Raise your hand if you routinely click on the “I Agree to the Terms of Service” button when you register online for a service. Go ahead; no one’s looking.
Don’t feel bad. We all do it. Truthfully, we have little choice in many cases. If you don’t like the terms, there’s no one to negotiate with. Your only option is to walk away. Instead, we assume that the agreement is reasonable and fair.
This is not always the case with contracts for HR and benefits administration technology, yet many employers assume that their service provider’s contract is fair, is in their best interest, and they do not have the ability to make changes.
Contracts are legal documents, and although I am not an attorney (your legal counsel should review all contracts), my team regularly engages in conversations around contract terms and their potential impact on the services provided. In fact, “review and advise on contract terms” is one of our standard service offerings — designed to help employers avoid problems down the road and maximize the value of the contract. For those who lack the resources for this type of consulting support, we’re happy to provide general guidance, along with specific points to look for.
Review the provider’s standard contract* as part of the selection process
A sophisticated buyer will ask to see the provider’s contract before deciding on which HR technology to purchase. This isn’t the time to negotiate terms, but it will give you a sense of possible issues you’ll need to negotiate when the time comes. It’s also an indicator of your future relationship with the provider. Think of this contract like a prenuptial agreement. If you’re not comfortable with the terms in the beginning “love” stage, it will only get worse when the honeymoon is over, and problems arise. (Read our blog on “Marriage Counseling” Can Save a Business Relationship)
*It’s in everyone’s best interest to use the provider’s form and negotiate from there. In our experience, most attorneys don’t understand what their clients are really buying, so coming to the table with your own contract requires extra time and energy working through operational issues. This can result in the relationship getting started on an unfortunately contentious note.
Assume the contract is in the provider’s best interest
This is a given, but that doesn’t mean there’s no room for negotiation. Unless your organization is exceptionally large or has endured a lawsuit, we find that most employers are overly willing to accept the presented terms. To counter this, we have a set list of “asks” (many of which we reference in this article), designed to shift the terms to the employer’s advantage, or at least to an even middle ground. You won’t always get what you ask for, but the process will educate you on what you are not getting from the contract (or what you don’t know).
Don’t just sign; pay attention to the terms.
It seems obvious, but keep in mind these are legally binding documents. It’s not like making a change to your broker of record. Your legal team will most likely view the contact from a “future litigation” perspective (that’s their job), but this doesn’t help you from an operational perspective. As you review the terms and conditions, think about implementation, upgrades and all manner of possible problems that might arise. Following are some specific things to look for.
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Termination Clauses – There are many good reasons to end a contract, but many employers find themselves in a situation where it’s painful to get out of the agreement. Look for and negotiate these termination clauses and related terms:
- Early termination: Most contracts lack an early termination clause, which can be important if there’s a change in operations or need. It’s worth negotiating this but expect an associated penalty fee that corresponds with circumstances.
- Change in control: This comes into play when Provider X is purchased by Provider Y, but the employer does not want to work with Provider Y. Ask for the ability to exit the contract with no fee in these instances.
- Dates: Whatever the termination clauses, look at the associated dates to ensure there’s sufficient time to plan for a replacement provider.
- Breach: While the contract may provide for termination due to a breach of contract, know that this legal strategy rarely succeeds. First, it’s tough to prove and, second, any breach clause is going to include a “cure period” that allows the provider to do just enough to avoid being in breach but may not satisfy you, the employer. Our advice is to negotiate for other types of termination clauses (e.g., early termination) to provide an out for an untenable situation.
- Price Increases – Many contracts will lock in the price for an “initial” period (usually the term of the contract). Others have annual increases. We try to negotiate the elimination of yearly increases for the duration of the original contract. If this isn’t possible, ask for a cap to ensure you can budget appropriately. Most common is to negotiate a cap equal the Consumer Price Index (CPI) or Producer Price Index (PPI), plus a small percentage (less than 5%). Providers have quietly shifted to using the PPI as it tends to be slightly higher. Over the term of a multiyear contract, a small difference will add up. Compare the rates at the time of the contract and negotiate to use the Index with the lower rate.
- Statement of Work – One common problem we see with contracts is related to the lack of clarity outlined in the statement of work (SOW). Ideally, the contract should refer to the SOW as an attachment (versus ambiguous statements within the contract about services provided). Always check to ensure the product or service purchased and the price quoted in the contract exactly matches the information in the SOW. Be sure to refer to it at implementation too, as the sales team may not communicate with the service team.
Perhaps our most significant concern in this area is contracts that include a hyperlink to the SOW or, more concerning, the Master Services Agreement. Signing a contract with hyperlinked information means you agree to the current information as well as to any changes made in the future to the information at that link. We advise employers to print (and date stamp) all hyperlinked information and have your legal counsel review as they would with other parts of a contract. Attach the printed copy as an exhibit and then redline the hyperlink in the original contract and replace it with a reference to the exhibit number.
- Subcontracting – You want assurances that any third-party contractors with access to protected health information (PHI) are bound by a Business Associate Agreement to satisfy HIPAA regulations. Sometimes employers ask that a provider does not offshore work due to cybersecurity concerns. Beyond HIPAA, look for guarantees from the provider regarding third-party work. At a minimum, ask that the provider apply their same operating standards to their subcontractors.
- Hiring – It’s not uncommon for a member of a service team to later be hired by an employer client and vice versa. The implementation process provides the opportunity to connect and assess particular skills, but you may want to address terms around this scenario. For example, specify that the provider may not hire one of your employees unless the job has been publicly posted.
- Jurisdiction – When engaging with an out-of-state provider, the contract may indicate the venue of law, i.e., the geographical location where judgment will be rendered in the event of litigation. While no one wants to think about a lawsuit, venue clauses are important as they give leverage to the party that makes the choice. Ideally, you want to be able to determine the venue of law, especially if laws in one state are particularly favorable to your organization. If the contract does not spell out a venue of law, we advise not to raise the question until the point becomes relevant.
- Insurance – The contract should commit the provider to the appropriate types and levels of insurance coverage. Be sure the contract states that the provider must notify you at least 30 days before cancellation. This reduces the chance of a provider purchasing a policy solely to secure the work and then canceling once a contract is signed.
- Auto-renewals – We do not advise agreeing to an auto-renewal of the agreement; it’s too easy to miss the date of notification to opt-out. Even if you’re happy with your provider, contract renewals provide the opportunity to discuss the relationship, make small adjustments and perhaps negotiate better terms if the amount of business has grown. If this is non-negotiable, mark your calendar at least 90 days in advance of the date required to give the provider notice of cancellation to ensure enough time to assess current satisfaction and talk to other providers, if desired. If you know you plan to change providers, begin your search process six months or more before the end of your contract, but wait to notify your current provider until the required date to avoid a possible decline in service. Notifications of non-renewals should equally apply to both parties.
“Letters of Intent – Yes or No?”
Employers sometimes ask me what I think about using a letter of intent (LOI) to allow work to begin while negotiating the terms of the contact. This typically comes into play if work must begin quickly to meet project deadlines, e.g., to ensure readiness for open enrollment. While this carries some risk for both parties, we believe LOIs make sense in certain circumstances, but only if money changes hands and there is a clear date by which a full contract must be signed, otherwise all work will most likely stop. LOIs should be limited to 30 to 60 days. Any fees paid should apply against a signed contract (and be proportionate to the amount of work to be completed during this time). If the parties can’t come to agreement on contract terms, do not expect a refund.
Contract negotiation need not be a painful process. In most cases, you can reach an agreement on most points, although technology providers serving large employers are less likely to negotiate their core terms of the agreement. While it’s rare for a provider to walk away from the table over a reasonable request, it can happen.
As with any relationship, we encourage employers to pick their battles. Arguing at the front end over every small point will start the relationship on a negative note, which may not bode well for the future. Alternatively, don’t shy away from putting your most important terms on the table. Most reputable providers are happy to engage in a dialogue in search of mutually acceptable terms. Contact us today if you’d like to speak with a Gallagher consultant about your specific contract negotiation challenges and how we can help.
About the Author
Rhonda Marcucci, together with Ed Barry, co-leads Gallagher’s HR and Benefits Technology Consulting Practice. Their team provides unbiased, well-researched HR technology and benefits administration consulting, including sourcing advice and service provider capability audits. Rhonda’s extensive and broad-based experience in finance, accounting, administration, strategic planning, information systems, sales and marketing, and operations is instrumental in helping employers identify a comprehensive strategy and execute against it.