Corporate investments in software systems have an alarmingly high failure rate. Millions are lost on canceled projects and systems delivered late, over-budget, or without promised functionality. Many things explain this. Some of these problems can be alleviated through effective planning of the technical and management parts of projects, and the legal relationships with vendors as well. These steps will help avoid failures and provide meaningful recourse when failures do happen.
The Risk Of Failure
Investments in technology carry an extraordinary risk of failure. Studies have found that:
- 31% of these projects will be canceled before they are completed;
- 53% will far exceed their original estimate;
- in 1995, companies and government agencies in the U.S. alone spent 81 billion for canceled projects and another 59 billion for projects completed late;
- only 16% are completed on time and on budget, and for large companies only 9% are so completed.
The kinds of damages suffered when a project fails include not only the out-of-pocket expenditures, but also operational downtime, lost opportunity costs, accelerated hardware obsolescence, conversions to substitute systems, loss of reputation and goodwill, and general damage to competitive standing.
Protecting Against The Risks
Good technical planning and project management are essential to project success. But they are usually not enough. Effective legal representation of the user in these transactions can help in two general ways: (1) to avoid failure, and (2) to create meaningful remedies if failure occurs.
Ensuring Functionality
Before examining alternative solutions or talking to vendors, a corporate user should carefully examine its own information needs and develop its own business requirements. This exercise, initially technical, is essential to providing a critical legal protection. User needs should define the project, and solutions should fit the needs, not vice versa.
In general, the exercise should include at least the following steps:
- Identify problems with existing systems. A systems analyst will facilitate this.
- By all means, involve actual users in the review.
- Focus initially on what is needed, not how it is to be accomplished.
- Develop a list of requirements written in terms of functional end-results, using business language.
- Review possible solutions from a top-down viewpoint. Partition the problem into manageable components, and work towards concrete, measurable detail.
- Throughout the process, try to measure the monetary benefits expected to be realized by the change. This will help determine whether value outweighs cost and will be important for later price negotiation.
- Include performance measurements such as maximum response times and hardware configurations as part of the total system requirement.
- Include a conversion plan to migrate from the existing system to the new one, if applicable, including "cost of ownership" elements such as new skills, training, and personnel that may be required.
- Identify likely future needs as well, such as increases in data volume and hardware upgrades. Current design should accommodate future scalability, portability, and flexibility requirements.
Implementation
As the project or its parts are completed, the system will undergo critical installation and testing. The corporate user should require the vendor to use samples of its live data in pre-installation testing, and to allow the user to participate in that testing. The vendor should be required to deliver automated test suites for all software provided, for validation at the user's site.
Final system "acceptance" should not occur until all material errors and defects are corrected. A procedure should be established in the agreement for the notification of defects, correction, re-delivery, re-test, etc., until all material errors are fixed. In multiple vendor projects, third party licensors should also be required to commit to these procedures.
Other Legal Protections
There are a variety of other important things the corporate user should consider in order to maximize the chances of success:
(a) In many ways, corporate users often have more leverage with the vendor than they may think. If the user retains meaningful options, whether they be competitive solutions or no change at all, the vendor will be motivated to negotiate. In many situations, vendors want to procure a "showcase" installation - a success story - for marketing purposes. And, as in all cases, it benefits a vendor immensely to have happy customers. All of these are sources of leverage.
(b) User payments should be based on milestones tied to conforming deliverables. A meaningful portion of the total fee should be tied to final acceptance.
(c) Clear, measurable commitments should be obtained from the vendor in critical service areas such as installation, data conversion, training, support, and ongoing maintenance. Maintenance costs should not commence until the expiration of the applicable warranty period.
(d) In cases of multiple vendors, ultimate responsibility for the project should rest on the prime vendor. Subcontractors and third party vendors should be identified and approved, and their commitment to develop, test, and maintain their components should be stipulated. Third party sublicense agreements offered by the prime vendor should be negotiated as necessary to fit the user's needs.
(e) The software license, consulting, equipment purchase, and service agreements, as applicable, should be balanced and effective in all other respects. They will typically require substantial re-negotiation from the standard vendor forms, in such areas as warranties and warranty disclaimers, limits on vendor liability and user remedies, and dispute resolution.
(f) Price itself is notoriously negotiable. Vendor pricing strategies can be bewildering. Fees can be spread among the software license, hardware, custom development, implementation, training, and maintenance. Vendors typically earn substantially greater margins in some areas than in others.
(g) Effective legal protection does not end when the contracts are signed. They need to be effectively implemented and enforced. This process is loaded with legal pitfalls for the user, as many rights can be lost for failure to notify the vendor of defects or otherwise assert claims in a timely and proper fashion, as contemplated by the agreements.
(h) Clear and effective dispute resolution remedies for the corporate user hopefully will never have to be used. However, their mere existence is a strong deterrent against nonperformance. The objective in any project is not a "good" lawsuit, but a system that meets expectations, on time and on budget. Effective legal remedies for failure, coupled with strong resources from experienced user counsel, will help motivate the vendor to perform.
(i) User remedies are often better than even bad contracts might appear to provide. The law in many states creates remedies in many cases despite contrary pro-vendor language in the written agreements.