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Reading between the lines

Contract negotiations are largely the preserve of a company's legal department. That said, many CIOs believe that an IT head must understand what he is signing. Rishiraj Verma reports

‘Look before you leap’ wasn’t said for no reason. While every precaution may have been taken to ensure that the best hardware and software have been chosen for the implementation that the organisation so badly needs, there are still important things that need to be taken care of. The CIO today needs to be aware of the little intricacies of the legal side of the IT deal. After all, the deal isn’t complete till it has been signed!

Going by the norm, the first step taken to finalise a deal is making the legal documents such as the agreement. There can be two instances in this process. Either the vendor or the organisation may create an agreement and ask the other to review and then negotiate on the terms and conditions. In either case, what becomes essential is the process of making the documents.


Neeraj B Bhai

Many organisations today have their own templates in which points may be changed according to the current contract being signed. There may be more than just one round of the papers being reviewed by both parties. For instance the vendor may ask for a particular clause to be changed and the company may or may not be willing to do so. It can thus be said that delays may be a norm while signing deals.

According to Neeraj B Bhai, VP, IT, Bajaj Auto Finance, his organisation generally creates legal documents on the basis of past experience with vendors. He says, “We have a basic agreement ready at all times.” However, he is quick to add that all vendors do not agree to the standard Bajaj agreement and hence, custom contracts have to be created for different vendors.


Vinod Sadavarte

Vinod Sadavarte, CIO, Patni expresses a similar view. He states, “We use standard templates for our legal documents, but in some cases, we need to create a custom vendor template and Patni’s legal department helps out in this.”

The CIO and the contract

Many CIOs opine that not only the contract, but also the language used in it should be made standard so that it is easier to understand what the various clauses are trying to say. There is, however, a counter-view that at the end of the day, the onus is on the CIO to understand what he is signing. Sadavarte says, “If the CIO is taking the initiative, he has to understand the language because of the responsibility he carries.”

The language in the deal is an important tool not just to exploit loopholes, but also to create them. For instance little details such as missing dates in a timeline can lead to major problems after the deal has been signed and the solution has to be delivered

The language in the deal is an important tool not just to exploit loopholes, but also to create them. For instance little details such as missing dates in a timeline can lead to major problems after the deal has been signed and the solution has to be delivered. This calls for erasing any ambiguity in the legal document. There are also certain best practices such as regular reviews of the papers by legal departments of both parties to ensure that the contract is being followed to the T.

Says Bhai, “It is desirable that the language used in contracts be made standard.” He doesn’t think that it is not possible in the near future because of no formal standards having evolved regarding contracts and each one differs based upon the organisation and the vendor involved making it next to impossible to standardise such a thing.

Whatever the case be, the language used in the deal is of utmost importance because that is what will go on to differentiate the right deal from the not so right one.

Components of an agreement

Language, as discussed, is essential to have a check on. However, equally important is a discussion on the important components that make up a contract. This too, like the deal itself, will depend on the organisation and the vendor they are dealing with. For instance, risk mitigation may be considered the Holy Grail by one organisation and secrecy of the deal may be much more important for another.

Some CIOs give their views about what they think are the most important components of the contract to be signed. According to Sadavarte, “Simple business language, dispute resolution, and protection of strategic information are important.”

Bhai divides the contract into various parts to suggest what, according to him, are the most important components. Says he, “There should be an operational part that deals with the timeline and then there should be a legal part that deals with ideas like liability and confidentiality.” He adds that if the contract is looked at in such segments, it will become much easier for a CIO to understand the implications of its smallest clauses.

Working in tandem

The situation may be analysed further to understand the fact that the CIO is also working in tandem with the legal department of the organisation. While he may be the first one to go through the contract, the legal department does come into the picture at some point or the other, just to make sure that no nuance has been ignored.

Explains Bhai, “There is a general expectation that the IT team must understand the contract language. That’s why the first writing and reviewing of the contract happens at the IT department and later at the legal division.” According to him both processes are equally important because the IT department knows exactly what is being offered to them and the legal department can spot loopholes, if there are any.

The term leverage may have been used ad-infinitum to make the CIO understand how to get the most out of hardware and software. But today, the CIO also needs to know how to get leverage as far as terms and conditions are concerned. Here too, the legal department of the organisation is of great help to him.

Sadavarte states, “Effective contract management is a must.” He adds that the terms and conditions of the contract must be regularly monitored to ensure smooth functioning.

The Analyst’s Point of View
Brian Babineau, Analyst, Enterprise Strategy Group

On enforcing SLAs
Customers should ensure that warranties and maintenance contracts define remediation policies if, for some reason, a system or software fails. Remediation should range from replacement of parts / components at no cost in a short period of time through entire system replacement, depending on the issue. Customers should be wary of performance guarantees, availability promises, or any metric that could be tied to ‘specific configurations.’ These guarantees are typically promised by field personnel to win business but can rarely be enforced at a legal level.

On language used in contracts
Every organisation should have its own language for handling contracts. Some of it can be standardised depending upon whether IT is buying hardware or software. The legal department can maintain historical contracts from these vendors to reduce any negotiations that may be necessary. To add a new vendor to the list, there should be standard profile questions, including providing warranty information on products.

On Force Majeure
This part of a contract is very much an ‘out clause’ in case certain events happen that neither party has control over. It has become more of an issue as hurricanes, floods, minor earthquakes, and others have damaged IT systems. These events will continue to happen, requiring vendors and users to balance their interests and work together in an attempt to bring systems back online within a reasonable timeframe. The legal departments of both vendors and customers will have to balance the economics and ultimate responsibility for such events as well.

Gary Barnett, Analyst, Ovum

On the practice of making legal documents
“General practice” varies considerably according to the size of the organisation and the type of the IT deal. In most cases the process begins with a formal proposal from the vendor, which then becomes the focus of negotiation. Larger client organisations will also have their legal department review the proposed contract. There is a growing trend in the use of third-party advisors too— external consultants who advise the client organisation on the contract terms.

On language used in contracts
Yes, in an ideal world the language for contracts would be simplified and standardised. However this will require a significant change on the part of both vendors and client organisations. As a first step, it should be the goal of anyone writing a contract to write it in such a way that someone with no legal training could understand the rights and responsibilities of the parties.

On Force Majeure
These clauses are a necessary part of any contract. It is fundamentally a question of legal and ethical fairness. Say, if a supplier is contracted to deliver 10,000 PCs by a certain date, and the delivery is delayed because the ship carrying it was unable to leave the port due to an armed conflict then it is hard to blame the supplier.
But you could argue that though events such as these are out of the control of the supplier, he could anticipate them.
For example a tropical storm. You could say that the supplier should have been aware of the likelihood of storms and have had contingency plans in place.

Force Majeure Almighty

The term translates to ‘Greater Force’ in French and refers to a widely used condition in most contracts. This clause protects both, the organisation and the vendor from what is known as breach of contract by mentioning certain events that may be out of control of the party. These events include natural calamities such as floods, fires, earthquakes and others. These calamities are generally titled Acts of God. There are also other instances such as war, national revolution or such others, which cannot be controlled by either party.

Bhai is of the view that this clause should exist, as the calamities are external catastrophic events. But it means ambiguity, which in turn could mean heavy losses to the organisation control of either party. He adds, “It is an ambiguous clause and there is a very thin line between ethically putting it to practice and making wrong use of it.”

Sadavarte observes, “It may not be possible to remove this clause since it is common to almost all contracts.”

Thus, we see that there is always scope for malpractice. Wordplay is a trick used by many to manipulate this clause. For instance, the vendor may add a phrase like “not limited to these instances alone” after listing down the aforementioned catastrophes. This means ambiguity, which in turn could mean heavy losses to the organisation.

Sadavarte reiterates however that it is one of the most critical parts of the contract and must never be neglected.

Enforcing SLAs

For the CIO, everything related to the IT deal has to be important. Even the smallest point being neglected early on may become a big roadblock in the course of time. It is understandable that signing the deal is one of the last few steps in acquiring the software or hardware the organisation is in much need of. But each aspect of the deal, even the fine print in the contract should be checked and rechecked to ensure a foolproof deal

If the CIO is buying a solution, he has to ensure that the after-sales tools such as 24x7 helplines are also provided. In the case of the IT deal too, he has to make sure that all the SLAs are enforced if need be.

Most CIOs will prefer not getting into such a situation in the first place, as it would involve another long cycle of legal proceedings. Sadavarte comments, “There should be the broader SLA for the usual terms and conditions and an operational one for the most critical services expected.” He cites the example of an emergency call and says that the operational SLA must include the consequences of the vendor not being able to provide support in the stipulated time.

Bhai speaks on another angle of this issue, “If the expectations of both the organisation buying the solution and the vendor are understood by the other, they won’t reach a point where the clauses have to be enforced.” According to him, if such a situation arises, the best way to deal with it is to conduct negotiations between the business heads of the organisations. “Going to court over such deals is a rare thing.” He adds that a proper dispute resolution mechanism in the contract would help a great deal.

Tech is a big deal

For the CIO, everything related to the IT deal has to be important. Even the smallest point being neglected early on may become a big roadblock in the course of time. It is understandable that signing the deal is one of the last few steps in acquiring the software or hardware the organisation is in much need of. But each aspect of the deal, even the fine print in the contract should be checked and rechecked to ensure a foolproof deal.

The CIO cannot afford to and must not let go of his concentration in an event that could and should be of biblical importance to him. All is well, only when it ends well!

 
     
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