New Zealand: IT outsourcing contracts – five tips for SMEs

Last Updated: 15 January 2019
Article by Andrew Oh
Most Popular Article in New Zealand, January 2019

When Kodak famously outsourced its entire IT function to IBM it marked both the dawn of IT outsourcing as a business strategy and, arguably, the beginning of Kodak’s end.

Since then, the breadth and prevalence of IT outsourcing has grown. It is common now to have third parties providing IT consulting, maintenance and support, and operations functions for critical business systems. SaaS products have replaced many substantial enterprise systems.

Outsourcing has become normal at all levels of the economy, but failures can hit small to medium enterprises hardest.

More often than not those failures flow from unrealistic expectations on both sides as to what can be achieved, what is involved, and at what cost. And the delays and changes come at cost.

What can you do to minimise the risks inherent in engaging an IT service at the outset? These are our top five tips for IT outsourcing agreements.

1. Know what you will do if it doesn’t go right.

The first tip is a practical one. Do you have a way back? Do you have the in-house expertise to roll back to a legacy system, or maintain business as usual if things go awry. If not, take mitigating steps in your contract.

How can you terminate? Do you have step-in rights that will allow you to pivot to a competing supplier, and will your supplier cover those costs? Do you have underlying control of the key infrastructure and code base if you do need to exit?

2. Leverage

Is your supplier proposing to be paid monthly on a time and materials basis, or even with a large upfront deposit?

Will they be in charge of critical IT assets, with all of the technical know-how, and you entirely reliant on them if you fall into a dispute?

Consider structuring your payments to give you some meaningful leverage. For example larger instalments on successful (and clearly articulated) milestone completion.

Encourage your supplier to share the risk (which can mean improving their upside if it all goes well).

3. Pay attention to warranties

It is important to establish exactly what the warranties your supplier gives you entitle you to.

The concept of a warranty in an IT context is slipping and sliding ever closer to the concept of support and maintenance.

It was once the case, in the days of large installed software, that the warranty period was the length of time during which the software, once installed would operate error free. If it didn’t, your supplier would fix it at their cost. Sometimes, if you had negotiated particularly well, you were also entitled to reparations (service credits, rebates, etc.) for that downtime or failure.

In the SaaS age though, a warranty period is often no more than merely a period of free support and maintenance. The supplier provides the software, integrated or not, on the basis that it may well have errors from the get go, but the supplier will iron them out during the warranty period. A very different set of expectations.

Neither of these are to be confused with a formal legal warranty, in the sense of a promise, such as a warranty of non-infringement of third party intellectual property.

All of them can work for you or against you, some are must-haves and some are situation specific, but you must be clear what you’re buying.

4. Keep it local

Even a significant dispute may be uneconomic to pursue if you have to go to another jurisdiction. Where at all possible, keep your dispute venue local.

As well as jurisdiction, it is well worth spending time on the dispute mechanisms. There aren’t many other types of agreement where they are more likely to be used.

Lightweight dispute processes which amount to little more than management negotiations are not much to rely on when the going gets tough and the relationship has broken.

For larger deals it is not uncommon to require the international supplier to provide a letter of credit from a local bank or in some other way guarantee their own performance.

Failing to incorporate thorough dispute and venue provisions can leave you writing off your initial outlay at the same time as you spend more to pick up the pieces.

5. Contract management and change control

Scope creep (or perceived creep) is one of the leading causes of dispute. Either a supplier thinks they’re giving away value, or a buyer thinks the narrow scope excludes things they thought were in scope from the start.

Spend the time up front to scope the project out fully, ensuring deliverables and acceptance criteria are clearly defined.

If a supplier claims that too much contractual detail jeopardises an “Agile process” (or similar), have a very frank conversation with that supplier about what exactly they think they can deliver. Be clear on the outcomes, and write it all down.

Suppliers need certainty as much as buyers. Both parties want a successful outcome.

If a project is staged or too big or uncertain to scope out end to end at the get go, ensure the first stage is clearly scoped and realistic off-ramps exist.

Be clear who can change the contract scope, and how. Scope and requirements will inevitably shift, so change control is critical to avoiding dispute.

The last tip: seek legal advice, preferably from a lawyer who is not directly connected to the project’s success and who can impartially work with you to draft the documents accurately and clearly.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions