CORPORATE & COMMERCIAL NEWS, JULY 2009

A stitch in time saves nine : some advice for IT project stakeholders

I recently learned that a large New Zealand company was having serious and costly problems with a multi million dollar IT System upgrade project. The problems related primarily to below standard software development work that had been carried out and the incompetence of the vendor’s personnel. Unfortunately, such issues are not uncommon. What did raise my eyebrows though was the fact that the large customer company had merely signed up to the vendor’s “time and materials” contract terms, with little or no amendments. What steps could they have taken to avoid the resulting problems?

Why would the customer of a multi million dollar IT project (or any other project) not take reasonable legal steps to protect its investment? As the old saying goes, a stitch in time saves nine, and likewise an effective contract upfront is likely to save cost and hassle later. There is a litigation boom at present which is driven to a large degree by the lack of sound, effective and workable contracts between parties. The resulting costs for litigants is far greater than the cost of structuring things correctly at the outset.

From my experience as an IT lawyer, the excuses why customers end up in this position are often as follows:

• “We were under intense time pressure”
• “We wanted a collaborative approach with our vendor - we would never have sued the vendor anyway and so paying for a contract would have been a waste of money”
• “Even the best contract will not prevent the worst blunder – it’s better to channel our energies at the project level rather than the ‘legal level’ ”

Some say that hindsight is a wonderful thing. Others say that prudence and good planning are better. When the customer stakeholders are sitting around the table with their CEO trying to figure out how to address a huge project budget blow out and late delivery, would they rather have contract terms with teeth in their favour or a document that gives them nothing to negotiate with?

Even small, considered contract changes by a specialist IT lawyer at the outset could well save the customer much, much more than that lawyer’s cost if a dispute was to arise. The involvement of a good IT lawyer prior to vendor selection will also highlight certain project related issues that might not otherwise have been considered. This may prove invaluable, especially in an industry where, in the absence of good IT lawyers, high level bullet points in PowerPoint
slides and brief scoping documents tend to be the norm.

Often, the issues raised by a good lawyer are ones which both the customer and the vendor need to consider together, resulting in a more constructive and productive relationship. A good IT lawyer will focus the issues; bring drafting skills and contract knowledge that others simply do not have; bring related persuasive negotiations skills; and will do all of this on a cost effective basis relative to the scale and risk of the project (and with some pre understanding around costs).

When sitting around the table with your CEO trying to figure out how to address a huge project budget blow out and late delivery, what position would you rather be in? It’s fairly straightforward, a better contract means a better negotiation position (even if you were never planning to go to court) and most likely, far less financial loss for your company (if forced to compromise) than the cost of the upfront legal input.

As the saying goes a stitch in time saves nine. It’s all about effective risk management and prudent decisions being made at the right time.

Sean can be contacted on +64 9 375 8722 or sean.lynch@heskethhenry.co.nz