June 11, 2012, 12:20 PM — Today's savvy IT leaders go into outsourcing decisions thinking about the business value of a potential deal--from scope to service levels to price. But they're overlooking the value of the contract terms that can make or break an outsourcing engagement, says Brad Peterson, partner in the outsourcing practice of law firm Mayer Brown. By estimating the dollar value of the most important commitments, options and incentives clauses in the agreement, customers could make much smarter decisions about how to set up the relationship, but few do.
"For the most part, customers haven't thought of valuing contract terms or wouldn't know how to go about it," says Peterson. "Some believe that terms are a 'soft' benefit and, thus, impossible to value accurately. Also, procurements teams are often compensated based on 'savings' without regard to whether the contract will allow them to realize that savings." But you can bet your IT service provider has a dollar amount assigned to every term that might make it to the negotiating table.
If customers don't price out contract terms, they may end up pushing hard on terms with little value while overlooking those that could cause deal degradation down the line. Many IT leaders today, for example, are driving hard bargains on limits of liability for data breaches that are unlikely to occur, says Peterson. Meanwhile, they happily sign off on "sole remedy" language that limits the customer's recourse when a vendor fails to meet its responsibilities. "Customers might be impressed by the strong promises at the start of a contract and miss the fact that the 'sole remedy' clause means that those promises don't provide value," Peterson says.