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Keys to success [July/August print edition]

Navigating IT procurement's legal and contract landscape


September 7, 2012
by Bradley Freedman

Information technology (IT) procurement can present both business and legal risks. Studies show many IT projects either fail or are late, over budget or don’t deliver expected benefits. The risk of failure is due partially to the conventional IT procurement process and customers not taking reasonable precautions. This article summarizes ways in which customers can increase the chances of successful IT procurement and manage risks.

Keys to success
Due diligence: The customer should do due diligence to be reasonably satisfied the IT solution is suitable, affordable (based on total cost of ownership over the lifecycle) and meets business requirements.

IT vendor due diligence: The customer should investigate the vendor and its ability to deliver on-time and on-budget services.
The business deal: Consider deferring detailed contract negotiations until the customer and vendor agree in principle to the deal’s basic business terms. Use a non-binding term sheet to document agreed business terms.

Project structure/management: IT procurement often includes a complicated implementation. All aspects of the implementation project (like services and deliverables from the vendor and the customer’s tasks) should be described in a contract document, such as a statement of work). The implementation project should be structured to provide the customer with reasonable project control mechanisms—to protect against unauthorized changes to project scope, unanticipated costs and unexpected delays—and reasonable remedies for deficiencies and delays.

Plan for disaster: Ensure sufficient and effective legal and practical rights and remedies in the event of an implementation project failure or customer-vendor relationship breakdown.

Risk allocation: IT procurement presents risks of loss to the parties and liabilities to non-parties. A key issue in IT procurement is risk allocation, and a main function of various kinds of contract provisions is changing the risk allocation that would result from generally applicable legal rules. The customer should understand the contractual allocation of risk and consider obtaining insurance for loss and liability.

IP ownership/licenses: IT procurement often involves pre-existing technologies and technologies created for the customer. The customer should ensure contract documents provide sufficient ownership and usage rights for each technology component.

Standard form contracts: The customer should carefully review the vendor’s standard form contracts to ensure they’re reasonable, fair and describe all aspects of the procurement. Ancillary and operational documents, like statements of work, are often key parts of the contract and should be prepared with care and legal advice.
Negotiation plan: The customer should prepare a reasonable negotiation plan with time to deal with issues and unanticipated delays. Prepare for negotiation fatigue and try to avoid arbitrary or unreasonable deadlines. The customer shouldn’t allow the vendor to start work without a signed contract, and shouldn’t sign a bad contract hoping to resolve problems as they arise.

Use the contract: The customer’s decisions should be informed by an understanding of the contract and the legal rights and obligations of the customer and vendor.

Procurement model
IT solutions are often based on commercial off-the-shelf (“COTS”) technologies and implementation services provided by vendors and service providers (often independent parties). IT vendors typically take the initial position for contract negotiation purposes that customers must irrevocably purchase licenses to the COTS technologies and commit to the implementation project before vendors or service providers do preliminary work determining the extent and cost of implementation services. So the customer must make key decisions based on incomplete and potentially inaccurate information about a solution’s likely costs and benefits. IT vendors and service providers often use standard form contracts that restrict customer rights and remedies for project failure. In those circumstances, customers are often compelled to pay more, wait longer and accept fewer benefits.

In many situations, IT project failure risk and resulting disputes can be reduced if preliminary work (discovery, gap analysis and design) is done before the customer must decide whether to irrevocably purchase and implement the COTS technologies. This allows the customer to make key decisions based on accurate information and realistic expectations. It’s fair to IT vendors and service providers, since the customer pays for preliminary work and reasonable contractual restrictions (such as a break fee) can deter the customer from opportunistic project termination.

IT procurement has risks. But chances of success increase with best practices and a reasonable and fair procurement process.        b2b

Bradley J. Freedman is a partner and technology law practice leader in Borden Ladner Gervais LLP’s Vancouver office. He specializes in technology, intellectual property, Internet, electronic commerce and related matters. Reach him at bfreedman@blg.com.