When your in-house expertise and/or budget doesn’t allow you to implement a vital IT development project, it’s time to weigh the advantages and disadvantages of outsourcing. If you finally decide to outsource your project, you have to choose an outsource service provider (OSP) that best fits your needs. The next step – a most important and responsible one – is negotiating and preparing a contract.
Signing a contract can be an easy thing to do. About ten years ago, I witnessed the signing of a contract that was hand-written on a piece of paper torn out of a spiral notebook. The contract contained just a couple of clauses, it didn’t take much time to prepare, and no lawyers were involved in concluding it. (I know you don’t believe that a contract could be signed without a lawyer that had gotten their share of the cake, but I always tell the truth however improbable it might seem.) Even though the parties were two guys who didn’t really like or trust each other, the contract worked fine. I guess it was so because they were standing on the same ground – having different interests, they spoke the same language and saw things in the same way. Conversely, your circumstances won’t allow you to neglect any precaution. The OSP you are going to sign a contract with will most likely have little or nothing in common with you, and your contract will have to be thoroughly thought over, discussed, and prepared.
After you make sure the project or the part of it that you are going to outsource is described in the text unequivocally and in detail, I recommend you focus as much attention on the payment details.
Flexibility of Provisions
Any customer wants the provisions of a contract to be as strict as possible, and it’s only natural. No doubt, a contract should provide for some penalties associated with the OSP’s inability to fulfill the contractual obligations. However, these provisions are a double-edged weapon: when OSPs face excessively strict terms and severe penalties, they tend to secure themselves by increasing the profit they get out of the project. For example, they may take advantage of your inexperience and include in the project the tasks and/or services that otherwise could be needless. Another way to compensate for the potential penalties is providing additional services and/or fulfilling tasks that are not stipulated by the contract (see the previous section). If the schedule doesn’t get off track and the project is implemented without any serious problem, no penalties are imposed, and this means you lose money – I mean that part that your OSP managed to add to the cost of the contract just in case.
To this kind of situation, make the provisions of the contract flexible (to a reasonable extent, of course). Don’t try to schedule every moment of the project implementation, and don’t set a milestone a day. It’s a good idea to find a compromise with your OSP and have a few major milestones and deadlines in the project, while the entire schedule can become a separate agreement appended to the contract. This agreement may be subject to change on mutual consent.
Liability Limits
Apparently, you are interested in limiting your contractual responsibilities. So is your OSP. Again, you have to be ready for a compromise. The contract has to help you and your OSP solve most problems amicably and to the mutual benefit. The party at fault should have as many ways to rectify the situation as possible, while the other party is supposed to be reasonable evaluating the amount of loss. And try to avoid fines – both paying and claiming them.
Another clause that your contract should have is the one where you will set the time limit after which no claims can be raised. The start time is usually considered the moment both parties acknowledge the issue.
OSP’s Requirements
Have you compiled a comprehensive list of responsibilities for the OSP? Good. Now, remember that your OSP will require a number of responsibilities from your end.
Procedures
You shouldn’t try to cram into the contract all of the procedures that are necessary to implement the project. However, the most important of them should be included in the text. For instance, OSPs are usually required to cope with the increasing volume of work and to allow for changes made to the project schedule. It’s only fair for an OSP to expect that in such cases the payment should be increased. An appropriate procedure stipulated by the contract will help you and your OSP define the increase in payment without negotiations that tend to become long and weary.
Supervision
If you want to visit your OSP every now and then to make sure that your project is not neglected, you may insist on including a corresponding clause in the contract. The OSP may respond with a proposal to schedule such visits and append this plan to the contract as a separate agreement. If you disagree, there’s always another option: you may be required to notify the OSP about your visits in advance. Some OSPs even demand additional payment for the expenses they incur due to such visits. I believe you and your OSP will be able to solve this problem if you understand each other’s concerns: you can’t let your project develop as it might, while your OSP shouldn’t be distracted from work and kept nervous.
Intellectual Property
IT related contracts normally have clauses on intellectual property rights. You and your OSP might need to use each other’s intellectual property, and this issue has to be negotiated and put in the contract. The parties usually don’t pay each other for their intellectual property rights. However, if a third party’s intellectual property is involved in the project implementation, you should take care of proper agreements and licensing.
Even more important is the answer to the question who will own the rights to the product that is going to be created, as well as the technologies and solutions that might be necessary to develop in the course of work. I urge you to be reasonable and look for a compromise here as well. I’m afraid that if you wish to be a sole proprietor of everything, the OSP will make you pay for it this way or the other.
Confidentiality
This clause is a must for the majority of contracts. Neither contracting parties, nor their staff and agents are allowed to disclose the contents of the contract and the most important information about the project. The non-disclosure term established by the contract or a separate agreement may last longer than the contract term. If you want the OSP’s personnel that will work on the project to sign a non-disclosure agreement, it will be accepted with understanding.
Contract Termination
Be sure there is a contract termination clause and the implications of this outcome for the parties. You and your OSP should agree upon the conditions on which the contract may end prematurely, the penalties for the party at fault, and any exemptions (e.g., force majeure).
Conclusion
Signing a contract with an OSP is a serious business in itself. If you are new to outsourcing, it makes the whole thing even more serious. I told you a few things you should keep in mind while preparing such a contract, and I hope my advice helps you.
Another thing. This contract isn’t that piece of paper torn out of a spiral notebook I told you about at the beginning. Consult your lawyer before you sign on the dotted line.
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Basil Tesler is an Editor-in-Chief for Web Space Station, an Illinois based software company. Web Space Station provides total IT solutions covering your most demanding technical needs. Our innovative approach works for you to increase productivity, improve customer service and reduce costs. And, we are dedicated to continually serving your needs through our outstanding and ongoing commitment to quality and support. See more information at http://www.WebSpaceStation.com.
