Watch Out For ´Definitional Disconnect´ In Outsourcing Contracts

Originally published on ITBusinessEdge, 24th January 2007.

With John Buyers, a partner and head of Commercial, Outsourcing and Technology at international law firm Stephenson Harwood. Buyers has practiced for many years as a lawyer in the IT and outsourcing industries, including at Elonex plc where he was general counsel and at Capgemini where he was lead international outsourcing counsel.

Question: Is it generally a good idea to use a draft contract from an outsourcing provider?

Buyers: There is a simple answer to this question, and in essence it applies to all draft outsourcing agreements, irrespective of whether they are submitted by the outsourcing customer or outsourcing provider. The answer is that the draft must "fit" the deal in all of its respects. The problem with many draft contracts supplied by outsourcing providers is that they adopt an off-the shelf "one size fits all" approach. Don't forget that outsourcers will sign many such agreements over the course of a year, as opposed to customers entering into such a deal only once or twice. Suppliers will therefore have a well evolved "way" of doing things and invariably a mature contracting policy on such deals. The contract that they propose will reflect this "cookie cutter" method.

It is inevitable that such a standard form agreement will reflect the supplier's position on every single aspect of the deal. It will therefore be restrictive in areas where the supplier perceives that they could lose money, such as, for example, liquidated damages and service credits. Conversely, such contract terms will make it very easy to enable the supplier to charge you for extras which you might think should be included in the base price. It may be that you are entering into a very simple generic outsourcing deal in which case, such a contract may be the most economic way forward. It is questionable however (even at the bottom end of the scale) that such generic deals exist. In my practical experience, most deals are individually tailored and therefore the "cookie cutter" will not be appropriate. The clear principle is that if you take control over the drafting of the agreement, you can be sure that your interests will be reflected in it.

Question: What are some of the common errors or omissions in outsourcing contracts?

Buyers: Many errors and omissions can stem from the fact that the contract does not reflect the deal in all of its respects. As discussed earlier, this can sometimes happen when...

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