer Negotiations Inc. (ICN).

“We’re asking for protections, like lifting restrictions on hiring [a vendor’s] staff and putting the software code into an escrow account,” he said. “We didn’t have those provisions in our contracts before because these companies looked like they were stable.”

And it’s not just start-up vendors that are feeling the effects of hard economic times. IT executives who attended this month’s procurement conference said they’re also questioning the viability of some of their large vendors.

For example, Nationwide Mutual Insurance Co. regularly monitors the financial performance of its largest technology suppliers, said Patrick Campbell, IT procurement officer at Nationwide Services Co., the Columbus, Ohio-based insurance and financial services firm’s IT arm.

Nationwide recently conducted a risk analysis on one of its telecommunications providers to address internal concerns about the struggling vendor, Campbell said. It also maintains relationships with alternate suppliers in case a vendor it uses goes out of business. “We try to mitigate risk by having options with our supplier base,” Campbell explained.

The economic downturn is also causing many companies to take a closer look at their outsourcing arrangements, said Sharon Horton, a consultant at Winter Park, Fla.-based ICN. Horton recommended that users put stipulations into contracts that would let them buy back IT equipment from outsourcers if necessary.

But conference attendees warned that even careful monitoring of vendors doesn’t always ensure that IT managers will be able to detect when one of them is about to go under.

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

Arizona requires multivendor support on large IT contracts. For example, the state divided its PC fulfillment and support responsibilities among two PC makers and four computer services providers. One of the latter firms recently went out of business, but Hessenius said there was no disruption in service. “The other three companies were glad to make up the difference,” he said.