IT OUTSOURCING: THE CHALLENGE OF CHANGING TECHNOLOGY IN IT OUTSOURCING AGREEMENTS

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Abstract

It is almost inevitable that what today is modern technology for a reasonable price will seem outdated and overpriced in tomorrow’s market. For the customer entering into an outsourcing agreement, therefore, there is an obvious tension between the commercial pressures to commit to a long-term relationship on the one hand, and the need to ensure that it keeps the flexibility to ensure that its technology is kept under review and up to date on the other. It is for this reason that ‘technology refresh’ provisions in long-term outsourcing agreements are so important. This article explores this issue and the contractual arrangements that need to be considered to deal with it.

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INTRODUCTION

Outsourcing a major business function involves a major investment in terms of cost and management time and, for this reason, it is rarely worth entering into an significant outsourcing agreement for a short-term period. Most outsourcing contracts last for at least three years, while some can last as long as a decade.

Committing to an outsourcing agreement for such a long term brings the benefit of stability to both the customer and the supplier. However, it hardly needs stating that a period of

BACKGROUND — THE ISSUES

Accommodating future technological developments within a binding legal agreement is not straightforward for a number of reasons. The pace and nature of technological change is necessarily difficult to predict when a contract is entered into. It is rarely possible to specify very far into the future the hardware and software that the customer expects the supplier to install to keep its systems up to date. For this reason, technology refresh provisions generally have to be drafted in relative

THE IMPORTANCE OF KEEPING TECHNOLOGY UNDER REVIEW AND CONTRACT MANAGEMENT

With these issues in mind, there are a number of ways in which technology refresh issues can be dealt with in an outsourcing agreement, but the foundation for any effective technology refresh provision is likely to be a robust system to keep the parties abreast of relevant technological advances.

It may well be appropriate to include a provision in the agreement to the effect that the supplier must report periodically to the customer on the technology which is then available, and which is likely

TYPES AND TIMING OF TECHNOLOGY REFRESH

Whether or not there is provision for reports to be provided on developments in technology, the agreement will need to provide for the possibility of a technology refresh exercise at periodic intervals. It is usually appropriate to distinguish in the drafting between smaller incremental steps, such as the periodic installation of new releases of software, and a more fundamental technology refresh that might involve the installation of whole new systems, or some other more significant departure

DEFINING THE PARAMETERS OF THE REVIEW

A well-drafted outsourcing agreement will, as far as possible, define the parameters within which any technology review is to operate, so that the parties’ understandings of what has to be achieved, how it is to be measured, and what the likely cost will be, are clear from the start. In this way, while the eventual outcome is unknown as at the date the agreement is signed, how that outcome will be determined is specified in a way that leaves minimal room for dispute.

In particular, parameters

TECHNOLOGY DEVELOPMENT — WHERE THE CUSTOMER WANTS TO BE

While it might be superficially attractive for the customer always to aim to have the latest in technology, there are disadvantages in being at the cutting edge, which will often mean that it is unsuitable for most businesses and organizations. In particular:

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    Brand new technology is likely to be harder to implement, giving rise to more ‘teething problems’ because it is relatively untested in operational environments.A more tried and tested platform may be more robust, as bugs have been ironed

HOW TO DETERMINE THE TARGET POSITION

The target position in terms of the desired state of technological advance will necessarily need to be determined in relation to what is generally available and/or installed elsewhere.

One way of doing this is by reference to a defined group of comparator organizations that compete with, or are in other ways similar to, the customer. In other words, the arrangement is similar to a general ‘benchmarking’ exercise used to determine the continuing competitiveness of the supplier’s prices. Given

PRICING IMPLICATIONS

For reasons already discussed, it is unlikely to be possible to be entirely prescriptive in advance as to the price attached to carrying out technology refresh in a way that is fair to both parties. The new technology that the refresh clause will demand, and the price of buying and installing that technology are unpredictable. There are, however, a number of ways in which suitable pricing models can be constructed, including the following (or some combination of them):

ACHIEVING OBJECTIVITY

It will be apparent by now that, because of the nature of the issues that surround technology refresh, no matter how much detail is built into the contract in terms of the parameters within in which it is to be carried out, it is unlikely to be possible to lay down a formula to determine,on an objective basis, exactly what the supplier has to do and at what price. t is likely always to be the case that reasonable people will be able to differ over the extent of what is required, and there will

THE IMPORTANCE OF CHANGE CONTROL

As we have seen, in order for technology refresh to be accommodated within a long-term outsourcing agreement, it is important to have a dynamic contractual framework that allows for change, and which can only be defined with a limited degree of certainty. However, it is of course essential that, at any one time, the contract provide certainty as to the specification and service levels to be delivered by the supplier, the timescales for delivery,and the price to be paid. As such, the operation

CONCLUSIONS

At the heart of the exercise of drafting any technology refresh clause is resolving the tension between flexibility and certainty. As soon as a customer signs a long-term outsourcing agreement, he/she gives up some of his/her future flexibility to buy from the market what he/she wants, when he/she wants, in terms of the technology that offers the best deal for him/her from time to time. To some extent, the object of the technology refresh clause is to compensate for that loss of freedom by

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