5 Constructive Approaches to Technology Transactions During a Pandemic
As time passes, companies must engage in constructive solutions to move business and technology projects forward. Many deals that were close to closing have been placed on hold and providers and customers are struggling to determine how the coronavirus pandemic will affect business going forward. Here are five contractual suggestions you can use to move deals forward during these uncertain times.
1. Start with a Proof of Concept or a Free Trial
In uncertain times, customers can become frozen and business deals get put on hold. If you are buying or selling technology solutions, one creative way to keep forward momentum without requiring the customer to take undue risk is to proceed with an initial period of services with little or no financial commitment for the customer. If the service in question can be packaged initially as a free trial or a limited-period proof of concept (POC), now is an excellent time to offer such low-risk solutions to customers. For the provider, the costs to offer such solutions at the moment are lower than prior to the coronovirus pandemic. For customers, low-risk ways to engage service providers create opportunities to move projects forward that might otherwise remain completely stalled. There are a number of ways to package a proof of concept. Some POC’s automatically transition to long-term contracts if certain guarantees are met while others leave the decision to proceed entirely in the hands of the customer. POC’s can be priced on a fixed-fee basis or those fees can be waived if the customer proceeds with a proposed contract. The key is to keep forward progress moving and overcome the paralysis created by market uncertainty. Providers have to offer more flexibility and lower risk to customers than the market would typically require. Those that do will have a competitive advantage in the weeks and months ahead.
2. Provide Flexible Terms and Termination Provisions
For technology solutions that are not amenable to free trials or short-term proofs of concept, providers should consider offering more flexible terms than the market would have previously required. Flexibility is the key to overcoming fear and uncertainty in the market. Services that were previously offered under annual or multi-year terms could be offered on a month-to-month for a period of time. Pay-as-you-go solutions are going to be easier to sell in this environment than solutions that those that require long-term commitments.
Many technology solutions contracts do not allow the customer to terminate for convenience. Fear and uncertainty in the market will make it much more difficult to sell contracts that may only be cancellable for cause. Customers are going to seek providers with more flexible termination provisions and those that can offer such flexibility, at least in the short run, should have a competitive advantage. If a solution is not amenable to being cancellable for convenience due to high start-up costs, consider re-pricing the solution, or softening the liquidated damages provisions related to early terminations for convenience. A customer may be willing to sign up for a long-term deal that is not cancellable for convenience, if the early termination fee seems reasonable to the customer. Providers should carefully consider how much money they will actually lose from early termination and set the early termination fee at that amount.
3. Build in Flexibility for Business Downturn
Given the economic uncertainty and almost certain recession, customers will seek contractual protection for business downturn. Business downturn provisions, a common tool used during the last recession, allow customers to resize the contractual commitment in the event of a substantial decline in revenue or a significant reduction in force. These business downturn clauses protect the customers from contracts that would otherwise not float down to account for evolving customer’s needs. For example, many contracts set a base price and allow customers to float up and then down above the base but never below it. If the business downturn provision was triggered, a new base price would be established, thus protecting the customer from having to pay for products and services that it no longer needs. Usually a business downturn provision is triggered at a 20% reduction in annual revenue or a reduction in force of 20% or greater. Downturn provisions should be negotiated on a case-by-case basis.
4. Build in Flexibility for M&A Activity
I have found that most technology solutions contracts lack the flexibility required for businesses frequently engaged in corporate acquisitions and divestitures as a general proposition. Agreements are frequently non-assignable or assignment is significantly restricted, use and access by third-parties is also frequently prohibited, and therefore many contemplated acquisitions, divestitures, and mergers can be impeded by the vendor contracts relevant to the transaction. Given the lack of liquidity in the current market, there is likelihood of consolidation and other corporate mergers and acquisition activity in the near term. Providers that can provide flexibility to customers likely to be engaged in such activity, will have a competitive advantage over those that do not offer a contractual solution for these issues.
The most important thing that customers need is the right to assign or sublicense in the event of a divestiture. Buyers and sellers do not want to have to engage in ancillary software negotiations prior to closing a deal and need to have assurances that if the buyer does not have its own licenses, an immediate compliance problem will not arise upon closing. By loosening the right to assign or offering a customer a limited right to sublicense a portion of its licenses to a divested or acquired entity for a short period of time, the provider is offering the customer something of significant value. Taking the time to talk through how licensing transitions will occur in various transaction structures and documenting those processes into an agreement, offers customers much needed flexibility while protecting the providers legitimate business and intellectual property concerns.
5. Add Global Health Crisis to Force Majeure Clauses
Force Majeure clauses are rarely heavily negotiated. They define the circumstances that would constitute a good excuse for a party’s failure to perform under the contract. Acts of terrorism, natural disasters and other acts of God have been traditionally included. In the light of the current health crisis, providers should include virus outbreaks, pandemics, and other national and international health crises to the list of events to be included in force majeure clauses.
Demand for technology solutions remains high, even as we head into what appears to be a global recession. Providers that are able to adapt quickly to provide constructive solutions to customer contracts will have a competitive advantage over those that fail to adapt. If you are negotiating technology contracts, we can help. Contact Scott & Scott, LLP at 214-999-0080 for a free consultation.
About the author: Robert J. Scott is the managing partner of Scott & Scott, LLP and the partner in charge of the firm’s technology transactions practice. Mr. Scott has been counsel on over $300,000,000 dollars in technology transactions and represents both service providers and customers in software, cloud, managed services, software development, hosting, and outsourcing transactions.