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Part 2: Clients – The Biggest Risk Factor for IT Business Owners

Here’s one of the great paradoxes of owning an information technology business: it’s impossible to bring in revenue without clients, but working with clients exposes you to the vast majority of risks you face. There are two reasons why.

First, as David Selembo notes, “allegations of professional negligence and breach of contract continue to be the most frequent claims made against information technology companies.” In other words, the claims most likely to be filed against your business come from your clients and allege that you didn’t do your work properly.

Second, IT professionals can be held liable for data breach-related losses their clients experience, if the breach was caused by professional work performed by the IT business. So when technology fails and causes a problem, the business responsible for implementing that technology can be named in a liability suit.

Oh, and one note: whether or not IT business owners are aware of the client-related risks they face, most of them are taking at least some important risk management steps. Of our applicants, 96 percent request quotes for Professional Liability Insurance (commonly called Errors and Omissions Insurance), which is the type of coverage that protects you if an unhappy client sues you for their financial loss allegedly caused by your technology products or services. (To get a quote of your own, apply online today.)

Of course, we realize that lots of IT professionals seek E&O coverage because a client contract requires it – but having this coverage is a good idea regardless of what your clients outline in their contracts. Read on for the reasons why.

Client Relationships: Contracts, Contract, Contracts

Overall, owners of small IT businesses are savvy about managing client relationships with contracts (see chart). In other words, they know that it’s important to attempt negotiating with clients for favorable contract terms. And when they’re not able to change a contract’s terms, they know to work with legal counsel to make sure they understand what they’re responsible for according to the contract’s terms.

But while the majority of applicants (84 percent) have client contracts in place, that leaves 16 percent who are not using contracts to manage client relationships. That’s a pretty big deal. Equally significant, 37 percent of applicants don’t have customer acceptance policies (such as a plan for getting clients to sign off on a project outline) and 53 percent – a majority – lack a client complaint resolution procedure.

Andrew Basile, Jr., an intellectual property attorney at Young, Basile, Hanlon & McFarlane, notes that working without adequate contracts in place is risky. He points out that “small problems, particularly during development, can be resolved successfully if acted upon early,” and added that customer acceptance procedures are “really advisable.”

Let’s examine how various documents can help an IT business avoid expensive lawsuits:

  • Client contracts: By clearly outlining what each party is responsible for, client contracts specify the scope of a project and provide the legal foundation for any disputes that arise down the road. Of course, having a contract is only half the battle. When you’re working with a client who has ready-made contracts in place, it’s important to review the terms of the contract to make sure they’re acceptable. This brings us to the next item.
  • Contract negotiation policies: While small IT businesses won’t always be able to negotiate better contract terms, having a “company policy” for when to ask for modifications is wise. Pushing for a limitation of liability clause, for example, is often a good way to minimize your potential exposure to loss.
  • Customer acceptance policies: To keep everyone – you, your team, and your clients – on the same page, establish a standard operating procedure that involves getting customer signoffs on each element of a project and on any changes that are made throughout the life of the project. Insisting on customer signoffs helps manage expectations and lowers the risk of miscommunications and lawsuits.
  • Client complaint resolution procedures: When something does go wrong, complaint resolution procedures help business owners respond methodically and carefully. Having an official procedure increases the likelihood that you’ll address all the areas of concern for your customers and prevent complaints from turning into lawsuits.

In most situations, these elements work together to help IT business owners manage risks and achieve the best possible outcomes.

Of course, one-person technology businesses may not have the funds or time to develop a new contract for every client and project. And those who have large corporations or government entities as clients may feel as if they have little or no say in the terms of their legal paperwork or may be boxed into contracts. Realistically, business owners aren’t always able to negotiate terms in their favor.

When that’s the case, client acceptance policies are especially important. If you can’t alter the terms of your contract, be sure to verify that your clients are clear about what you’ll be delivering. Should there be a dispute, you can avoid a lawsuit by referring to previously agreed-upon project specifications. That may mean diverting more resources to QA and client communication to ensure that things get done right the first time.

Even when larger clients aren’t open to contract negotiations, though, don’t be afraid to point out contract terms that seem incorrect. Larger companies typically use standard templates for contractors. It’s entirely possible that someone in legal forgot to change the coverage limit or update the policy types required for your business. If something sounds off, be sure to verify with the client – having a contract with unrealistic terms can be disastrous in the event of a dispute.

Client Contracts in the Courtroom

So why are client contracts so important? Because in the event of a legal challenge, the court’s ruling will ultimately be based on what was outlined in contracts. Contracts put in writing the official, legal nature of your relationship with your clients: what you’re expected to do, what they’re expected to do, and what can happen if either of you fails to meet those expectations.

In non-technology situations, you might be able to count on legal precedent to cover you if your contracts are insufficient, but technology is notorious for being ahead of the legal system. Technology will always evolve faster than legislators can write laws or courts can hand down rulings, as the article Laws and Ethics Can’t Keep Pace with Technology from TechnologyReview.com highlights.

And while our court system may be a marvel of 18th-century democratic innovation, it is not known for being populated with technology experts. In fact, in the recent dispute between streaming provider Aereo and TV networks, members of the Supreme Court were ridiculed for their lack of technological savvy. (See New York Magazine’s article 8 Times the Supreme Court Was Bewildered by Technology for more.)

In brief: if a client takes you to court, the chances are good that you’ll be the only person in the courtroom who understands the nature of your work. Without clear-cut contracts outlining what was expected of both parties, you’ll have a serious uphill battle to demonstrate your lack of liability.

70% of businesses raise prices or cut hiring when sued