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Information Technology Outsorcing Transaction - Halvey K.J.

Halvey K.J. Information Technology Outsorcing Transaction - Wiley Publishing, 2005. - 649 p.
ISBN-10 0-471-45949-6
Download (direct link): informationoutsourcingtransactions2005.pdf
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(r) BUSINESS RECOVERY. The customer should consider which obligations the vendor will assume with respect to business recovery in the event of a disaster or force majeure event (i.e., an event outside the vendor’s control). For example, will the vendor be required to maintain a “hotsite” from which services can be provided until services can be restored at the regular service location? Will the vendor be required to interface with certain other vendors in the event of a disaster or follow certain escalation procedures? In addition, the customer may wish to consider limiting the duration of any interruption of the services by providing that the customer can terminate the agreement without liability or obtain services from a third party if the services are interrupted for more than a specified period. Finally, the contract should specify what priority will be given to the customer’s services in the event of a disaster that affects more than one of the vendor’s customers and may require the vendor to restore the customer’s critical services within a specified period.
(s) PRICING/FEES. A discussion of pricing/fee structures typically implemented in IT outsourcing arrangements is set forth in Chapter 6.
(t) PAYMENTS. The parties will have to negotiate when invoices will be paid (e.g., in arrears, in advance), in which manner (e.g., wire transfer), and in what currency. Most vendors propose that payments be made in advance of the services being provided. Because the customer will lose the “cost of money” if payments are made in advance, the customer typically wishes to pay net 15 to 45 days. The customer’s position may depend on its current payment practices with other vendors.
With respect to disputed amounts, the parties may wish to consider including a provision that allows the customer to withhold disputed amounts with an obligation to pay amounts in dispute exceeding a certain threshold into escrow. It is
148 Ch. 4 Outsourcing Contract
very important to the customer to include language that requires the vendor to continue to perform services in the event of a fee dispute.
(u) TAXES. The parties should research the extent of the tax liability that will be imposed in connection with the IT outsourcing contract and any supplemental agreements before entering into any IT outsourcing arrangement and determine how any such liability will be allocated between them. The allocation of tax is becoming an increasingly controversial subject in outsourcing agreements because many states and countries impose a tax on services.
(v) DEALING WITH BUSINESS VARIABILITY. No customer’s business remains static over the term of the IT outsourcing contract (particularly when the term is as long as 10 years). Therefore, it is important that the parties consider during contract negotiations possible changes in the customer’s (and the vendor’s) business over the term of the IT outsourcing contract and include provisions in the outsourcing agreement that allows for business variability. Examples of provisions that deal with business variability include the following:
Additional and reduced resource charges. The IT outsourcing contract typically includes rates at which the customer may receive additional resources or services, as well as rates by which the baseline fee will be reduced if lesser resources or services are used. The rates may vary depending on the amount of resource needed and the amount of notice given.
Renegotiation trigger. The IT outsourcing contract may include a renegotiation right if the customer’s demand for services increases or decreases above or below a certain level. An example of such a provision is:
In the event that Customer’s use of the Services increases or decreases more than [***] percent in the aggregate [per Service], Customer and Vendor shall negotiate and implement an appropriate adjustment to the Fees. In the event Customer and Vendor cannot agree on the adjustment to the Fees required by this Section, such disagreement shall be submitted to dispute resolution.
Termination right. The IT outsourcing contract may include a partial or full termination right if the customer’s demand for services decreases below a certain level. Such a termination right may be tied to a termination fee.
(w) AUDIT. The following topics should be considered regarding audits:
Services. The customer typically wishes to retain the right for its auditors and agents to audit the vendor’s operations and records to ensure that the vendor is complying with its obligations under the IT outsourcing contract, as well as governmental rules and regulations. Such an audit may include the right to periodically inspect the vendor’s premises. The parties will need to discuss each party’s obligation in the event that an audit
4.3 Key Contract Issues 149
reveals noncompliance with agreed-on procedures, government rules, and regulations.
Fees. The customer should also have the right to audit the fees charged by the vendor. This right typically extends back for a reasonable period, and the vendor is obligated to provide sufficiently detailed financial information to verify the charges under the IT outsourcing contract. Vendors are particularly sensitive, with good cause, about an audit provision that could potentially allow the customer to access the cost data with respect to the vendor’s fees. It is unlikely that the customer has a legitimate need for this cost data, and many customers simply choose to require that sufficiently detailed information be provided solely to verify the fees they have paid. In any event, the customer typically wishes to be able to recover the amount of any overcharges, plus interest from the date payment was made. Similarly, in most cases, the vendor may wish to be able to recover the amount of any undercharges.
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