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By Martin Mengelle, Regional Counsel, Central America, Caribbean and Puerto Rico, Hewlett-Packard Co.

The unique nature of Information Technology (IT) transactions makes the legal support of this type of deal a challenging task. Aspects of a typical IT transaction include services, transfer of people and assets, various aspects on IP rights, traditional and complex lease options and other commercial terms that, taking them individually, they may look similar to other non-IT related transactions. However, all of these aspects put together in an IT environment and combined with other synergies typical of IT deals make the IT outsourcing a unique type of commercial transaction that requires from counsel an equally unique set of IT legal and business acumen. Considering the distinctive aspects of a typical IT outsourcing deal, this article presents a top ten list of tips that you should consider when negotiating IT outsourcing deals, whether as legal counsel for the client or for the IT vendor.

1. Look to this deal as an opportunity to build long-run success for both sides and not unilateral advantage.

Fruitful and successful IT outsourcing transactions are based on long term relationships - which do not necessarily mean long term contracts. It is a fact that in any business negotiation both sides of the table have different ideas of what constitutes a "successful deal". However, particularly on IT outsourcing deals, it is equally true that such "success" will not last long if the other party feels and ends up realizing that it didn't get a fair deal. The dynamics within IT outsourcing calls for the parties to have a long term relationship that can give the opportunity for all to achieve their goals. IT outsourcing is really a partnership to achieve technology improvements and efficiencies to drive better and higher business results for both parties. As legal counsel in this type of transactions, you must put contract terms in perspective, avoiding falling into legal theories of unimaginable risks and instead focus on advising your client on what specific aspects of the deal being negotiated will impact your parties' identified interests.

2. All the terms and conditions of an IT outsourcing contract affect either one or all of three key aspects of the deal: risk, cost and savings/revenue.

The naked truth of IT outsourcing for a customer is to receive a better service in a more cost efficient way (i.e. cheaper). For an IT vendor, it's all about economies of scale and leverage on expertise and efficiencies to achieve the desired return. However, for both parties, at all stages of the relationship, it is all about knowing how to manage risk and costs to get to the desired savings or revenue (depending on which side of the table you are). Therefore, a truly successful IT outsourcing deal calls for the parties to work together to re-assess and re-distribute risk and cost between them in a way that client can see tangible savings, improved services and customer satisfaction, while the IT vendor can still meet its margins and naturally foster a continuous business relationship. Your role as a legal counsel is to make sure you put in place the necessary contract mechanisms to protect your party's interests, working with the other party to create clear standards for measurement and control of the potential risks that may directly affect your established goals in the transaction.

3. Know who is on your side of the table, what issues they bring, what role each of them plays in the negotiation and what role they expect you to fill.

An IT outsourcing deal and negotiation requires the involvement of many different key areas and departments, all of which are equally important to determine where your risks, costs and savings/revenue are and what issues may affect these aspects in the long term. The top key areas typically involve sales, finance, human resources, tax, procurement and legal. Collaboration among these areas is key to ensure each of them contribute to achieving the common goal, while addressing their particular area of concern. Get involved in the business deal and structuring as early as possible. Stay in close communication with each of these key areas, anticipate potential legal issues that will affect the deal and work on alternative solutions. Identify key aspects of the deal and learn from the expert from that area (finance, HR, procurement) how that aspect may affect the overall contract. Get a clear understanding of what role you play in the negotiation -besides the obvious role to protect the interests of your client...who is not your deal team but the company you represent.

4. Know who is on the other side of the table.

Similarly to the fact that you need to know your team and goals, you also need to know as much as you can about the team that seats on the other side of the table. Remember, IT outsourcing contracts based on good relationships tend to lead to successful results for both parties. Know who is the sponsor of the deal, what type of subject matter experts or advisors they are bringing to the table and learn from them what matters most for them about the transaction at hand. Learn about their motivations because this may give you good input for alternative points of negotiation and pressure.

5. If you walk the walk, talk the talk...

This old saying is still current and fully applicable to IT outsourcing deals. ARCs and RRCs, SLAs, MFCP, SOW, FRM, TFS, DRP, Dedicated and non-Dedicated Equipment, Risk Allocation Pool, etc... As many other specialty business venues, IT outsourcing carries its own set of terminology and lingo. Some of these terms may sound familiar to you from other types of business transactions, however, don't assume all IT terms are similar to those you learn from other type of transactions or that you will be able to figure them all out when the contract negotiation starts. In fact, if you do that it may be too late for you to try to revert some business agreements. Each of the defined terms in an IT transaction most likely has a fundamental meaning in the economics of the deal that will affect your risk, costs, or savings/revenue. Familiarize yourself with key contract terms and definitions as soon as you are involved in the business transaction of the IT deal. Do it before business negotiations start, and if you are involved later on in the process, don't wait until contract draft negotiation starts, most of the business agreements that serve the basis for contractual draft negotiations ("agreement in principle" or "business principles") already contained defined IT terminology with specific business and legal meaning.

6. Identify what type of IT outsourcing transaction your have in front of you.

IT outsourcing transactions can relate to different aspects of the technology environment. It can address a specific scope of services such as ITO (infrastructure technology outsourcing) deals, BPO (business processes outsourcing) or ADM (application -software- development and maintenance); or go to more complex and comprehensive deals like full outsourcing of all key technology areas or cloud computing. No matter how big or complex the IT deal is, all three key aspects of the IT outsourcing equation (i.e. risk, cost, savings/revenue) must be managed. However, depending on what type of IT transaction you have it will be the type of risks to manage and the economies of the deal to ponder. Early identification of the nature of the IT transaction will help you anticipate what key contract issues must be addressed.

7. Prepare your negotiation strategy and identify internal key dates or events that may affect the progress of negotiations.

As in many other commercial deals, planning ahead and preparing yourself for the negotiation is key to a good start and a sustainable effective counseling during the negotiation process. However, due to the different stakeholders that usually get involved in an IT transaction, it cannot be emphasized enough the importance of a good early planning and constant communication with the different team members when it comes to negotiations around an IT transaction. You should partner immediately with your business team and define and agree with them on a negotiation strategy for each step of the negotiation process. Not only for those aspects of the deal that carry more activity from legal, but also from the other aspects of the deal where it seems that legal has less to contribute. Review all relevant company policies that may affect the deal and consider whether sometime in the negotiation process your team will be required to obtain approvals or clear some potential internal conflicts. These internal processes usually take time to complete, so plan ahead on when, what, and to whom you will need to escalate the required approvals in order to get those on time according to the negotiation strategy and plan.

8. Understand and make sure you are involved in the definition of the IT contract structure.

Choosing the right type of contract structure for an IT transaction is key to a successful and less stressful contract draft negotiation. The size, complexity and scope of the IT transaction is what defines the type of contract structure that the parties will have to deal with. The task of assessing the best contract structure fit for the deal should be carefully analyzed and discussed with the deal team and with the other side of the negotiation table. Picking the correct contract structure will surely save many negotiation hours and discussions, avoiding unnecessary frictions between the parties and contribute to a balanced result in the outcome of the deal negotiation and relationship.

9. The IT contract is not only "lawyer stuff" and each component of the contract interacts and affects the whole negotiated IT transaction.

A typical IT contract contains (i) general terms and conditions for a service contract; and (ii) Schedules and Exhibits that describe other relevant aspects of the IT transaction such as: scope of services, service levels, penalty formulas, price and financials of the deal, conditions to transfer of certain assets and employees, onetime transformation activities, among others. All components of the IT contract are important parts of the transaction as whole. Both the business team members and the legal counsel should not see the negotiation of the general terms and conditions as a separate track from the negotiation of the other schedules and exhibits that attach to the service contract. Both stakeholders should get involved in the definition and negotiation of the key aspects of all those components of the IT contract. This means that the legal counsel should be actively involved in the negotiation or at least the review and approval of key terms of those other schedules and exhibits. At the end the IT outsourcing contract is a composite of pieces of different legal, technical, performance and financial terms and conditions.

10. Once the ink dries, the real work begins, so be prepared to pass the torch.

It's important to reiterate that contracts based on good relationships tend to produce the desired results for both parties. Therefore, is very important that whoever takes over the execution of the contract gets a clear idea of what are the key issues negotiated and the important milestones of the relationship. For someone who will face the task to manage the contract after signing, having a good (not perfect) contract is a good starting point; but most importantly is to know what that contract says and why. Those are the questions the other party will ask when business issues start to show up down the road in the relationship ...and they will come. As the legal counsel who was involved in the negotiation, is important that you prepare a summary of the contract, detailing key information about the deal, milestones and specific issues that were heavily discussed during contract negotiations. This summary will be your best tool when it comes to explain other team members about any issue that may come up after the deal is closed.

Conclusion

IT outsourcing is a fascinating area, it is subject to constant changes and challenges, the same as the technology that is the subject of the IT business. Providing legal support to IT outsourcing deals is one of the most rewarding experiences a transactional attorney may have in his career. Whether you represent the interests of the client that is outsourcing its IT needs or you are representing the IT vendor that will provide the IT services, the whole business and negotiation dynamics around an IT outsourcing transaction is unique and any in-house counsel that is involved in this type of negotiations must be aware of the distinctive aspects of an IT deal in order to bring value to the table and help your business team achieve its goal in the deal.

The information in this Top Ten should not be construed as legal advice or legal opinion on specific facts and should not be considered representative of the views of its authors, its sponsors, and/or the ACC. This Top Ten is not intended as a definitive statement on the subject addressed. Rather, it is intended to serve as a tool providing practical advice and references for the busy in-house practitioner and other readers.

 

Region: United States
The information in any resource collected in this virtual library should not be construed as legal advice or legal opinion on specific facts and should not be considered representative of the views of its authors, its sponsors, and/or ACC. These resources are not intended as a definitive statement on the subject addressed. Rather, they are intended to serve as a tool providing practical advice and references for the busy in-house practitioner and other readers.
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