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  1. 1. Managing Risk on IT Projects - A Legal Perspective April 19, 2006 By: Matthew Peters, Partner McCarthy Tétrault LLP Barristers & Solicitors 1300 – 777 Dunsmuir Street Vancouver, B.C. V7Y 1K2 Direct Line: (604) 643-7162 Direct Fax: (604) 605-5265 E-mail: [email_address]
  2. 2. Overview <ul><li>Context for discussion </li></ul><ul><li>Deal Risks Generally </li></ul><ul><li>Detailed review of the Risks: The Problems and Some Solutions </li></ul><ul><li>The Economic Model and Risk </li></ul><ul><li>Q&A </li></ul>
  3. 3. Context for Discussion <ul><li>Assumptions: </li></ul><ul><ul><ul><li>We are talking about medium to large scale IT projects, with an emphasis on large scale projects </li></ul></ul></ul><ul><li>Focus: </li></ul><ul><ul><ul><li>On the customer side (but not exclusively) </li></ul></ul></ul><ul><ul><ul><li>Rationale: The customer is typically the side that must ensure risks are managed </li></ul></ul></ul>
  4. 4. What Risks? <ul><li>RFP Risk </li></ul><ul><li>Project Completion Risk </li></ul><ul><li>Service Delivery Risk </li></ul><ul><li>Legal Liability Risk </li></ul><ul><li>Regulatory Risk </li></ul><ul><li>Relationship and Governance Risk </li></ul><ul><li>External Risks </li></ul>
  5. 5. RFP Risk <ul><li>Some Problems: </li></ul><ul><ul><ul><li>RFP does not complete </li></ul></ul></ul><ul><ul><ul><li>Customer picks the wrong vendor </li></ul></ul></ul><ul><ul><ul><li>Not enough Vendors respond </li></ul></ul></ul><ul><ul><ul><li>Vendors perceive the process as unfair </li></ul></ul></ul><ul><ul><ul><li>Vendors waste time and money bidding on projects they cannot or should not win </li></ul></ul></ul><ul><ul><ul><li>Vendor consortium falls apart or slows the process down </li></ul></ul></ul><ul><ul><ul><li>Vendors “run all over” the customer </li></ul></ul></ul>
  6. 6. RFP Risk (continued) <ul><li>Some Solutions: </li></ul><ul><ul><ul><li>Have a clear vision of the project </li></ul></ul></ul><ul><ul><ul><li>Customer needs to do early due diligence to validate the project </li></ul></ul></ul><ul><ul><ul><li>Run a fair, transparent process with knowledgeable procurement people involved </li></ul></ul></ul><ul><ul><ul><li>Transparency into the vendor bids so that there can be meaningful negotiations </li></ul></ul></ul><ul><ul><ul><li>Vendors need to do due diligence on the customer and the project before bidding </li></ul></ul></ul>
  7. 7. RFP Risk (continued) <ul><ul><ul><li>Customer needs to obtain its approvals as early as possible </li></ul></ul></ul><ul><ul><ul><li>Customer needs to do sufficient due diligence on the vendors </li></ul></ul></ul><ul><ul><ul><li>Customer needs to have visibility into the vendor consortium to the level that the customer is comfortable that the relationships are being properly managed </li></ul></ul></ul>
  8. 8. Project Completion Risk <ul><li>Some Problems: </li></ul><ul><ul><li>IT projects tend to be over budget, late or worse, they don't complete at all </li></ul></ul><ul><ul><li>The wrong people are involved or the right people leave part way through </li></ul></ul>
  9. 9. Project Completion Risk (continued) <ul><li>Some Solutions: </li></ul><ul><ul><ul><li>Over budget, late or worse . . . </li></ul></ul></ul><ul><ul><ul><ul><li>milestone payments </li></ul></ul></ul></ul><ul><ul><ul><ul><li>holdbacks </li></ul></ul></ul></ul><ul><ul><ul><ul><li>performance guarantees </li></ul></ul></ul></ul><ul><ul><ul><ul><li>using license fees as a &quot;holdback&quot; </li></ul></ul></ul></ul><ul><ul><ul><ul><li>detailed specifications attached to original agreement </li></ul></ul></ul></ul><ul><ul><ul><ul><li>tight change control process with &quot;ordinary course&quot; carve out </li></ul></ul></ul></ul><ul><ul><ul><ul><li>contingencies </li></ul></ul></ul></ul><ul><ul><ul><ul><li>fixing realistic dates </li></ul></ul></ul></ul>
  10. 10. Project Completion Risk (continued) <ul><ul><li>People Risks: </li></ul></ul><ul><ul><ul><li>Ensure that you have the right people from the beginning: </li></ul></ul></ul><ul><ul><ul><ul><li>customer team </li></ul></ul></ul></ul><ul><ul><ul><ul><li>vendor team </li></ul></ul></ul></ul><ul><ul><ul><ul><li>externals including: </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>lawyers </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>stakeholders </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>SMEs </li></ul></ul></ul></ul></ul>
  11. 11. Project Completion Risk (continued) <ul><ul><ul><li>Ensure that you do not lose the right people during the project: </li></ul></ul></ul><ul><ul><ul><ul><li>key personnel provisions </li></ul></ul></ul></ul><ul><ul><ul><ul><li>subcontractor provisions </li></ul></ul></ul></ul>
  12. 12. Service Delivery Risk <ul><li>Some Problems: </li></ul><ul><ul><li>Service levels are left until after signing </li></ul></ul><ul><ul><li>The vendor is not delivering the services in accordance with the service levels </li></ul></ul>
  13. 13. Service Delivery Risk (CONTINUED) <ul><li>Some Solutions: </li></ul><ul><ul><li>Service levels should be attached to the agreement. If this is not possible, the customer needs an exit ramp. </li></ul></ul>
  14. 14. Service Delivery Risk (CONTINUED) <ul><ul><li>What will incent the vendor to deliver the services in accordance with the service levels? </li></ul></ul><ul><ul><ul><li>Traditional approach: </li></ul></ul></ul><ul><ul><ul><ul><li>Service Level Credits per service </li></ul></ul></ul></ul><ul><ul><ul><ul><li>weightings and point process </li></ul></ul></ul></ul><ul><ul><ul><li>Think outside the box: </li></ul></ul></ul><ul><ul><ul><ul><li>Ask the vendor what motivates their people internally </li></ul></ul></ul></ul>
  15. 15. Service Delivery Risk (CONTINUED) <ul><ul><ul><ul><li>Other ideas include: </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>dashboards and other reporting processes </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>executive compensation/performance bonus tied to service delivery </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>governance and meetings </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>root cause analysis and remediation plans </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>SLA credits directly applied to problem (note that cash should be in the customer's hands until approved) </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>incentives for over-performance </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>SLA adaptability over time and due to different circumstances </li></ul></ul></ul></ul></ul>
  16. 16. Legal Liability Risk <ul><li>Some Problems: </li></ul><ul><ul><li>Who bears the risk of loss if things go wrong? </li></ul></ul><ul><ul><li>Vendors want to limit legal liability </li></ul></ul><ul><li>Some Solutions: </li></ul><ul><ul><li>What risks should be borne by the customer? </li></ul></ul><ul><ul><ul><li>Things within the customer’s control (such as approvals) </li></ul></ul></ul>
  17. 17. Legal Liability Risk (continued) <ul><ul><li>What risks should be borne by the vendor? </li></ul></ul><ul><ul><ul><li>Things within the vendor’s control (such as delivery) </li></ul></ul></ul><ul><ul><ul><li>IP </li></ul></ul></ul><ul><ul><ul><li>Others </li></ul></ul></ul><ul><ul><li>What risks should be shared? </li></ul></ul><ul><ul><ul><li>Cap on liability </li></ul></ul></ul><ul><ul><ul><li>Consequential damages </li></ul></ul></ul><ul><ul><ul><li>Insurance as a way to share liability </li></ul></ul></ul>
  18. 18. Regulatory Risk <ul><li>Some Problems: </li></ul><ul><ul><li>Both the customer and the vendor may be subject to certain regulatory or policy requirements. Who bears the risks of non-compliance? This is particularly relevant in situations where there continue to be dependencies between the parties. </li></ul></ul><ul><ul><ul><li>e.g. privacy laws, consumer protection, FI laws </li></ul></ul></ul><ul><ul><li>Consequences include both legal liability and perception risk </li></ul></ul>
  19. 19. Regulatory Risk (continued) <ul><li>Some Solutions: </li></ul><ul><ul><li>Ensure that baseline compliance is met in the contract </li></ul></ul><ul><ul><li>Ensure that each parties responsibilities are clearly delineated with processes to identify, early on, when a failure has or will occur and attribute appropriate responsibility </li></ul></ul><ul><ul><li>Know when the baseline is not enough </li></ul></ul><ul><ul><ul><ul><li>determine this in advance </li></ul></ul></ul></ul><ul><ul><ul><ul><li>signal this to the vendor early in the process </li></ul></ul></ul></ul><ul><ul><ul><ul><li>address PR issues associated with that </li></ul></ul></ul></ul>
  20. 20. Relationship and Governance Risk <ul><li>Some Problems: </li></ul><ul><ul><li>Relationship cannot adapt over the length of the contract </li></ul></ul><ul><ul><li>Parties cannot effectively communicate and address difficulties in the relationship </li></ul></ul><ul><ul><li>No process to escalate problems and resolve them before they become bigger problems </li></ul></ul>
  21. 21. Relationship and Governance Risk (continued) <ul><li>Some Solutions: </li></ul><ul><ul><li>Establish a clear, tiered governance structure that is also used for dispute resolution </li></ul></ul><ul><ul><li>The process should accommodate regular meetings, including at the highest levels </li></ul></ul><ul><ul><li>The right people need to be involved. Neither party should let the other party get away with appointing the wrong people to this process </li></ul></ul><ul><ul><li>Arbitration/Mediation </li></ul></ul>
  22. 22. External Risks <ul><li>Some Problems: </li></ul><ul><ul><li>External factors (such as a labour disruption) affect the project </li></ul></ul><ul><ul><li>Political will of both parties over the course of the relationship </li></ul></ul><ul><li>Some Solutions: </li></ul><ul><ul><li>The Force Majeure trap: </li></ul></ul><ul><ul><ul><li>Often overlooked </li></ul></ul></ul><ul><ul><ul><ul><li>Vendor slips in “any other factors beyond the vendor’s reasonable control” </li></ul></ul></ul></ul><ul><ul><ul><ul><li>You can drive a truck through a clause like that </li></ul></ul></ul></ul>
  23. 23. External Risks (continued) <ul><ul><ul><li>Be specific – what is in and what is out. This determines who bears the risk on these issues and who should have alternative arrangements in place </li></ul></ul></ul><ul><ul><ul><ul><li>Acts of God </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Labour disputes </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Subcontractor problems </li></ul></ul></ul></ul><ul><ul><li>When can the parties pull the plug? </li></ul></ul><ul><ul><li>BCP/DRP </li></ul></ul><ul><ul><li>Political Will Risk </li></ul></ul><ul><ul><ul><li>What if a party’s “political will” changes? Address with exit ramps and appropriate allocation of risk and economic costs </li></ul></ul></ul>
  24. 24. The Economic Model and Risk <ul><li>There should be transparency into the economic model in order to determine risk premiums, contingencies and other costs associated with risk </li></ul><ul><li>The parties need to determine what risk premiums are appropriate in the economic model and what risk premiums are not appropriately reflected in the model </li></ul>
  25. 25. The Economic Model and Risk (continued) <ul><ul><ul><li>For example, if SLA contingencies are being layered on top of the economic model then the customer needs to ask itself why the vendor is assuming it will fail to deliver the services. </li></ul></ul></ul><ul><ul><li>Watch out for duplicated risk premiums: </li></ul></ul><ul><ul><ul><li>e.g. insurance costs, SLA contingencies, and overhead can all be covering the same risk </li></ul></ul></ul>
  26. 26. <ul><li>QUESTIONS? </li></ul>
  27. 27. Vancouver P.O. Box 10424, Pacific Centre Suite 1300, 777 Dunsmuir Street Vancouver BC V7Y 1K2 Tel: 604.643.7100 Fax: 604.643.7900 Calgary Suite 3300, 421 – 7th Avenue SW Calgary AB T2P 4K9 Tel: 403.260.3500 Fax: 403.260.3501 London Suite 2000, One London Place 255 Queens Avenue London ON N6A 5R8 Tel: 519.660.3587 Fax: 519.660.3599 Toronto Box 48, Suite 4700 Toronto Dominion Bank Tower Toronto ON M5K 1E6 Tel: 416.362.1812 Fax: 416.868.0673 Ottawa The Chambers Suite 1400, 40 Elgin Street Ottawa ON K1P 5K6 Tel: 613.238.2000 Fax: 613.563.9386 Montréal Suite 2500 1000 de La Gauchetière Street West Montréal QC H3B 0A2 Tel: 514.397.4100 Fax: 514.875.6246 Québec Le Complexe St-Amable 1150, rue de Claire-Fontaine, 7 e étage Québec QC G1R 5G4 Tel: 418.521.3000 Fax: 418.521.3099 New York One New York Plaza, 25th Floor New York NY 10004-1980 U.S.A. Tel: 212.785.6410 Fax: 212.785.6438 United Kingdom & Europe 5 Old Bailey, 2nd Floor London, England EC4M 7BA Tel: +44 (0)20 7489 5700 Fax: +44 (0)20 7489 5777