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Advanced
How To Guide
Choosing eBusiness vendors and software
2.05 Contract Penalties
In general users seek performance not compensation from
their vendors. When a major problem occurs, the loss
of data or business opportunity can't be compensated
by an amount of money. However, a good vendor agreement
does outline exactly what sort of penalty should be
paid in the event of underperformance. This sanction
should have enough teeth to make the vendor live up
to its responsibility.
Penalties are often broken into minor and major categories,
with a description of each being clearly articulated
in the agreement. Often, a certain number of minor infractions
will account for a major infraction. The agreement should
also outline how many major infractions would be cause
to allow you to terminate the contract.
Often, penalties are designed to be a percentage of
the monthly contract; the specific percentage being
based on the severity of the problem. In technical situations
users could look for a proactive penalty approach in
which the vendor uses sophisticated monitoring tools
to spot any problems and voluntarily pays for any time
that a metric is missed. A reactive policy, on the other
hand, requires that the customer spot the problem and
offer proof that remuneration is needed.
Service level credits are an increasingly common approach
to performance problem resolution in technical situations.
Here a service level credit is granted to the customer
after a service level failure. The supplier may be required
to write a cheque to the customer or the customer may
simply have the right to apply the credit to future
service. The total service level credits for a measurement
period might be capped at, say, 10% or 15% of the total
monthly bill. This means that, although poor performance
could reduce the supplier's profit margin, it would
not create a loss for the supplier. There are many variations
on this theme. Some agreements impose credits only for
repeatedly missing required service levels. Some allow
the supplier to earn back service level credits for
subsequent good performance, or to use superior performance
to get "Get Out of Jail Free" cards to avoid
future service level credits.
Compensation for consequential loss is a more complicated
issue. Getting a service provider to agree to cover
you for consequential loss, such as loss of sales revenue
due to non-availability of a website, is not easy. Vendors
are not likely to take on a liability greater than the
value of the contract. If your eBusiness vendor does
offer to cover for consequential loss it will have to
buy the insurance cover from a third party. That cost
will be passed on to you, as will the administrative
cost for having supplied it. Users might just as well
take out their own insurance against consequential loss
as expect the vendor to provide it.
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