Exit clause in SLAs: 7 key pointers

An exit clause is a useful tool to close a deal when any agreed and important terms of a service contract are dishonored. Here are seven points to include in an exit clause.

Image goes hereShivashankar

It’s always wise to have an exit clause in a service level agreement (SLA). Since the future cannot be predicted and there are chances that either of the parties could exit the current line of business or enter into competing businesses, it is recommended that an organization makes provisions to exit the contract. An exit clause may also be considered to close the deal if any or all of the SLAs are dishonored repeatedly.
 

Mentioned below are pointers that should be considered for incorporating an exit clause.

1) Non performance/ inefficiency: If the service provider is unable to perform as per the SLAs agreed, a relevant exit clause would help in decommissioning the vendor. Ideally, inability to meet the SLAs should be reviewed with the vendor using the data from the last few months/ quarters, and an improvement plan needs to be agreed upon. Termination of the contract should be resorted to only in case of unsatisfactory progress. In such cases, monetary penalties can only serve a limited purpose as business loss may be much higher than the penalty imposed upon the vendor.

Non performance of SLAs could include:

a.  Service delivery levels

b.  Non deployment of adequate skilled resources on-site/off-site

c.  Not maintaining adequate level of inventory

2) Breach of trust/ integrity issues/ breach of non-disclosure agreement/ breach of non-poaching clause, etc: An SLA should specifically have exit clauses related to NDA, non-poaching, and breach of trust.

NDA provides legal protection to the customer about the information shared with the vendor. Such information can be vital for the customer’s business; if its confidentiality is not maintained, it may lead to business losses. Competition drives vendors to partner with multiple original equipment manufacturers (OEMs) and that could lead to one customer’s information being passed on to a competing OEM. Many of the contracts require highly skilled resources from the customer and vendor to work jointly and get to know each other’s skills in-depth. With a proper non-poaching clause, both the parties can be protected from any such adventures.

Breach of trust/ integrity issues/ code of conduct issues could arise from employees of both parties and a safeguard exit clause would always come in handy.

3) Contractor partnering with competitor: Market situations may always result in the current contractor partnering with a rival or diversifying into a competing business. Mention of such situations as part of the exit clause is very important.

4) Discontinuance of business: If either of the parties exits the business or sells itself off, an exit clause can protect/ limit the losses due to non-performance.

5) Change of scope and revision of fees: This is a very important point, since in any contract, there can be upward or downward revision of scope. The exit clause should be drafted in a way that both parties get an opportunity to renegotiate the terms and on non-agreement, plan a proper exit from the contract.

6) Obsolescence of assets/ end-of-service life: There must be an exit clause relating to technology obsolescence, since if an OEM vendor stops supporting a product, the services can only be provided on best effort basis.

7) Force majeure: The vendor agrees to the SLAs and other terms based on prevailing market, political, and economic situations in the country. Also, the customer may agree on providing certain facilities/ benefits to the vendor. Force majeure exit clause can protect either side in case of any abnormal developments that can have serious, adverse impact on business.

Most Indian companies accommodate an exit clause in SLAs. However, the manner in which an exit clause is executed is also important. Ideally, there should be a phase-wise approach to ramp down a vendor’s services and/ or to migrate to another vendor.

About the author: S Shivashankar is vice president and head - IT infrastructure, security operations, and engineering at Reliance Communications. He has more than 16 years of experience across technology, business, and operations.

(As told to Anuradha Ramamirtham)

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