Technology Service Providers: No Magic Pill For Common Client Headache

By: Gretchen Sayers, Esq. and Roxanne Westfall – Media/Professional Insurance

“Why did they sue us? We didn’t do anything wrong!” These are often the first words out of a policyholder’s mouth after a client files a lawsuit against their firm. As many innocent insureds eventually find out, doing everything right does not necessarily shield a company from being sued. If a company ultimately prevails in court, it can cost tens of thousands of dollars to successfully defend against even the most baseless of allegations. While it is virtually impossible to insulate any business completely from litigation, there are practical steps a Technology Service Provider (TSP) in particular can take to reduce the likelihood that a dissatisfied or financially troubled client will file suit. At the very least, these steps will certainly prove helpful in the defense of a suit if litigation cannot be avoided.

Check Client Financial Health

Confirm that potential clients are financially sound before executing contracts. It only makes sense to do business with paying clients as opposed to those who don’t have the means to pay. Gather as much financial information as you can from the client up front without irritating them and consider independent financial resources such as Dun & Bradstreet when appropriate. Taking on a client who will have trouble paying invoices is not only bad for the bottom line, it increases the chances of ending up in court with the client as explained above.

Manage Accounts Receivables

Don’t let account receivables get too excessive. Many of the lawsuits brought against TSPs are in response to their own efforts to collect account receivables. The amounts owed by the client begin to escalate, but the TSP keeps doing work and generating more invoices. Eventually, the TSP starts getting aggressive and may even file their own lawsuit against their client to collect amounts legitimately owed. The client, who is now faced with a daunting bill either they cannot pay or simply refuse to pay, counters that they are not obligated to pay because the services received were unacceptable. By requiring periodic payments after client sign-off on work completed, a TSP is setting up an “early warning system” to alert if problems with the client are developing, and will be able to step in to address the issues before they get out of hand. If the client cannot or will not pay, it is best to find that out early. Letting the problem go unchecked, and compound as more work is completed, will only increase the likelihood
of litigation.

Document, Document, Document

Preserve letters, meeting minutes, e-mails and other relevant documents which contain expressions of satisfaction relative to the services provided. Complimentary communications are fairly common between a client and its TSP, and they can be useful in contradicting future statements that work done was not as promised or was of unacceptable quality. While such documents may ultimately be used in defending a lawsuit, they may also be very useful in dissuading a client who is considering filing suit. A CEO or project manager who is thinking of suing may not remember the glowing comments that they or members of their staff made six months earlier, and hopefully will think twice about filing suit after being reminded with black and white documentation of those comments.

Another important type of documentation involve those that memorialize significant changes in the project description or in client expectations. Often, the client requests changes over the course of a project. If litigation ensues, it is extremely important to be able to compare the product provided with what the client reasonably should have expected. If there is only the original contract (and both sides agree that the original project materially changed), a clear and convincing comparison will be difficult at best. In documenting project changes, an actual amendment to the relevant contract is best, but may be impractical for various reasons. More feasible is to keep any written communications that document the changes. Don’t be passive. Initiate correspondence and e-mails that confirm points of agreement and project or schedule changes. Even handwritten notes documenting conversations and meetings about project changes can be extremely effective, if dated and legible. If the client signs
or initials such notes that’s even better.

Be Cautious Of Personnel Changes

Commonly, when a new person is hired into or promoted within the client company, they will want to instantly demonstrate their value. Some attempt to accomplish this by “saving” the company from a “bad” computer system or by recommending a “better” system (one with which the new person has more familiarity). If the predecessor selected the TSP, this in itself may be enough reason for the newly hired individual to find fault. In this situation, the TSP can try very hard to build bridges, but ultimately a dispute may be unavoidable as the new person may be politically motivated to criticize the current system. In such cases, prior documentation is the only thing that may save the day.

There is no “magic pill” that will completely protect a TSP from being sued by a dissatisfied client. If there were, TSPs and other service providers, wouldn’t need to maintain errors and omissions insurance. At the end of the day, insurance is an important safety net when all else fails. It is just as important, however, to adopt and consistently adhere to a risk management program that can help reduce the chances that your business will be the target of client litigation.

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Categories: Media Professional Insurance Articles

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