We are living in a post-modern, digital age. Our technology, our culture and our way of doing business and interacting with each other have undergone tremendous changes in recent decades. Changes that are mostly due to the explosive and unprecedented development of telecommunications and information technology. And yet, there is something decidedly medieval about the way that this revolutionary business operates.
IT service contracts, particularly for IT outsourcing, are still largely custom-tailored solutions, i.e. items of craftsmanship in an age of industrial and post-industrial processes. IT law has for some time been the Savile Row of contract-drafting, where every deal is bespoke tailored according to particular specifications by highly skilled craftsmen. However, this field of law, like any other, exists to serve the ever-evolving needs of its clients, i.e. the companies purchasing IT services. And those clients are increasingly looking for off-the-rack solutions, not expensive tailoring.
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‘Clients are increasingly looking for off-the-rack solutions, not expensive tailoring.’
The IT industry, and with it the services of IT law practitioners, need to modernise, to move away from the traditionalist habits and scheduling expectations which have always been used to produce unique products for bespoke IT legal services. The IT industry needs an industrial revolution.
This need for modernisation is driven by changes inside the IT services industry. This relatively young field of business is slowly reaching maturity: clients today have more accurate knowledge of their businesses’ IT service and supply arrangement needs, and IT providers need to adapt to satisfy these more sophisticated expectations. Clients are increasingly interested in retaining service providers who offer efficient and business friendly services, not in purchasing or leasing IT equipment or hiring IT professionals.
Focus on the end result, not the process
The focus is now on finding a fast-track to the end result: instead of making separate deals for various elements needed to create a functioning IT infrastructure, clients only want to contract and pay for the actual service. This has also meant an increase in IT outsourcing. Firms are giving up their own data centres, IT staff and application licenses, and purchasing services from external providers on a pay-as-you-go basis.
The same shift can also be seen in the way Service Level Agreements (SLAs) are handled. SLAs are a staple of IT outsourcing. They establish the acceptable levels of availability or efficiency for IT services in a particular relationship, along with penalties and compensations for failure to meet the agreed upon goals.
To truly serve clients’ needs, modern SLAs need to assess the success of the essential object of an IT outsourcing deal, instead of assessing how each of the various individual elements of an IT service contract is functioning. , That is to say, a successful modern SLA assesses whether the desired service is available and whether it produces added value for the client’s business. Today’s clients are not, and do not need to be, interested in the technical details of data centre or application defects; they are interested in making sure that they get what they have paid for: an efficient and business-friendly service. The process is less important than the end result.
At the same time, the structure of outsourcing is changing. Traditionally clients would enter into a number of layered agreements with various data centre and application providers, each with its own liabilities and responsibilities towards the client.
Now we increasingly see use of a prime contractor model. In this model, one provider is responsible – and liable – for providing the desired service, and usually provides the means for that service through its own sub-contractors, assuming liability for their actions. For the client, this streamlines the process and makes sense: again, what the client desires and is paying for is the end result.
Sweet for both the client and the IT provider
What does all this mean for IT providers? First of all, IT companies need to acknowledge that the market for outsourced IT services is increasingly competitive. Large businesses are carrying out divestments and merging functions to secure efficiency and profitability. The word partnership is treated almost as an expletive– clients want services that are flexible and adapt to their own changing businesses. And if those services are no longer producing value, or essential for the client’s business, they may be likely to be divested or submitted for a new round of tendering.
This also means that IT contracts need to be drafted in a way that allows for termination or reopening for tender with a minimum of fuss. Clients want to avoid hostage situations where an undesired IT partner holds a company’s business for ransom by refusing to let go of business-critical functions. IT companies need to acknowledge this, because business at gunpoint is not good business.
‘IT contracts need to be drafted in a way that allows for termination or reopening for tender with a minimum of fuss.’
With that in mind, the clients of IT services also need to remember that the deal needs to be sweet for both parties. There is such a thing as a deal that is too good. If a client manages to impose standard terms, SLAs, schedules and prices that are vastly advantageous for the client but unprofitable for the IT service provider, there is a risk that the provider will try to get rid of the deal as soon as possible, or lower its performance to a level that is financially sensible but much lower than the client desires.
Having the power to be the Wolf of Esplanadi does not mean that you should. In a business deal, both parties need to turn a profit, so relying on the tight competition between providers to hammer through unreasonable terms may turn out to be a mistake. Short-term economic gains can lead to long-term losses.
In summary, the IT services industry needs to modernize and provide more products relevant in the age of mass-produced, reasonably priced, business-friendly solutions. IT lawyers and professionals can still wear their Saville Row suits, but except in special cases, they should leave bespoke tailoring to the tailors.