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Subject: Hostage Fees and Evergreens
From: Patrick Cunningham <[log in to unmask]>
Reply-To:[log in to unmask]
Date:Tue, 7 Oct 2003 13:17:09 -0700
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These things come up every year or so and when I post my opinions on
the subject, I tend to get emails from vendors who claim that I "don't
understand" their business. Note also, this is my personal opinion here
and not my company's or ARMA's.

As noted by others, "hostage fees" are the impolite way that records
managers describe a line item typically called "termination fees" on a
records storage contract. Depending upon who you talk to, these will be
justified as ways to recover the investment made to acquire the account
or as a mechanism to recover the loss of revenue for the abandoned
space. For some vendors, they are the only punitive way they have to
keep a bargain-hunting customer from walking away from the contract.

I have always believed that a customer is a free agent at the end of
the contract term. They can pay the normal retrieval fee, plus,
perhaps, a small fee for pallets and shrinkwrap, since these are not
ordinarily part of a retrieval. Beyond that, there are no other costs.
I've been told by those in the industry that they need add in extra
charges to cover the cost of verification of the outgoing boxes, but I
have to wonder why normal retrievals are not subject to the same level
of "quality control"? I've also been told that terminations are a lot
of work and that requires them to hire extra help or keep people on
overtime. Well, that may be the case, but my experience in running a
records center tells me that a mass retrieval is much more productive
than normal one-off retrievals because you typically can pull boxes in
location sequence -- and many boxes will be located close to one
another becuase they came in together and never left. Yes, you likely
need to add in a forklift operator, but again, you now have two people
managing pallets of boxes rather than a cart or two. In any event, the
normal retrieval fee should cover the labor cost with something left
over as profit for a well run operation.

As to the recovery of the lost revenue for the abandoned space, I would
argue that the company now avoids a significant customer acquisition
expense. They don't have to build shelving for that new customer and
can use existing (and often fully depreciated) shelving.

The utility of termination fees lies in the ongoing contract period.
The vendor clearly needs protection to prevent the bargain hunter from
moving on every year or two. If you break the contract without cause,
you should be liable for storage expense to the end term of the
contract.

As for "evergreen" clauses, there are a couple ways these are
interpretted. First, others have discussed the contract that continues
to roll over indefinitely if neither party terminates the contract at
the end of the contract period. Generally, there is provision for the
vendor to change terms and conditions as necessary with each "renewal"
of the contract (generally, the customer's payment of the bill without
dispute amounts to de facto acceptance of the new terms and
conditions). The other "evergreen" clause allows the vendor and the
customer to periodically review the terms and conditions of the
contract and adjust them as they see fit (and with the other party's
implied or real permission). Again, payment of a bill with new terms,
conditions, and pricing usually amounts to acceptance of the new terms.

Generally, you want to ensure that your contract does not allow
arbitrary changes by the vendor. Our contracts generally cap annual
increases and prohibit ad hoc increases (i.e. surcharges due to the
cost of fuel). You also want a clear endpoint to the contract. The
vendor will likely want a provision to ensure that they get paid after
the term of the contract (if you stick around without negotiating a new
contract) and likely they will want some way to raise prices, if
necessary, so that you don't pay the initial (i.e lower) prices
forever.

Patrick Cunningham, CRM

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