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What to Look Out for when Reevaluating Contracts

by: Karen Cayamanda

Friday, November 18, 2011 |

Service terms and contracts in the outsourcing industry continue to change as the landscape of the field evolves. Not a lot of terms change on regulatory requirements or governing transactions in outsourcing, but they can increase in importance as outsourcing risks and challenges continue to emerge. As a case in point, accounting scandals with Satyam and terrorism in Mumbai changed security controls in India. 

As client markets pick up from recession, rates are again experiencing an upward movement. The question on who takes on greater risk between provider and client has also shifted, and this resulted to more considerations on liability clauses, especially for outsourcing to cloud service providers.

Guidelines on how to evaluate outsourcing contracts

With the trends and changes in the market, buyers are pushed to reassess their contractual terms. A research from Forrester enumerates guidelines on how to evaluate outsourcing contracts and protect players from risks and threats, as stated in the article published at NetworkWorld.com:

  • Directly address the need for liability - As the need for a cloud computing strategy increases, clients ought to be more cautious in reviewing terms on liability. Forrester clients discovered that there are cloud service providers who refuse to accept liability and insure clients for exposure of private data. Because of this, a Forrester client was forced to pull out from the deal.
  • Update change of ownership provisions to safeguard against industry consolidation - The possibility of industry consolidation makes it more important for buyers to ensure that their contract allows for termination in the occurrence of a company changing in ownership and control. In most cases, it is impossible to predict the actions of a provider but clients should expect volatility in SaaS and cloud segments. 
  • Bulletproof your provisions for permissible rate increases - A clause or a statement on allowable rate increases is appropriate for expiring contracts or those with terms that cover a long period of time, but clients should take it upon themselves to compare ongoing increases with current labor costs. Also, consider that services costs typically decrease over time, and in this regard, increases might not be justified. Lastly, contest provisions that will allow your provider to raise prices without your permission. 
  • Transition assistance is important - With the rapid changes the industry is experiencing, it is safest to have provisions in your agreements that cover transition assistance. This normally includes terms on timeframe and costs to compensate for loss of business. The stated requirements should apply for both transitioning work back in-house or onto another provider. It would be ideal to have clearly stipulated roles and responsibilities for the parties during transition. 
  • Key personnel provisions - Direct contact to a supplier’s managerial, administrative, and technical support teams can make a big difference in the success of an outsourcing venture. Adding provisions on the ability to access key personnel assures customers that they will be given quality service. In the cases of ramps or issues, it is critical that customers be able to connect to the right people.
  • Align termination fees with length and type of contract - For contracts that are shorter in term and that will utilize less assets on the supplier’s end, termination fees and provisions might be in the form of a penalty rather than a way to compensate for rendered investment. Costs that are for the purpose of a penalty should be avoided. Suppliers will always try to recover costs in the process of winning and executing a contract. In this scenario, it will be smart to research on supplier selling and delivery costs and use this as ammunition to negotiate.

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