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Get the most from technology-outsourcing agreements

As companies search for ways to cut costs and streamline operations, many consider outsourcing their technology operations — ranging from Web design to software development to database management. To reap the greatest benefits from these arrangements, your business must pay close attention when negotiating outsourcing agreements.

Why the agreement matters
What might happen if problems arise from your technology-outsourcing arrangement? Your usual legal recourses — such as lengthy litigation seeking damages, injunctions or performance — will likely be inadequate to timely and effectively solve the problems. Further, technology agreements often cap damages at levels far below actual damages suffered. For these reasons, your business needs to act aggressively when negotiating outsourcing agreements.

At a minimum, your contract language should detail:

o Specifications,

o Deliverables,

o Schedules with monetary penalties and incentives, and

o Particular vendor employees to work on your project.

You’ll also want to specify remedies, options and requirements that reflect your real business risks of a vendor’s failure to deliver, bearing in mind the need to keep your company running if a breach occurs.

Which provisions to watch for
Here are some of the most important areas to cover:

Exclusivity. Beware of exclusivity provisions that require you to buy additional services from the vendor or give it the right of first refusal or at least the right to bid on additional services. This can deter other vendors from bidding, limiting your options and diminishing your negotiating strength.

Gain-sharing. A gain-sharing provision gives you the right to share in cost savings that develop as efficiency increases and costs decrease.

Product ownership. If your business wants to own the vendor’s work product, make sure the contract is clear on this point.

Termination. You need to be able to terminate the agreement if the vendor fails to provide services or otherwise breaches the agreement. A termination provision also protects you if the vendor appears in danger of failing — such as from falling stock prices, employee defections, or reorganizations and mergers. Conversely, limit the reasons for vendor termination, ideally allowing it only if you fail to pay undisputed charges.
Exit plan. In case either party terminates, the agreement should establish a transition period during which the vendor continues to provide service, because you probably won’t be able to immediately secure the necessary substitute services. You can require a vendor to provide transition service through a third party if the vendor declares bankruptcy. You also may want to retain the right to hire the vendor’s employees and reacquire its equipment and software.

Escrow. When a vendor develops a custom program for you or uses its own proprietary system, have the source code deposited in an escrow account that you can access if triggering circumstances — such as bankruptcy — occur.

In the case of bankruptcy, the court-appointed trustee can reject provisions in a technology-outsourcing agreement. So try to incorporate appropriate protections — such as a guaranty from the vendor’s parent or affiliated company or a surety bond.

What to avoid
Although tempting, avoid shortcuts when negotiating agreements — doing so can prove costly. Be sure your agreement addresses all conceivable contingencies.