Don't leave it all to the lawyers

If you are outsourcing a significant IT function the chances are that you will end up using lawyers when it comes to finalising...

If you are outsourcing a significant IT function the chances are that you will end up using lawyers when it comes to finalising the agreement. But the lawyers will still expect you to participate in the negotiations and make decisions, and that can be difficult when the important issues appear to be buried in lengthy documents. Here are just a few pointers to watch out for.

Structure
Like a good story, the agreement should have a beginning, middle and an end. In IT parlance that means implementation, service delivery and exit arrangements. But this is one story where you do not want an unexpected twist in the tail.

Continuing the metaphor further, you need to make sure that the end leads to a sequel. One way to get this right is to first call to mind all the steps you are taking to implement the current outsourcing arrangement; then picture the same process next time round but without the know-how, staff or infrastructure which you have now; and, finally, specify the help and information you will need from the current supplier to bridge the gaps.

The agreement should give you a contractual entitlement to these things, and within a timetable and procedure which makes the whole thing workable.

Continuity
If you are outsourcing a business-critical function, look through the agreement for any clauses which could have the effect of allowing the supplier to suspend services.

Even during periods of dispute - which are bound to arise from time to time in all outsourcing arrangements - look for contractual assurances that the supplier will not exercise the sanction of withholding services.

In return, the supplier will want assurances that it will be paid. Usually, there are clauses which state that the services are contingent on the customer organisation doing certain things, such as procuring transfers of software. Make a list of all these items and make sure the project manager ensures the contingencies are met.

Change
Changes during the term of the agreement are inevitable, not just in technology but also in the business requirements. So seek out the change control procedures in the contract and check that they cater for a wide range of changes in a workable
manner.

Be aware that suppliers may regard changes as an opportunity to make additional margin.

Liability
Look for the clauses which limit the supplier's liability for any default. Consider, in particular, any clause which excludes the losses commonly known as consequential losses. The meaning of "consequential loss" is controversial. Think of it as the business costs of failure: lost profits, time wasted by staff, loss of anticipated savings, damage to goodwill.

Suppliers will tell you that the exclusion of consequential losses is an industry norm. The problem is that, if you think about it, most of the losses which you might incur fall within the exclusion clause.

Some suppliers will allow such clauses to be deleted, because they are content to rely instead on a financial cap on liability, combined with reassurance that UK courts apply various rules to disregard spurious or "remote" claims.

For suppliers of the old school, consider a clause which defines certain types of loss as direct loss, that is to say losses which can be claimed. For example, the contract could state that the organisation will be entitled to recover staff salaries and overtime in the case of a problem which results in the organisation incurring wasted or additional staffing.

Price structures
Given that at least part of the rationale for many outsourcing arrangements is to save money, organisations should beware of price structures which are more or less fixed throughout the period. During this time, any cost savings could disappear as the market and business conditions change.

Ask yourself how the contract mitigates this risk. One possibility is to include a clause which has a mechanism to periodically benchmark the contract costs against current market data.

Charles Drayson is a partner in the IT law team of Andersen Legal, the global network of law firms associated with Arthur Andersen

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