Avoiding IT project failure: Holding vendors' feet to the fire

A business' information technology systems are its backbone and central-nervous system. Investments in these systems are significant, and the business risk in the event of their failure is even greater.

Yet too often the process for selecting vendors, products and services, and negotiating the contract that sets forth the vendor's obligations and the business' rights is rushed and flawed. Customer references are not sought, system requirements are inadequately defined, and the fine print is ignored until it's too late.

The CPR Institute for Dispute Resolution has found that 50 percent of IT projects fail. A survey conducted by Pricewaterhouse Coopers of litigation involving IT projects over a 25-year period from 1976-2000 found that in the vast majority of cases the computer system or software did not work as warranted, and in many cases did not work at all. The survey found that in the disputes that arose, often the vendors had made exaggerated claims and unclear specifications.

While there is no silver bullet to assure that IT projects succeed, it is possible to reduce the risk of failure through: 1) an informed system and vendor selection process; and 2) well-managed contract negotiation and implementation by the business. This article sets forth some simple rules for success on these two fronts. The use of the term “system” refers to the combined software and hardware needed to offer the solutions your business seeks.

System and vendor selection Clearly identify and express the functions the system must perform; i.e., problems it should solve, tasks it should perform, and the time requirements in which it should do so. If there is any concern that internal company personnel are not sufficiently equipped to perform this job, an outside consultant unconnected to whoever might ultimately be hired to help identify requirements, draft requests for proposal, and review responses from vendors.

In addition:

• Request proposals from multiple vendors and leave time for face-to-face interviews with not only the sales team, but the vendor's designated implementation team for your project. Successful implementation requires excellent communication and responsiveness. Interviewing the implementation team will offer important information on the capabilities of the vendor in this regard.

• Request customer references and follow up with them. Do not underestimate the importance of the vendor having implemented the system in other businesses similar to your own.

• Ask to see the vendor's form of contract that will be used as the basis for the final contract.

• Set a timeframe for vendor selection that permits time for thorough review and consideration of the proposals, and the negotiation process.

Contract negotiation

The timeframe for contract review should be sufficient to permit counsel who is expert in technology contracts to review and critique the contract offered.

Beware of vendors who, upon giving you a copy of the contract, tell you that any promised discounts require execution of the contract in a very short time period.

Vendors know that the less time you have to understand the “legalese” of the contract, the less likely you will be to request changes and clarifications.

Also:

• Identify up front what could go wrong and the cost to your business if failure or delay does result. Review and negotiate remedies and damages with this exposure in mind.

• A very specific statement of work should be part of the contract. Exhibit 1 should contain the system specifications.

This includes:

1) The software to be implemented or developed and the functions it must perform.

2) All other deliverables, including consulting, training, and documentation.

3) Milestones and criteria for performance and acceptance.

Be sure that the statement of work or another part of the contract includes any statements or representations made by the vendor regarding system functions and capabilities that were important to you in selecting the particular system or vendor. If they are not explicitly included in the contract, the “Entire Agreement” clause typically found in most IT contracts will render such promises unenforceable.

Other recommendations:

• Be sure the contract has a workable approach to test performance before “acceptance” of the system, and be sure that a substantial amount of the purchase price has been held back until “acceptance” has occurred. The “acceptance” concept in the law of contracting is important in that the buyer can reject the goods only before “acceptance.” After that time, the buyer is left to its contractual remedies, and those are often very limited. Testing must assure that the system works properly in a live environment and integrates with your business' other computer systems. A minimum testing period of 30 days is advisable.

• Make sure the warranty in the contract expressly includes those functions or attributes of the system that were fundamental to your business' purchase decision. Most warranties that are implied by law for goods contracts are typically disclaimed in software agreements. Examples of functions you may want to have included in the warranty include that the software is free of defects or viruses, that the software does not infringe the intellectual property rights of third parties, and that the vendor is not currently the subject of any litigation that will prevent it from performing under the contract.

• Carefully scrutinize the remedy and damage provisions of the contract. Most courts will enforce these limitations against a purchaser absent fraud or complete failure of the vendor to implement the promised remedy. Most of these clauses limit the remedy to repair or replacement of the system and limit damages to whatever the purchaser has paid for the system. Contracts typically exclude the recovery of consequential damages such as lost business or the cost of labor to deal with the failure.

• Beware of provisions that shorten the time period for bringing claims against the vendor or select a court venue or law that is unfavorable to your company.

Project implementation

Assign a team from the company that is charged with interfacing with the vendor on system implementation, and then:

• Schedule weekly project implementation meetings with the vendor at which a senior company officer, who is not on the implementation team, is present.

• Be sure that the company's project manager is checking the implementation against the statement of work in the contract, including the project schedule.

There are many factors that affect IT project implementation success. However, careful product and vendor selection and informed contracting as described above can go a long way toward achieving project success.

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