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When providing legal reviews of IT related contracts, one of the questions I ask IT customers is “What is your IT and business strategy ?”.
This is because it usually starts a conversation about the background to the IT contract. This in turn provides a lot of guidance for me about where I should focus my attention on the legal review and also allows me to add value to any legal review of that IT contract.
If you don’t talk to your lawyer about your IT and business strategy regarding an IT contract, but simply ask your lawyer to do a “legal review” in isolation, then at best you will not obtain much added value and at worst you could end up in disputes or losing huge amounts of money.
Many disputes in IT contracts arise out of delays, the IT not working properly, the standards of the IT not meeting pre-agreed specifications, the pricing structure not being clear or the price of the IT being more than anticipated. Hence, a “standard” legal review will tend to focus on clauses that relate to these issues.
However, explaining your IT and business strategy to your lawyers will really help to make their legal reviews much more useful.
Here are typical examples of why it has been useful for me to talk with clients about their IT and business strategy when conducting legal reviews of IT related contracts.
Case Study 1 – I was asked to do a legal review of an IT contract by a well known national organisation. The IT contract consisted of the supplier’s standard terms and conditions. Having asked about and discussed the IT and business strategy with the CIO of the national organisation, it became clear that the national organisation might merge or take over other organisations in the near future. Hence, I inserted a break clause for the national organisation into the IT contract just in case the national organisation merged. As it happens, the national organisation did merge and this break clause was invoked by the national organisation so that the IT contract was terminated, allowing the newly merged organisation to select a new IT supplier that was more appropriate for its needs. In this case, if a break provision had not been inserted then the national organisation might have had to retain the original IT supplier or pay for the remaining portion of the contract which would have been very expensive.
Case Study 2 – An IT customer asked me to look at an IT supplier’s terms and conditions where the minimum term was for 3 years, the reason for the 3 year term being that this would entitle the IT customer to better prices from the IT supplier. However, once I asked the IT customer about its IT and business strategy, it became clear that the IT customer was quite uncomfortable about entering into a 3 year commitment as it was not sure how its business levels would fluctuate over that 3 year period. The IT supplier would not agree to provide the better pricing if the contract was for less than 3 years. What I managed to negotiate for the IT customer were break clauses into this contract where the IT customer paid fixed payments to the IT supplier based upon the lost profit of the IT supplier if the contract was terminated early by the IT customer. This way, the IT customer obtained the better pricing and the IT Customer at least had the option of exiting early for a pre-agreed fixed price.
Case Study 3 – I was asked to review a contract for an IT Customer where the IT supplier had standard terms which said that the contract would only be for 12 months after which the contract was subject to review. Having spoken to the IT Customer, it became clear that they were quite keen on the IT supplier because it had specialist and unique skills and, because of this, the IT Customer actually wanted to work with the IT supplier on a long term basis, perhaps for 3 to 5 years. However, the IT Customer was satisfied with this 12 month contract because it was just “trying out” the IT supplier for 12 months to see how things worked out in practice. Again, having understood the organisation’s IT and business strategy, I added provisions to the IT contract which said that the IT Customer could renew the contract on the same terms as the original contract at the end of the 12 month period with prices staying the same (except for an adjustment for inflation).
This avoided the situation of the IT Customer having to renegotiate the contract and the prices at the end of the 12 month period, especially if the IT supplier felt that the IT Customer was dependant upon the IT supplier at that point, which might have encouraged the IT Supplier to increase prices significantly.
Interesting points include:
- explaining your IT and business strategy to your lawyer will help you to get more value out of any legal review of an IT contract rather than simply asking your lawyer to do a legal review in isolation
- in each case above, the person doing the deal for the IT customer mentioned that the legal contract review had really helped to align the deal more closely with the IT customer’s key business objectives and helped the IT customer to avoid business risks
- the legal fees in each of the contract reviews above were less than £1,500 ex VAT but in each case I would estimate that the added value or costs saved by each IT customer were more than £30,000 (and in one of the cases probably more than £150,000)
Next week I’ll talk about indemnities in IT contracts including what they are, should you demand them from your IT supplier and what customers normally agree to in their IT contracts when it comes to indemnities.
p.s. If you are involved in Outsourcing Deals or SLAs then take a look at these links and the work that I’m involved with: