When selecting a new CMMS package, you are not just buying software. These days, you are entering into a long-term relationship with the CMMS vendor, from the day you sign the contract until the day you terminate the maintenance agreement and implement another vendor’s software solution. Your relationship can span one or more decades given how complex, time-consuming, and expensive it is to replace your CMMS software. That is why you want to take the time to review your vendor contract and get it right.
[pullquote]At the time that you sign the contract with the CMMS vendor, you have the highest leverage. The vendor’s sales team and senior management are anxious to close the deal, celebrate the win, pass the client account to the implementation team, and move on to the next target sale. You are also eager to close and move on, as it has been a long, arduous process to date for all stakeholders, and your senior management is looking forward to realizing business-case benefits as quickly as possible. The contract is your last opportunity to manage expectations of the vendor, and all of the people in your company who are or will be involved with the CMMS software.
The contract should not only reflect the fairest pricing, but also the product and services purchased, assumptions regarding the software itself and any implementation services provided, warranty information, timelines, terms and conditions governing the vendor/client relationship, the guidelines on how to manage risk, and how to handle the situation if either party is dissatisfied. Some of these elements are discussed below, from the perspective of a CMMS expert, not a legal one, including tips and traps when negotiating contract terms.
Pricing for goods and services purchased
Business requirements: The key to managing expectations on what exactly is being purchased for what purpose, is bringing clarity to your business requirements. In turn, well-written technical specifications can minimize the price tag. This is one of the many benefits you reap from months of hard work with a wide representation of stakeholders to define future state processes and supporting system requirements. The more detail you can provide, the better, so that the CMMS vendor can more accurately price the job. When CMMS vendors sense their clients do not really know what they want, the price rises to reflect their increased risk of failure. Other ways to ensure vendors have sufficient detail to finalize pricing are:
- extensive vendor demos spanning two to five days, depending on the size of your operations, which not only provides your users with enough time to properly assess a vendor’s software solution, but also allows vendors to better understand your needs and in turn, appropriate pricing
- test scripts and scenarios for key processes and their supporting technical specifications, so that your users can better judge how well the vendor’s solution works with your processes and your data, and the vendor can better understand and price what it will be supplying
- data dictionary and sample data for legacy systems and any interfacing software applications, in order to better price data conversion and software integration, respectively.
Timing of contract signing: As with many businesses, if you can time the signing of your vendor contract to coincide with the end of a month, quarter, or year, then you might be able to negotiate a better price. This is because CMMS salespeople have targets to meet or exceed by a certain date in order to maximize remuneration. Public companies have an even stronger link to contract timing due to pressure from shareholders to attain published revenue goals. Obviously, your leverage on pricing is also heavily dependent on supply and demand — for example, pricing discounts can be higher during tough economic times when demand for CMMS typically drops off.
Risk/reward pricing: For a company that is willing to take on additional risk, the reward will often be preferred pricing. For example, you might elect to take on additional risk, presumably for a lower price, as one of the first customers of a new, unproven CMMS package, module, beta release, or customized functionality that will be built into the core product. You may also be able to negotiate better pricing when a CMMS vendor is unfamiliar with your type of business, your industry, or even the country in which you operate. Surprisingly, many companies do not take advantage of this opportunity.
{pb}Payment terms
In my view, payment terms can be one of the most frustrating components of a contract. Most large CMMS software vendors are anxious to realize some significant revenue as soon as the contract is signed, to ensure your commitment to the project and in recognition that something tangible — the software license — has been delivered. Typically, 50% of license costs are due on signing as a deposit, and a further 50% upon delivery of the software, usually shortly after signing. On the professional services front, CMMS software vendors prefer to render invoices once or twice a month for fees and expenses incurred, whether at your site or behind the scenes. Fees are based on an hourly rate for consulting, training, software programming, and project management.
I think this practice, although the norm, is not fair to you the customer. Ultimately, it has the potential to strain the relationship, especially when the CMMS vendor enjoys a significant size advantage. In my experience, a more balanced approach is to pay for software, and more importantly professional services, based on milestones, accomplishments, or performance targets. Why should you pay for almost 100% of the software license fees when the software has simply been delivered, but is completely unusable for months until it is properly installed, configured, tested and implemented?
My preference is a payment schedule that includes 10-20% once you have signed the Statement of Work, a further 10-20% once you have successfully completed User Acceptance Testing, a further 10-20% once the system goes live, and the balance 90-120 days following go-live. This or a similar payment schedule ensures both you and the vendor are focused on the steps leading to a successful implementation. Additionally, consider tying a significant bonus to the performance of your employees working on the project, as well as the vendor, when performance targets are exceeded for such measures as asset availability, spare parts inventory, or energy consumption. This is really the definition of success, not simply implementing the CMMS.
Warranty vs. maintenance
I have a simple perspective on software warranty and maintenance. My position is that warranty starts after the software is implemented — the go-live date — and from three to 12 months is a reasonable warranty period, depending on size, complexity, amount of configuration/customization, and the terms of the maintenance agreement. Maintenance should kick in only after the warranty period ends, otherwise the vendor is double-dipping. Sounds obvious? You may be surprised to learn that many vendors start charging maintenance fees before even implementing the software.
Another clarification to seek is what the warranty and maintenance agreement actually cover. I believe the vendor should warrant against your technical requirements, assuming you have gone to a sufficient level of detail, as opposed to what is more common — warranty against what the vendor claims the software does. Similarly, be wary of a maintenance agreement that forces you to prove a software glitch was caused without a doubt by the vendor’s software, and not possibly by you when installing or using the software, or by your technical or business environment.