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
before you leap wasnt 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 isnt 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, 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 Patnis 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 doesnt 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. Thats 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.
|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
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.
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
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 wont 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!