Negotiating ASP Agreements
By Richard Scott Draughon, Esq.
July 1, 2002
The idea is that the outsourcing approach will be less expensive and more supportive of the Customer's core business than in-house alternatives.
The demise of many dot-coms over the last year underscored the failure of many technologists to successfully integrate traditional brick and mortar business models into cyberspace. Much of the success of traditional business institutions during the next year will be a function of their ability to integrate the role of the technologist in leveraging cyberspace. It is the same management challenge in reverse, with leadership now being exercised by traditional business institutions.
In struggling with this reality, many entrepreneurs and established business institutions are experimenting with technology outsourcing. This management technique focuses on finding a technology service provider to assume management responsibility and control of the technology support function.
These transactions take a variety of forms. Offsite website hosting is a common example. The Application Service Provider (ASP) arrangement is also common, along with outside sourcing of online data archiving and record retrieval services. New versions of these services include website sublicensing supporting the sale of vendor products, equipment co-locations and electronic storefront development, hosting and management contracts.
The common features of these service frameworks include transactional pricing structures and vendor management control and responsibility. The idea is that the outsourcing approach will be less expensive and more supportive of the Customer's core business than in-house alternatives.
Achieving the benefits of technology outsourcing requires a realistic review of the proposed transaction. Success ultimately depends on the integration of the Vendor's operation with the Customer community. The needs of the Customer and the technologies proposed are both evolving dynamics. A smooth interface between business and technology paradigms requires sustained commitment on both sides of the transaction.
The timesharing initiatives of 1970-80 ultimately declined because of the reduction in equipment and technology costs. The loss of control, need for data security and integrity as well as customer demands for more responsive information and systems ultimately undermined the rationale for timesharing.
These same risks accrue to technology outsourcing today unless the Customer retains some level of management control over the transaction. The focus for establishing and negotiating these details is the outsourcing agreement. In negotiating effective arrangements, customers should consider the following issues:
(1) Structured Development Process: Customers can establish management control over the technology development and implementation process by documenting tasks, methodologies and deliverables as part of the contracted Scope of Work definition. This approach assumes customer approval of each task deliverable as a prerequisite for further engagement (and payment).
(2) Ownership: Clear definitions of ownership should be defined in the agreement. Document a distinction between software, data and equipment, as well as related intellectual property rights (e.g. trademarks and patents).
(3) Payment: Spend time studying the Vendor's pricing algorithm to define the risk of budget overrun. Contract pricing algorithms often assume unrealistically low levels of usage and shift the cost of faulty assumptions to the Customer.
(4) Data Integrity: Shift the risk of maintaining data integrity to the party controlling the data. Before transmission to Vendor, Customer has data control. Once the Vendor accepts the data for the system, responsibility for data control (and security) should shift to the service provider.
(5) Support: Define a structured process for engaging the support services you will need. Examples include telephone support, solving system defects, user training and maintenance issues. The ability to issue Work Orders on a time and material basis may provide important leverage in your vendor relationships.
(6) Customer Ownership: Recognize the risk of delegating online customer management. If your ASP arrangement includes vendor management of an electronic storefront, structure the website presentation to insure customer goodwill accrues to you rather than the Vendor.
Addressing these key issues in ASP Contract negotiations will help customers maintain the control necessary to exploit the advantages of the ASP model with minimal risks.
This article was adapted from remarks made by Richard Scott Draughon, Esq. to the South Florida HIMS at the Broward County Convention Center on June 7, 2001. Richard Scott Draughon is President and Chief Executive Counsel for Draughon® Professional Association, one of the leading technology law firms in the State of Florida http://www.draughonpa.com. He is also the founder and author of MyTechnologyLawyer.com, an on-line interactive resource for managing the legal affairs of the technology enterprise.
Copyright © 2002, Draughon® Professional Association, All Rights Reserved.
Please share your thoughts and comments regarding this feature. You can do so by posting to our Hot Topics Forum.
