In our previous post we discussed the importance of conducting a thorough due diligence and procurement process with smart technology providers. Next up? The contract.
The price of a procured product is always important, but equally important are other contractual terms that reflect the commercial agreement. Ultimately, the contract should answer the fundamental question of “What are you buying?” The product itself is not the only feature being purchased. A customer is also buying certainty, service performance, risk mitigation, flexibility, security, compliance, and other similar “intangible” items of value.
The Price of Certainty
As part of the price, the purchaser of smart technology is also buying certainty. What do we mean by that?
Certainty in a technology solution can come in several forms:
Timing Certainty. If the smart technology supplier is providing implementation and configuration services for the technology, the contract should provide a clear set of milestones that establish a precise timeline for when the supplier will accomplish its promised activities. Best practices also dictate that the contract include “teeth” behind those milestones—often in the form of payment holdbacks or credits if the supplier fails to deliver on time—which creates a built-in incentive for the supplier to meet its promised timelines.
Financial Certainty. A poorly drafted contract often lacks precision around the pricing terms. Yes, it may include the cost per smart device or the price of a monthly subscription. However, what else is included or not included? Does the per device cost include updates and upgrades? Or is such support “extra”? What is in scope for the monthly subscription? If the contract does not address these sorts of questions, then it creates budget uncertainty down the road because the supplier may have surprise change orders if the parties’ respective assumptions are misaligned.
Functional Certainty. The contract should clearly describe the features and functionality of the products and the scope of the services being performed. In addition, a well-drafted contract will include an “acceptance” process where the purchaser of the technology is able to ensure that the products and services meet the specifications before payment is made and the products and services “go live.”
A purchaser of smart technology buys not only products and services, but also a level of performance for those products and services. For example, if smart HVAC equipment is consistently having availability downtime issues during extreme weather, then it is the equivalent of having no HVAC equipment at all. While the smart tech provider will have the incentive to fix the problem for reputational reasons, fear of bad PR alone does not exactly bring comfort to a customer experiencing support and quality issues. A strong contract can fill this gap by establishing standards of performance and response processes when issues arise that can commit vendors to providing support throughout the life of the smart devices.
Service levels are the most effective way to ensure supplier accountability. Timeliness, availability, resolution of errors and similar metrics should be tracked by the vendor and regularly reported. Finally, the best way to make sure these service levels are meaningful is if the supplier is required to issue a credit to the customer if those service level metrics are not achieved.
The area of smart technology is rapidly evolving, and business needs may change. It may not always be easy or desirable to switch smart technology suppliers, but the contract should include the flexibility to terminate. Certainly, the ability to terminate for contractual default is a given, but the purchaser of smart technology may also need the ability to terminate for “convenience.” Flexible termination rights are another aspect of the transaction that is being purchased.
A customer of smart technology will also need flexible terms to operate its business following termination or expiration. The supplier will first need to return (or destroy at the customer’s election) all confidential information or data that it may have in its possession. Second, the customer will want to avoid any extra termination-related fees that limit financial flexibility. Finally, switching smart technology suppliers can be costly not only financially, but also in terms of time and resources. A well-drafted contract will include “termination assistance” terms that require the smart technology supplier to help the customer achieve a smooth migration from the supplier’s technology solution to a successor supplier’s technology solution.
As we see from the daily headlines, data breaches are a costly threat to any business and are becoming more frequent across industry. Governmental investigations, regulatory fines and third-party lawsuits arising out of security incidents can pose significant financial risk to any real estate business. A sophisticated purchaser of smart technology will recognize that security is a key component of the solution that it is buying.
From cameras collecting the images of visitors to users synching their smart phones with an interface, these pieces of technology process and store a significant amount of information. In the coming weeks, we will discuss the privacy considerations that are associated with data collection. For now, however, one should recognize that the contract should account for how the supplier will protect this information and allocate the risk for if/when a security breach occurs. Contractual commitments mean the vendor could be held liable if there is a data breach and it is determined there were flaws in its own security procedures or the protections in the devices.
A Question of Compliance
Depending on the type of technology and its capabilities, FCC approval may be required before certain smart technology products can be brought to market. A well-drafted contract will include commitments from the supplier that its products meet any applicable regulatory requirements. In addition, the contract should address the supplier’s responsibility for costs and fines to the extent it has not sufficiently satisfied its regulatory requirements. While technology is evolving at a rapid pace, speed of innovation should not be an excuse for vendors to cut corners on regulatory compliance. A sophisticated contract will clearly provide that regulatory compliance is part of the solution being purchased.
Buyer Be Aware
Ultimately, the purchaser of smart technology should make sure the contract reflects the bargain. Far too often, we see contracts where the smart technology purchaser is committed to paying a price, but the contract fails to provide the answer to the question: “What are we buying?” The solution being purchased is not just products and services, but also intangible qualities such as certainty, performance, flexibility, security and compliance.