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Practice Areas

Outsourcing Contracts

EM Law are experts in drafting, negotiating and advising clients on outsourcing contracts. Our lead outsourcing contracts lawyer is Neil Williamson who has extensive experience in advising clients on a wide range of software and technology law matters.

What is outsourcing?

Outsourcing involves a transfer by a business to a third party of the operational responsibility for the provision of a distinct business function, process or service. The success of an outsourcing is dependent on putting in place a flexible but clearly defined arrangement which properly reflects the customer’s requirements and provides a mechanism by which the parties can respond to changing needs and a changing environment. It is fundamental that both parties understand the needs, objectives and business drivers of the other in order to create adequate outsourcing contracts.

What about outsourcing contracts?

Due to the reliance by businesses on computer systems, IT and technology outsourcing is extremely common. There are however special issues that need to be considered when drafting IT outsourcing contracts. Some IT outsourcing contracts cover particular service elements whereas others contain a bundle of IT services. Assuming that the outsourcing will require the hand over of complex IT systems, the importance of pre-contract due diligence cannot be underestimated. The due diligence process should be aimed at identifying, among other issues:

• The software licences being transferred to the supplier. The customer should review the licence terms at the outset, to identify whether assignment of the software licence is possible without the express consent of the software licensor and whether the licence scope prohibits the effective use of the software by the supplier. Alternatively, the customer might want to retain ownership of the software licences and sub-licence the use of the software to the supplier. If the licence terms prohibit sub-licencing, the written consent of the licensor should be obtained first.

• The software source code. The customer will need to consider the extent to which the supplier requires access to the source code of the customer’s software. However the software source code will only be released to the customer or supplier in limited circumstances, for example if there is an escrow arrangement. For this reason, the supplier will usually enter into a maintenance agreement with the licensor separate to outsourcing contracts.

• The software maintenance contract terms. The customer will need to consider whether it can assign software maintenance contracts to the supplier or whether the supplier already has alternative arrangements in place. As a result, the customer may need to terminate unrequired maintenance services and the amount of notice that needs to be given should be taken into account. Clearly, if the customer cannot terminate on short notice, it may end up having to pay for the continuation of services until the next contractual break point.

Of particular importance when drafting IT outsourcing contracts will be the clauses relating to intellectual property rights, especially those that relate to the customer’s use of existing third party software and to the ownership of, or rights to use, any software developed by the supplier in the course of providing the outsourced services. Indemnities in relation to intellectual property rights should be provided, in case the developed software infringes any third party rights.

Also critical in IT outsourcing contracts will be the provisions relating to change control, as changes will be needed throughout the contract term to reflect amendments to the scope of the existing services, provide additional services or make any necessary amendments as a result of new and improved technology.

Unless the outsourcing covers the whole of the customer’s IT infrastructure, it is likely that the customer will retain overall control of its IT strategy and remain responsible for the security of the IT system. Security in this sense relates to matters such as the protection of network and information systems and checking for viruses, as opposed to the physical security of premises. Most outsourcing contracts will contain a data security clause setting out requirements which the supplier must comply with to ensure the security of that data. This could include confidentiality requirements, ensuring that staff who are involved with handling such data have been properly vetted and virus protection issues in relation to the IT systems.

Outsourcing contracts therefore need to identify the requirements of the customer and contain a full description of the outsourced services, the level of service required and how much the services are priced at.

For any questions you may have concerning outsourcing contracts contact Neil Williamson.

EM Law Neil Williamson

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