Developing Effective Contracts for IT Services
Contracts are vital parts of outsourced IT service delivery, when well-constructed, they help eliminate ambiguity, improve efficiency and reduce risk. The World Commerce & Contracting (WorldCC) previous known as IACCM states “Developing a contract allows both parties to fully understand their obligations and clearly define intellectual property and key success criteria. The development phase forms the foundation for managing the contract and relationship effectively.” Contracting Standards | WorldCC Contract Management Standards
The WorldCC outlines the critical principles which a typical service contract should contain, these include the following:
- A statement of objectives
- A list of services
- Performance standards
- Definition of responsibilities
- Performance metrics
- Penalties or repercussions for breaking terms
- The right to exit the agreement
Additionally a typical service contract should contain:
- Alternative Dispute Resolution
- Assignment and Novation
- Compliance with Laws
- Customer Audit of Suppliers
- Data Security and Privacy
- Force Majeure
- Indemnification of Third-Party Claims
- Intellectual Property Rights and Indemnification for Third Party IP Claims
- Liability Caps and Exclusions from Liability
- Non-Solicitation
- Safeguarding Confidential Information
- SLA Remedies
- Sub-Contracting
- Suspension Rights
- Termination Assistance
Outside of the legal terms and conditions, IT service contracts should contain sufficient information to unambiguously describe the service details management frameworks.
You may adopt these principles in their entirety or select the elements that benefit you and comply with local laws and industry regulations. When agreed to by both parties the principles can be built into your contract templates. This drastically cuts down on back-and-forth negotiations while still allowing flexibility for amendments. This also means that the business team can get straight to work on the more important aspects of the deal.
Whichever way you choose to implement them, the importance is to instil collaboration, fairness and balance in your contracting processes.
The benefits of good contract management
- Reduced negotiation time
- Increased clarity over terms
- Faster delivery of products and services to market
- Swift revenue turnaround
Poor contracting costs you money and, any company could raise its profitability by at least 10% simply through better understanding the link between contracts and economics. Recent studies suggest that this is right — they show companies that have focused on “contracting competence” achieve 7–10% margin improvement through a combination of reduced costs and higher revenues. Contracting Excellence Journal
Outside of the legal terms and conditions, IT service contracts should contain sufficient information to unambiguously describe the service details management frameworks.
The below diagram demonstrates pitfalls of poor contracts.
9.2% is the average value loss in today’s contracts. Latest Research | Commerce And Contract Management Research (worldcc.com)
That leakage – which affects both buyers and suppliers – occurs during the post-award phase of contract management. It is a loss that no-one can afford, and which can be avoided. Yet without positive action, the uncertainty and volatility of the market means it is set to become worse.
Specifics of IT service contracts
Information technology services tend to be technical in nature and often consist of multiple, often connected, service domains with several service partners (for example, hosting, compute, application management and service desk).
In IT service contracts there are three fundamental components which require clarity and thought to build effective agreements;
- Service description; the definition of the services being provided by the service provider or partner and any aspects for which the client is expected to perform
- Service levels; the performance standards and measurement metrics which will be performed by the service provider to validate the services are being undertaken to the agreed standards
- Charges; the sums to be paid by the client for the services.
These three pillars of a service contract describe what you are getting, how you know you are getting it and how you much pay for it. Good contracts have clear linkage between these elements to avoid dispute and provide a degree of transparency to manage change.
These elements are supported by several other important aspects including:
- Governance; the forums, their membership and frequency of meetings and any supporting documentation
- Exit; the obligations and activities to be performed at the end of the agreement
- Change; the process and procedures to follow to change the contact
Cloud and as-a-Service Contracts
Cloud and as-a-service contracts tend to be much less bespoke services and there is little or no scope to deviate from the providers standard terms and conditions. These agreements are generally for shorter terms and for a well defined standard scope. Whilst the ability to customise and negotiate different terms are limited the importance of understanding and managing the contract still remain.
Don’t just leave it on the shelf
It is important to manage the in-life service and ensure the goals, objectives and commercial terms agreed during the pre-contract stages are achieved. A well-constructed and clearly written contract (with appropriate contract terms) is a good starting position. Next, it is equally important for all parties to be clear on their obligations throughout the life of the contract. Depending on the size of your organisation or complexity of the technology environment, a management tool such a Brooklyn Vendor Assurance https://www.brooklynva.com/ can help structure, manage and track the in-life service against corporate policies, best practice and the specifics of each agreement.
We have worked with several clients who identified failings in their existing agreements and specified them to be addressed in the next contract. Often, many of their issues were already addressed in their previous contracts but the agreements were not understood or sufficiently managed to prevent the failings.
In short, know your contract and put measures in place to track compliance and use appropriate multi-level governance mechanisms to monitor, manage and optimise the relationship.
What are the benefits of specialist contract management consultants?
Our expert consultants have many years of experience and can leverage a large repository of reference agreements bringing the following benefits:
- accelerated timelines
- a library of best practice content
- subject matter expertise in a wide range of industry sectors and technologies
- industry insight, we know what is standard and what is not
- pragmatic, balanced approach
- connections and escalation routes within many of the leading providers
Peru approach to developing winning contracts
We recommend defining and publishing key commercial principles early when contracting for traditional IT services. Next, structure the tender writing and supplier response format to facilitate efficient incorporation of the vendor solution into a contract. This helps set expectations and give early insight to any likely areas of significant disagreement.
We work closely with internal and/or external legal teams and bring both technology and commercial subject matter expertise into the agreement.
We maintain a library of templates of key commercial principles, service descriptions, service level metrics and charging models which can be rapidly adapted to meet most services. This helps accelerate the process and starts for the position of successfully deliverable outcomes. We also have experience of managing the full contract drafting lifecycle, focussing attention on the most critical issues and maintaining communication, action tracking and driving progress in what can be a lengthy and protracted process.
We advocate and encourage the production of ‘fair’ contracts that accurately reflect the services offered, clearly define the boundaries of the agreement and protect both parties from unstainable relationships.
A service relationship built on trust and mutual respect should be at the forefront of the sourcing and contracting process. If either party is disingenuous or tries to exert undue power during the contracting process, it is likely trust will quickly breakdown and any resulting agreement will not lead to a successful outcome whereby the customer receives the service they require and service provider provides a commercially sustainable solution.
Recent case studies where we have helped and supported our clients though the stages of the contract development can be found here.
Why Peru Consulting for Sourcing and Contracting?
Peru practitioners are sourcing and contracting experts and specialise in helping our clients from all sectors and industries successfully manage, leverage value and pro-actively govern their third-party arrangements. Offering tender & contract writing services, our people reflect our values, and we guarantee a collaborative, quality, agile and trusted service. As Peruvians we differentiate ourselves through our “Triple A” consulting principles: Accelerate – Identify and deliver value early, Assure – the right things and provide certainty and Augment – be a part of the team and hit the ground running.