Dotting the I's and crossing the T's in IT-contracts


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Dotting the I's and crossing the T's in IT-contracts

  1. 1. Dotting the Is and crossingthe Ts in IT-contractsKey legal attention points for successful IT-contractsKristof De Vulder , DLA Piper28 May 2013
  2. 2. DLA Piper Global business law firm 77 offices in 31 countries in Europe, Asia, US, Africa Over 8.000 people (including 4.200 lawyers) 135 lawyers in Belgium (Brussels and Antwerp) Globally over 200 lawyers fully dedicated to technology and sourcing2
  3. 3. Agenda for today IT-contracting trends Why do we need IT-contracts? Win-win approach to IT-contract negotiations Key issues and recommended mitigation3
  4. 4. IT-contracting trends 2013"we live in interesting times" Cost is (still) king Customers previously well known for negotiating hard are becoming more flexible -at least when negotiating provisions with a cost impact! Noticeable shift back to smaller single supplier deals or multi-supplier frameworkcontracts Focus on speed and reduction of procurement process cost (more "sole source"basis) More (pre-)litigation More cloud Customers continue to require more flexibility Termination rights Re-negotiation rights (hardship, extra-ordinary event, cost saving initiatives, etc.) Suppliers have become much tougher on payment clauses Customers are similarly getting tougher in demanding financialprotection4
  5. 5. Why do we need contracts?"It’s not that I don’t trust the person sitting acrossfrom me at General Motors. In fact, I may feelmore comfortable with him than his counterpart atToyota.I may trust him completely.What I don’t trust is that he will be sitting there ayear from now. And even if he’s there, he mayhave to play by a new set of rules."Supplier executive quoted in Collaborative Advantage, by Jeffrey H. Dyer,2000
  6. 6. Why do we need contracts?6PoorrelationshipExcellentrelationshipAdequatecontractInadequatecontractControlledriskNirvana!SeriousriskPotentialriskContractqualityRelationshipqualityCompanies inevitably look out for their own interests!
  7. 7. Why do we need technology contracts ?• Best practice technology contract is critical!• What distinguishes IT-contract from other contracts?Technical and complexEvolution/InnovationInternationalIT-projects are more susceptible to delays/failure
  8. 8. IT-contracting negotiations approach Outsourcing "just like M&A"…? Point scoring lawyers and penny pinching procurement teams, sayhello to evasive and risk averse supplier teams The reality = an unbalanced deal is inherently fragile and suits no-one Case study: Airline company has two large outsourcing agreements Networks deal negotiated aggressively and in bad humor; characterised thereafterby escalations and formal contract notices Desktop deal negotiated with openness and trust; customer "cut some slack" whenscope and pricing issues arose, and relationship is running smoothly8
  9. 9. Key issue: Acceptance process Case study: Customer is an intergovernmental organisation that concluded a major systemsintegration agreement with global technology company Intermediary deliverables are accepted but UAT fails. Customer continues to referto initial high level requirements to argue that final deliverable cannot be accepted Supplier argues that detailed scope definition as agreed during the project fullyreplaces initial requirements Contract is unclear and escalation process results in pre-litigation process Some important "lessons learned": Clarity of contractual scope and associated acceptance process is crucial Customer high level requirements always to be clarified in detailed scope definitiondocuments Sign off detailed scope definition documents which replaces/supersedes customers initialhigh level requirements Validation of deliverables against detailed scope definition documents only Avoid "we agree to agree" clauses9
  10. 10.  Case study Outsourcing agreement with initial term of 5 years and with 2 possible extensions ofeach 1 year Contract is governed by Belgian law Liability claim from the customer after 2 years Parties liability (including suppliers liability) is limited as follows:"Either Partys aggregate liability arising out of or in connection with thisAgreement is limited to the greater of 1 million € or the amounts paid or payableunder this Agreement. Neither party is liable for indirect or consequential loss." Careful drafting is required in order to limit exposure / manage risks! What does "paid or payable" mean? all paid amounts + unpaid invoices all paid amounts + unpaid invoices + charges incurred but not invoiced yet all paid amounts + unpaid invoices + charges incurred but not invoiced yet + expectedcharges until first exit date (i.e. after 5 years) all paid amounts + unpaid invoices + charges incurred but not invoiced yet + expectedcharges until first exit date + expected charges until maximum term (i.e. 7 years) What does "indirect or consequential loss" mean?10Key issue: Liability
  11. 11.  Case study Global network outsourcing agreement with robust SLA and service credits in caseof SLA failure Service credits are defined as customers "sole remedy" After 1,5 years, customer experiences 3 full internet outages (in total +9 days) overa period of 2 months and decreased service globally during this period In accordance with the SLA, supplier is liable for a service credit of 2,600 euro Clear understanding of service credits is required Does the service credit constitute a liquidated damage OR a price adjustmentreflecting the actual quality of service provided? Value of having bonus and/or earn back mechanisms Defining an "at risk amount" or "service credit cap" Termination events11Key issue: Service credits
  12. 12.  Case study Global pharma company considers buying cloud services Question arises how to select cloud provider and negotiate cloud terms and conditions Shift in mentality! Standard commoditized offering, therefore limited flexibility or ability to change t&cs Serious gap between expectations of a global company and (content of the) t&cs "click wrap" Often presented as less or no "legalese" contracts Limited obligations/liability Unilateral changes Suspension and termination rights Back-up? Exit and release of data Privacy Contract evaluation should be a key part of provider selection. Deciding between: negotiating on basis of service providers own terms developing own template for Cloud based services middle ground of an "addendum" or "overlay"12Key issue: Cloud computing contracts
  13. 13. Thank you for your attention!Kristof De VulderPartnerDLA Piper UK LLP+32 (0)2 500 15 20+32 (0)494 57 15