The Flexibility of Click to Accept Terms: the Individual Consumer vs. the Enterprise

Every day we click away our rights to our favorite apps and social media platforms.  It happens again when you get that shiny new update to the most recent IOS or Android software.  There is a little blurb about what the software update fixes, but what else is buried in those pages and pages of words that we scroll past and accept?  We are all guilty of it, many lawyers included, because the truth is, we don’t have too much control over what we agree to. You have two options: scroll down and accept or be stuck in the past.  The world of technology is fast paced and an operating system that is a month old could leave you with poor call quality, missed emails or worse, question marks in place of the newly diversified emojis.  Your option is accept or be left.  So that leaves us with the lingering question: what are we agreeing to and are our private pictures, text messages, direct messages, and inbox protected?  The software updates aren’t the only form of technology that makes us question what we are signing. 

Every few months, there is a status message posted all over Facebook.  This post announces to the social media conglomerate that the user does not authorize Facebook to use any of its content in any manner.  The hopeless user dates and time stamps the post, making it look tremendously official, and in less than four hours, it goes viral.  We have all seen this post, some of us have laughed immediately, while others run to google to see if there is any validity to this post and then you have a large group who have re-posted the status message.  Well, let’s give this viral post some context.  Have you ever desperately wanted to get out of a lease you signed?  The once charming New York City five hundred square foot $3000.00 per month apartment in Chelsea that you share with a roommate just no longer looks appealing to you or your bank account.  Ok, so here’s how you get out of that lease, place a sticky note on your landlord’s door with the following verbiage:  Dear Landlord, from this day forward I hereby return my apartment to you and will no longer be paying rent.  Do you see how ridiculous and ineffective that is?

Reposting your “copyrights” on Facebook is the equivalent of your sticky note to your landlord.  The status message is like telling your mortgage company via email that you will no longer be bound by the terms of your mortgage.  It is comparable to taking your car back to the lot and telling the bank that holds your car note, you are going to Uber going forward.  Your post means nothing, and here is why: the day you signed up for Facebook, you clicked a little green button that read “Sign Up.”  By clicking that button, you agreed to their Terms and even certified that you read their Terms and Policies.  That click is no different from signing your well-practiced signature on any contract or lease.  That one click of your mouse binds you and a post cannot get you out of a contract. So, what exactly did you click and agree to?  You have agreed to let Facebook and anyone they are affiliated with, or any company or person that pays Facebook, to share any and everything that you post.  That’s it, in a nutshell. 

Individuals using their smartphones or social networks aren’t the only people who face click to accept terms.  These terms are often seen on an enterprise level as well.  For example, a national radio station might purchase a text message providing service so that their listeners can text in when the station is running certain contests.  Before the radio station can use the service, they will be asked to agree to terms referred to as “click-to-accept” or “shrink wrap.”  

As IT attorneys, we are tasked to negotiate our clients out of “click-to-accept” terms.  Vendors often push back and will tell the client that everyone using their service is bound to these same terms, but of course, when there are hundreds of thousands or millions of dollars at stake, no is just not an option.  Recently, our client was asked to accept the terms of a Vendors standard End User Licensing Agreement (“EULA”).  The EULA had several terms that, because of the nature of our clients business, could not be agreed to.  Initially, we sent the Vendor our standard terms that we use when dealing with the type of services that they offered.  The response was an immediate no, everyone likes to use their own paper negotiated by their attorneys, understandable.  Instead of redrafting the entire EULA, we reviewed the terms of their EULA, and the areas that we could not agree to.  Taking some of our standard terms, along with the language in their EULA, after several negotiations, we were able to enter into a letter agreement with the Vendor.  After successful negotiations, the client was not bound by the click to accept terms, or any shrink wrap terms that may have been contained in the service that was being purchased. 

So, what do you do if you’re not an enterprise with millions of dollars and amazing attorneys to negotiate your rights? How do you protect your content or what you are clicking to accept?  Here is the secret: If you don’t agree with the terms, don’t use the service and if you want to keep it private, don’t post it! 

 

Who is not in the Berne Convention?

I was negotiating an intellectual property indemnity clause, and we agreed that the scope would be limited to members of the Berne Convention.  Basically, I wanted a global scope and they were worried about "oddball" countries.  Before settling on the point, I did a little research to see just what the gap would be.   Below are lists of Berne Convention signatories and UN members as of October 15, 2015.  Note that Taiwan is not in either.

Berne Convention Signatories                        UN Members 

                                                                                                          

                                                                    Afghanistan

Albania                                                         Albania

Algeria                                                         Algeria

Andorra                                                        Andorra

                                                                    Angola

Antigua and Barbuda                                    Antigua and Barbuda

Argentina                                                     Argentina

Armenia                                                        Armenia

Australia                                                       Australia

Austria                                                          Austria

Azerbaijan                                                    Azerbaijan

Bahamas                                                       Bahamas

Bahrain                                                         Bahrain

Bangladesh                                                   Bangladesh

Barbados                                                      Barbados

Belarus                                                         Belarus

Belgium                                                        Belgium

Belize                                                           Belize

Benin                                                            Benin

Bhutan                                                         Bhutan

Bolivia (Plurinational State of)                       Bolivia (Plurinational State of) 

Bosnia and Herzegovina                               Bosnia and Herzegovina

Botswana                                                     Botswana

Brazil                                                           Brazil

Brunei Darussalam                                        Brunei Darussalam

Bulgaria                                                        Bulgaria

Burkina Faso                                                 Burkina Faso

                                                                    Burundi

Cabo Verde                                                 Cabo Verde

                                                                   Cambodia

Cameroon                                                    Cameroon 

Canada                                                       Canada

Central African Republic                              Central African Republic

Chad                                                           Chad

Chile                                                           Chile

China                                                          China

Colombia                                                    Colombia

Comoros                                                     Comoros

Congo                                                        Congo 

Costa Rica                                                  Costa Rica

Côte d'Ivoire                                               Côte d'Ivoire

Croatia                                                       Croatia

Cuba                                                           Cuba

Cyprus                                                        Cyprus

Czech Republic                                            Czech Republic

Democratic People's Republic of Korea         Democratic People's Republic of Korea

Democratic Republic of the Congo               Democratic Republic of the Congo

Denmark                                                      Denmark

Djibouti                                                       Djibouti

Dominica                                                      Dominica

Dominican Republic                                      Dominican Republic

Ecuador                                                       Ecuador

Egypt                                                          Egypt

El Salvador                                                  El Salvador

Equatorial Guinea                                        Equatorial Guinea

                                                                   Eritrea

Estonia                                                        Estonia

                                                                   Ethiopia

Fiji                                                               Fiji

Finland                                                         Finland

France                                                         France

Gabon                                                          Gabon

Gambia                                                        Gambia 

Georgia                                                        Georgia

Germany                                                      Germany

Ghana                                                          Ghana

Greece                                                         Greece

Grenada                                                       Grenada

Guatemala                                                   Guatemala

Guinea                                                         Guinea

Guinea-Bissau                                              Guinea-Bissau

Guyana                                                        Guyana

Haiti                                                             Haiti

Holy See                                                                                           

Honduras                                                      Honduras

Hungary                                                        Hungary

Iceland                                                          Iceland

India                                                             India

Indonesia                                                       Indonesia

                                                                     Iran (Islamic Republic of)

                                                                     Iraq

Ireland                                                          Ireland

Israel                                                            Israel

Italy                                                             Italy

Jamaica                                                       Jamaica

Japan                                                           Japan

Jordan                                                          Jordan

Kazakhstan                                                   Kazakhstan

Kenya                                                           Kenya

                                                                    Kiribati

Kuwait                                                          Kuwait

Kyrgyzstan                                                    Kyrgyzstan

Lao People's Democratic Republic                  Lao People's Democratic Republic 

Latvia                                                           Latvia

Lebanon                                                       Lebanon

Lesotho                                                        Lesotho

Liberia                                                          Liberia

Libya                                                             Libya

Liechtenstein                                                 Liechtenstein

Lithuania                                                        Lithuania

Luxembourg                                                    Luxembourg

Madagascar                                                    Madagascar

Malawi                                                           Malawi

Malaysia                                                         Malaysia

                                                                      Maldives

Mali                                                                Mali

Malta                                                              Malta

                                                                      Marshall Islands

Mauritania                                                      Mauritania

Mauritius                                                        Mauritius

Mexico                                                           Mexico

Micronesia (Federated States of)                    Micronesia (Federated States of)

Monaco                                                          Monaco

Mongolia                                                        Mongolia

Montenegro                                                    Montenegro

Morocco                                                         Morocco

Mozambique                                                   Mozambique

                                                                      Myanmar 

Namibia                                                          Namibia

                                                                       Nauru

Nepal                                                              Nepal

Netherlands                                                    Netherlands

New Zealand                                                  New Zealand

Nicaragua                                                      Nicaragua

Niger                                                             Niger

Nigeria                                                          Nigeria

Norway                                                         Norway

Oman                                                           Oman

Pakistan                                                        Pakistan

                                                                     Palau

Panama                                                          Panama

                                                                     Papua New Guinea

Paraguay                                                       Paraguay

Peru                                                              Peru

Philippines                                                     Philippines

Poland                                                           Poland

Portugal                                                        Portugal

Qatar                                                            Qatar

Republic of Korea                                          Republic of Korea

Republic of Moldova                                      Republic of Moldova

Romania                                                        Romania

Russian Federation                                        Russian Federation

Rwanda                                                         Rwanda

Saint Kitts and Nevis                                     Saint Kitts and Nevis

Saint Lucia                                                    Saint Lucia

Saint Vincent and the Grenadines                  Saint Vincent and the Grenadines

Samoa                                                           Samoa

                                                                     San Marino

                                                                     Sao Tome and Principe

Saudi Arabia                                                  Saudi Arabia

Senegal                                                         Senegal

Serbia                                                            Serbia

                                                                     Seychelles

                                                                     Sierra Leone

Singapore                                                      Singapore

Slovakia                                                        Slovakia

Slovenia                                                        Slovenia

                                                                    Solomon Islands

                                                                    Somalia

South Africa                                                 South Africa

                                                                    South Sudan

Spain                                                            Spain

Sri Lanka                                                       Sri Lanka 

Sudan                                                           Sudan

Suriname                                                      Suriname

Swaziland                                                     Swaziland

Sweden                                                        Sweden

Switzerland                                                  Switzerland

Syrian Arab Republic                                     Syrian Arab Republic

Tajikistan                                                      Tajikistan

Thailand                                                       Thailand 

the former Yugoslav Republic of Macedonia  The former Yugoslav Republic of Macedonia

                                                                    Timor-Leste

Togo                                                            Togo

Tonga                                                          Tonga

Trinidad and Tobago                                      Trinidad and Tobago

Tunisia                                                          Tunisia

Turkey                                                          Turkey

                                                                    Turkmenistan

                                                                    Tuvalu

                                                                    Uganda

Ukraine                                                         Ukraine

United Arab Emirates                                    United Arab Emirates

United Kingdom                                            United Kingdom of Gr.Britain and N. Ireland

United Republic of Tanzania                          United Republic of Tanzania

United States of America                              United States of America

Uruguay                                                       Uruguay

Uzbekistan                                                   Uzbekistan

Vanuatu                                                       Vanuatu

Venezuela (Bolivarian Republic of)                Venezuela (Bolivarian Republic of)

Viet Nam                                                     Viet Nam

Yemen                                                         Yemen

Zambia                                                        Zambia

Zimbabwe                                                   Zimbabwe

Service Level for Open Source Policy Compliance?

In “Managing software legal compliance” in the February 22, 2010 edition of Network World, Sorin Cohn-Sfetcu and Kamal Hassin write that “ascertaining the legal compliance of software is just as important as assuring the quality before pressing it into production”.  This assertion raised some interesting questions in my mind about the contractual provisions that should be incorporated in outsourcing contracts, and in particular application development and maintenance (ADM) agreements.

I think it has become pretty common practice in well written, customer-friendly outsourcing agreements to include provisions either forbidding the use of open source code and other third party materials or, more realistically, requiring the vendor to obtain the customer’s consent before using them.  Also, it is common to include robust audit provisions that would allow auditing of the vendor’s code, as the authors of the article cited above suggest.  Both requirements provide the basic tools allowing the customer to have an open source usage policy while requiring the vendor to comply and audit compliance.

Of course, when the relationship is based upon the vendor’s form, the vendor probably has not given the customer any meaningful audit rights.  In addition, the vendor may have included language that gives it the right to use open source wherever it sees fit.  In a transaction I recently negotiated, the vendor proposed language giving it the right to incorporate open source at any time without providing notice.  Clearly, we pushed back on that idea.  Even worse, some vendors will just incorporate open source without letting the customer know that they are going to do so.

Even where customers have a contractual right to impose an open source policy and to audit compliance, one has to remember that having a contractual right to do something and actually seeing it happen are two entirely different animals.  Provisions buried in the boilerplate are often forgotten and worse, ignored from the outset.  The concept of service levels and service level credits (the penalties the vendor pays when it fails to meet service levels) came into being as a way of keeping the focus on issues that are fundamental to service quality.  Service levels are frequently used to measure and maintain many kinds of metrics measuring productivity and performance.

If compliance with an open source policy is important to the customer (and it should be), shouldn’t compliance with the open source policy be something that is addressed as a service level?  The value of a service level measuring compliance with the customer’s open source policy is that it would shine attention on this issue on a monthly basis, and require monthly measurement of compliance.  If any issues are found, correction of any non-compliance at no charge should be a required part of the service level response, as well as a service level credit for missing the service level.  What will constitute correction will, of course, depend upon the type of open source that was used.  In some cases, correction might even mean rolling back to a previous version of the code and making the changes again from scratch (without using open source this time, of course).  Also, what will constitute correction may be impacted by whether the program in question is used internally or distributed.  Keep in mind that using the code as part of a website may constitute distribution. The reporting requirements, obligation to correct improper usage at no charge and the potential service level credits would elevate the importance of the issue in the vendor’s eyes, making compliance arguably more likely and achievable.  Depending upon the contract terms, repeatedly missing the service level might also be grounds for termination.

In a subsequent post, we will discuss the way a service level for open source policy compliance might be drafted, what the appropriate service level metric might be, and what behaviors this service level might drive.

Drafting and Negotiating Teams

I had lunch with a client and friend recently, and we had an interesting (to us at least) conversation about what are the parts of an outsourcing or technology services contract that are likely to be the sources of conflict as opposed to the ones that are likely to be used in a conflict.  Both of us were of the view that the terms that some lawyers may not want to focus on – or that the business people think the lawyers should stay out of – are the ones where the conflicts arise.  The true “legal” terms often end up mattering often only if there is a problem that the business people cannot resolve.

The parties enter into a contract so that the customer can get the services and the vendor can get paid.  So, it really should not be surprising that the scope of services and the pricing are the places where most disputes arise.  Over the years, I have worked with clients (both vendors and customers) on a number of disputes, and the issues have always fallen into one or more of the following categories:  (i) whether certain services were in scope and so included in the price; (ii) whether the deliverables met the specifications, and so whether changes and/or corrections are included in the amounts already paid (or if a holdback must be released); (iii) whether the customer and its other suppliers have met their responsibilities and as a result whether the supplier is entitled to additional charges for working around a failure of the customer to meet those responsibilities or is excused from its failure to perform; (iv) whether the supplier’s performance meets the required service levels; (v) what the schedule for performance was and whether or how far behind the supplier is in performance; (vi) whether milestones have been met for payment; (vii) whether the customer or the supplier can assign the contract and their rights/obligations to a subcontractor, the purchaser of their company or some other party; and (viii) general disputes about what the pricing schedule means and what amounts the supplier is allowed to charge.  My lunch partner had very similar experiences.

You can argue that perhaps some of the categories I listed above should be broken out, or combined with each other.  Perhaps you have seen some other permutations on the fact patterns of the disputes.  That is really beside the point.  The point is that the vast majority of disputes in contract matters (including outsourcing arrangements) arise out of who, what, when and where.  However, unlike many contracts where the who, what, when and where may be quite clear (Wally will provide a bushel of grade one wheat to Wendy in Wichita on Wednesday), the scope of services in an outsourcing arrangement may be very sketchy and too often, will not have been carefully written and reviewed by the relevant stakeholders so that it lines up with what is actually needed or what is actually being provided or reviewed by the lawyers and contract wonks to make sure that it is clear.

Ironically, too many lawyers and other professional negotiators focus their time on reviewing and polishing the terms and conditions.  We will have many posts in the future on topics related to issues in the limitations of liability, the indemnifications, dispute resolution provisions and other legal terms.  However important those provisions are, they come into play rarely, and only when something else has already gone wrong.  I am always shocked in those instances in which the lawyer (or other custodian of contractual tightness) for the other side of the deal is completely absent from the drafting, review and negotiations of the parts of the contract that matter the most, the scope of work, the service levels and the pricing.  While I freely admit that lawyers and other contracts wonks should not be deciding the business terms, and that many lawyers are focused on eliminating risk rather than identifying and managing it, I am still puzzled why the people who are the most critical readers of a document and who are trained in finding the holes and the gaps are ever left out of preparing the provisions that actually give rise to disputes.

So, what is the right way to work on the scope, service levels and pricing?  Of course the level of effort and the team participants should vary depending upon the size of the transaction, the risk and the complexity.  For example, for a time and materials project to provide consulting, the definition of the scope is less critical and requires less precision in drafting from the vendor’s perspective than does a large fixed-price project.  For anything more than the smallest, simplest deals, it seems to me that the correct team (from the vendor perspective) includes at a minimum: (i) the project manager who will have to deliver, (ii) a person with a strong technical understanding of what needs to be delivered, and (iii) a person whose job is writing tight, clear contractual language.  Ideally, the person who sold the deal should be involved too, so that the team knows what expectations were set with the customer.  On the customer side, I think you need: (i) the business person (or a senior representative if there are many) who is supposed to benefit from the services, (ii) a person with a strong technical understanding of what is being delivered and how it will fit into the overall environment and (iii) a person whose job is writing tight, clear contractual language.

The pushback I have received on these views normally can be summarized as one (or both) of two responses.  One response is that there is no time to pull these resources together or that these people are not available.  The fallacy of this argument is that there is no time to do the job right, but apparently there is the available time to deal with the inevitable delays that arise from the customer and supplier having misunderstood each other.  The other response is that one person (i.e., the one giving the response) has it under control and does not need some or all of these other participants.  I hope Superman remembered to bring his cape.

Why Service Levels?

We have mentioned service levels in prior posts and lightly touched on how service levels, among other issues, can give rise to disputes.  This post will cover what a service level is and what it is designed to achieve; we plan to follow up with additional posts that will address other fundamental aspects of an outsourcing contract, such as the scope of services pricing schedule.

So let’s start with the basics.  What is a service level?  A service level is a contractual measure of the service the vendor must achieve.  As we noted in a prior post, “[t]he concept of service levels and service level credits (the penalties the vendor pays when it fails to meet service levels) came into being as a way of keeping the focus on issues that are fundamental to service quality.  Service levels are frequently used to measure and maintain many kinds of metrics measuring productivity and performance.”  Service levels should be SMART: specific, measurable, achievable, relevant and timely.  The purpose of a service level is to lay out a quantitative and qualitative measurement of the service that the vendor agrees to deliver.

What is a service level designed to achieve?  A well-balanced and effective service level is tailored to focus on issues fundamental to service quality.  It is important to strike the right balance between too many services levels (the customer’s desire) that detract from the fundamental service issues, and too few service levels (the vendor’s strategy) that do not effectively make the vendor responsible for fundamental service issues.  When you think of a spectrum, the service levels (in the aggregate) should fall around the midpoint – robust enough to measure the fundamental aspects of the service and but not so comprehensive as to make it difficult or impossible for a vendor to meet them.  This concept is one that mirrors our philosophy regarding contracting – when the contract is generally fair and balanced, it helps promote a mutually beneficial long-term relationship between the parties.

Why would you include service levels in a particular deal?  Perhaps most importantly, it is the opportunity for the vendor and customer to have the proverbial meeting of the minds before contract execution.  The customer can articulate the parts of the service it deems critical or fundamental and which require measurement; the customer’s ability and opportunity to convey these requirements can translate to specific, measurable, achievable, relevant and timely services levels…and a happy client.  Conversely, the vendor has a chance to determine not only if it can meet the customer’s expectations, but earns an opportunity to have a meaningful dialogue, and promote a positive relationship, with the customer.  Furthermore, well-drafted service levels may help drive out unnecessary costs by giving the vendor an opportunity to articulate the quality/cost tradeoffs in a quantitative way.  Finally, with the appropriate thought and planning, service levels can be used to protect the customer from degraded performance during predictable periods of peak demand.

So what does it means to have fair and balanced service levels?  As in-house counsel for a management and technology consulting services vendor, I had the opportunity to work alongside the business people who were responsible for selling and delivering the deals.  Over the course of watching the team win and deliver deals, I had some interesting conversations with those business partners.  In deals where the team held its margin and generally met a set of tailored service levels, the customers were satisfied with the services in particular and the vendor overall.  This satisfaction often led to a better relationship between the parties, one where the customer rewarded the vendor with additional work.  In deals where the service levels were either loosely defined (which may have occurred for a number of reasons) or overly prescriptive and/or comprehensive for the deal, the customer experienced a high level of dissatisfaction.  It often felt that the vendor had sold it a bill of goods, and that the service offering did not meet the customer’s expectations.  The interesting take-away from this is that the outcome is not one party’s fault, but rather a missed opportunity for the parties to tightly define a specific set of service levels at the outset to achieve that (sometimes elusive) fair and balanced contract.

I would argue that every outsourcing deal should consider including service levels, regardless of how small.  It gives the parties an opportunity to set expectations regarding fundamental aspects of the service and its delivery (delivery of it?).  If the parties can agree upon fair and balanced service levels (and resist the temptation to “win” by getting lopsided service levels), they’ve just taken a big step toward a productive long-term relationship.  We will discuss other ways to further that type of relationship in future posts.

One note of caution: Customers should approach the development and negotiation of services levels with an approach that uses logical analysis and a pragmatic view of human nature.  Service levels will drive the vendor’s behavior – that is their purpose.  But the customer needs to think “several moves ahead on the chess board” to make certain that the behavior it is driving is the desired behavior.  For example, if the outsourcing is for a help desk, a service level measuring the average call length and penalizing the vendor if the average call length for a month exceeds some metric will encourage the vendor to bring calls to a close within that time.  That outcome is great if the customer wants to drive out costs, but very bad if its goal is to maximize problem resolution and user satisfaction.

Termination Provisions

Glance through the termination provisions of an outsourcing or technology services contract and you’ll quickly notice a one-sidedness to the terms.  Termination provisions provide terms and conditions under which the relationship between a vendor and a customer may be dissolved.  As this post will discuss, the risks involved with the contract are different for the customer and the vendor – which means each side has a different stake in the performance of the contract.  The risk plays out slightly differently whether the contract is terminated for cause or whether it’s terminated for convenience, but both instances illustrate why the contract may often include terms that, on first blush, favor the customer heavily over the vendor.

Generally speaking, termination provisions aren’t mutual between the vendor and the customer because the risk each side bears is substantially different.  If the relationship between the vendor and the customer is terminated, it’s likely that the vendor’s largest loss will be revenue.  The customer, on the other hand, is in a position to lose a service that could bring day-to-day business to a standstill.  For example, if the service that vendor is providing is IT help desk support, a sudden loss of service may be enough to render the whole company’s IT useless or at least less useful.  While, understandably, no company wants to lose a customer or revenue, the vendor’s entire operation isn’t shut down if one contract ends.   The customer, then, has to be much more protective of the instances which would result in the termination of the contract simply because it has more at risk than the vendor.

The difference in risk between the customer and the vendor affects termination for cause and termination for convenience in different ways.  No one – not the vendor and certainly not the customer – wants to be terminated for cause.  In contrast to a termination for convenience, termination for cause arises when one of the parties is not performing an essential function of the contract.  Perhaps the vendor is routinely late in providing the service and has not satisfactorily addressed and fixed the problem after a given period of time.  Termination for cause means not only lost revenue for a vendor but may also impact the ability to acquire new contracts.  New clients will want to know why and under what conditions a former client terminated the contract and terminations for cause will be viewed with great concern.

Even with these downsides to the vendor, the customer is still in an even more vulnerable position of losing a chunk of operational time.  Given the need for the vendor’s uninterrupted service, a customer should very rarely allow the termination of a contract for cause.  This might happen, for example, if the customer is persistently and severely late with payment to the point of non-payment or if the vendor’s intellectual property is breached by a practice adopted by the customer.  It should be noted, though, that there are few instances where a problem that might result in termination for cause couldn’t be remedied through monetary damages (other than non-payment).  As the instances where this could happen are so rare and the customer’s stake in the contract so great, it is mystifying that a customer would allow a termination for cause to happen.

Termination provisions for terminations for convenience, on the other hand, really should be so restrictive that vendors aren’t even permitted to exercise the option.  Termination for convenience occurs when the vendor’s service or the customer’s needs are no longer aligned with the best interests of the business and, as a purely commercial decision, the customer terminates the contract.  Here again, the customer has much more at stake from termination for convenience than the vendor.  As with termination for cause, if the vendor decides to terminate for convenience, the customer is left with the sudden absence of the vendor’s service that, as discussed earlier, could bring business as usual to a halt.  The added disruption that a termination for convenience causes is the unanticipated search for and transition to a new vendor.  This process can be lengthy (possibly reaching up to six months) and highly disruptive.  To ensure a smooth and orderly transition to a new vendor, then, the current vendor really shouldn’t be able to terminate for convenience for the term of the contract.  At the very least, the notice provisions which give the customer fair warning of a possible termination of the vendor’s services need to be far enough in advance to ensure a smooth and (hopefully) seamless transition to a new vendor.

While there is an absence of mutuality here between when the customer and the vendor can terminate for convenience, the restriction is understandable.  Let’s say, for example, the customer and the vendor have entered into an agreement which ultimately turns out to be a losing contract for the vendor.  Knowing that that customer is dependent on the vendor to keep business running smoothly, the vendor could terminate for convenience and then extort a more favorable and lucrative contract from the customer – all because the customer is so reliant on the vendor’s service.  Ultimately, the vendor, not the customer, must take the risk that the price is correct.  Of course, the vendor may protect itself to an extent through cover.  And this is not to say the vendor is left without options.  The vendor can simply choose to not renew the contract at the end of its term.  Or, if it’s a losing contract, it may simply choose to not renew unless the customer agrees to a higher price.

Whether for cause or for convenience, the unexpected end of a contract will likely leave one party at a loss.  The smart contract will have prepared for this and, through adequate termination provisions, will keep the customer’s business up and running.

What Can You Learn About Outsourcing from Coney Island?

This week’s news included stories about nine famous businesses on the boardwalk at Coney Island that are closing down because their leases were not renewed by the new property managers.  After several rounds of discussions, these businesses, including Ruby’s and Shoot the Freak, are being given just two weeks to pack up and leave.

What lesson can you learn from this that is relevant to outsourcing?  Simply that, if you are a customer in an outsourcing transaction, you need to structure your agreement so that you are not given a rapid and graceless exit at the end of the deal.

A great deal of attention is typically paid to the provisions governing the transition in.  Of course, the transition in is the first step after signing the deal, and it is staring you right in the face as you are negotiating.  As part of the negotiations, the parties normally talk about what transition planning needs to occur, what things need to get done and how long it will take before the new supplier can go live in production.  While that information is readily available, it is only logical that this information should be used to estimate what the back end transition out of the contract will be.

There will be various ways that the supplier can end the contract – by giving notice of non-renewal, termination for cause or perhaps some other basis for termination.  The notice periods are not necessarily critical, provided that the client does not have to make a decision to keep or not keep the supplier.  Where the client does need to make a decision – for example a notice of a price increase that the client must accept if it wants to renew – then the notice period must be long enough to allow the client to take the necessary steps.  If those steps include an RFP process, as much as six months notice (or even more for very large deals) may be an appropriate notice period.

Regardless of the length of the notice period, the important thing is that the contract should not end at the conclusion of the notice period.  Yes, I said the contract should NOT end at the end of the notice period for termination or non-renewal.

At the end of the typical contract notice period, the customer may not have had sufficient time to select a replacement vendor and allow that vendor to be ready to take over performance of the services.  Accordingly, the supplier should be required to continue to perform the services at the then-current pricing (perhaps with an adjustment for inflation), for a sufficient period of time to allow the client to transition performance to a new provider.  This is typically called a transition assistance period.  The more flexibility that can be obtained in the length of the transition assistance period, the better.  I have run into a number of instances in complex transactions where the transition from one vendor to another took months (and in a couple instances, more than a year) longer than expected.  If the customer had not had the ability to require the former incumbent to continue to perform until the transition over to the new vendor was completed, the client would have been in a desperate situation.  About as desperate as being given two weeks to move your business.

Take It Or Leave It

When I write posts for this blog, I normally try not to take the supplier-side or customer-side view, but instead try to show both viewpoints and a possible way forward.  I recently worked on a transaction that did not end up going through, and the positions that the supplier took struck me as being worth discussing.

The deal had to do with an outsourced managed service.  The supplier was trying to structure their service as being a product offering and not subject to negotiation.  For some managed services, this sort of utility model can make a great deal of sense for both the customer and the supplier.  Where maintaining rigid consistency in how the service is delivered will yield cost and quality benefits, many customers will see the value in trading away flexibility or customization for a good price and reliable service.  The growing number of utility models for various IT services is a boon for many of the consumers of these services, who have no trouble for fitting into the cookie cutter model.  For those business consumers for whom flexibility is more important, there are plenty of more flexible solutions, which will obviously be more expensive but may be a better value.

The vendor’s rigid approach to negotiating the services and service levels was not surprising to me.  This was consistent with their business model.  What was puzzling was the vendor’s insistence on several positions that are, in my mind, completely inconsistent with each other and show a complete lack of interest in being fair to the customer.  Specifically, the vendor’s bottom-line, walk away positions were:  (i) the vendor could change the service descriptions at any time with what amounted to six months’ notice, (ii) the customer had to commit to a three year contract with very high termination costs, and (iii) the customer could not terminate for cause unless availability was below 95% for three straight months, for a mission critical service that should have 99.9% availability.  I think that these positions can be translated fairly to mean:  (i) the vendor can change the deal any time it wants by removing or changing services, and (ii) no matter how the vendor changes the services and how bad performance is (with only the faintest of outer boundaries), you are stuck and can only terminate by paying the balance of the contract.

For small businesses, this sort of take or leave it and customer-be-damned approach is something that is all too common.  However, I was shocked to see a supplier in a competitive industry dealing with a large customer take such an astonishingly tone-deaf position.

This situation illustrates what happens when a vendor selection is made in a non-competitive procurement.  The vendor we were dealing with might have been just as truculent if it were going up against other competitors.  However, in a competitive process the customer would have had the option of comparing the terms, pricing and customer care exhibited by that supplier against the same factors for other suppliers.  In the end, the vendor with the “my way or the highway” approach might have won because of much better pricing.  If that were the case, then the customer at least would have been more satisfied with the vendor’s hard-edged terms because they were accompanied by a price that was attractive.  On the other hand, the vendor with the take or leave it approach might be more cooperative (or quickly dispensed with) if the other vendors met the customer’s needs and expectations with more flexible, customer oriented terms.

If you are in a hurry to get the deal done, that is precisely when you have to go with a competitive process, unless you can afford to be told to take it or leave it.