In the search for seamless customer experience and efficient internal operations, software development and support have become crucial elements of business strategy. Some medium-sized businesses face the problem that they are too big to rely on standard or entry level software but too small to flex their muscles in the face of larger service-providers. Often these businesses turn to medium-sized software experts to create bespoke software or to provide them with access to more comprehensive SaaS products offering greater functionality.
One of the difficulties in the relationship between business management and outsourced software and support services is that the parties often don’t speak the same language. There can be a disconnect between what management thinks the software can do and what it’s functionality actually is. In the absence of the budget to employ business analysts to bridge the gap between IT and business, it is up to the client and the service provider to be sure that they are pulling in the same direction.
Let’s take a look at some of the key areas to consider when negotiating these agreements.
Duration of the agreement:
In cases where bespoke software is being developed, the duration of the agreement usually covers the development period and sets out how any updates are dealt with.
When it comes to the support services portion of the agreement, two of the most common ways in which the term of the agreement is determined are:
- An indefinite agreement that can be cancelled for convenience or by the innocent party if the other party breaches an agreement. This type of agreement provides the most flexibility for the parties but also comes with a level of risk as neither party is assured of long-term support or income. The best way to manage this risk is to build in a longer termination period in the case of termination for convenience to allow the parties to make arrangements to mitigate any negative consequences arising out of this termination.
- A fixed term agreement with an option to renew. Here the agreement is in place for an initial term, and, during this term, the parties can only terminate if there is a breach of the agreement. Towards the end of the initial term, parties typically have the opportunity to discuss renewal terms. It is common for an agreement to state that, unless the client gives notice of termination within a particular period, the contract will roll over for another term.
This construction provides more stability as both parties know that they can rely on the relationship being in place for a certain period (unless there is a breach). The downside of this is that if the terms of the agreement are not adequately defined, both parties may experience prolonged periods of unsatisfactory performance, impacting profitability or service quality.
The scoping of the services
This is, without a doubt, the trickiest part of contract negotiations. Parties often don’t describe the nature and timing of the services, or the functionality of the software in sufficient detail. An example is an entry that reads “provide system reports”. An entry like this does not provide enough information as to what kind of reports must be provided by the service provider, how often they must be provided, who they must be sent to etc. Parties often think they know what is meant but down the line, memories fade, and the parties may find that they are not on the same page after all.
Parties also commonly use phrases such as “as soon as possible” or “reasonable endeavours” to try and give flexibility to support requirements but these terms are open to interpretation and what may seem reasonable to one party may not be reasonable for another. Wherever possible, place exact time periods in place. These should be fair to both parties and, there can always be an option to negotiate a longer or shorter period but starting from a place of clarity helps put the parties’ responsibilities in perspective.
The software
Once again, clarity is key. Demonstrations and frank conversations around what can and can’t be done are essential. The parties will only be able to agree project milestones, completion dates and payment terms when there is clarity around the nature and functionality of the software (as it exists or will be developed).
Factors to consider include whether there is a chance that versions of the software may be discontinued. If that happens, does that mean that the client must immediately upgrade to a latest version or change to a different piece of software altogether? What are the costs and time periods involved with this?
Where the service provided is developing software specifically for a client, it is important to understand to what extent the client owns the software. Are there parts of the codebase that is generic and remains the property of the service provider? Is there a license granted to the client or is the software assigned outright to it? In the case of a license agreement, is the integrity of the software maintained through clauses preventing reverse-engineering, sublicensing or similar conduct?
Conclusion
Every business relationship benefits from an unambiguous understanding of the rights and responsibilities of the parties involved. In the case of a software and support services agreement which is extremely technical by its very nature, the parties need to take special care to ensure that the agreement is well negotiated and clearly drafted to ensure a long standing and fruitful engagement.
The information provided in this article is provided for general information purposes only, and does not provide definitive advice. It does not amount to legal or other professional advice and so you should not rely on any information contained here as if it were such advice.
Wright Hassall does not accept any responsibility for any loss which may arise from reliance on any information published here. Definitive advice can only be given with full knowledge of all relevant facts. If you need such advice please contact a member of our professional staff.
The information published across our Knowledge Base is correct at the time of going to press.
