Alert 06.08.20
Alert
Alert
06.22.20
In responding to the COVID-19 pandemic, CIOs may decide to undertake IT initiatives to enhance business resiliency and capabilities while containing costs. Some of these initiatives may involve large, complex migrations and implementations of technologies that require the assistance of experienced systems integrators. Such suppliers have broad service offerings with deep expertise in the platforms and technologies of leading companies, such as AWS, Cisco, Citrix, Dell EMC, Google, Microsoft, Oracle, Salesforce, SAP and VMware.
Before engaging a systems integrator, CIOs should conduct a competitive selection and contract negotiation process to obtain favorable pricing and the best available terms and conditions. Customers should only enter into final contracts with systems integrators that include strong protections against key financial, performance and legal risks, and provide robust rights and remedies.
While there are many contractual matters that should be addressed in a systems integration agreement, the following deserve special attention:
Base Contract. Although systems integrators will often present their form contract as the base document for negotiations, it is commonplace for systems integration agreements to be based on a form contract furnished by the customer. The form contract used for a complex systems integration should be designed specifically for this type of project and include the following provisions:
A standard “Professional Services Agreement” used for consulting engagements will typically not have sufficiently robust contractual protections for the customer against all of the risks associated with system integration projects.
Pricing Models. There are a variety of pricing models that can be used for a systems integration project, including fixed fee, capped time and materials, and straight time and materials pricing. The appropriate pricing model may vary by project and project phase.
Under either a fixed fee or capped time and materials model, the customer will benefit from greater certainty as to the cost of the engagement. However, a fixed or capped fee is only as good as the specifications and requirements on which it is based. High level, inaccurate or incomplete information usually results in unanticipated pricing (and schedule) adjustments through change orders.
A straight time and materials model may be more appropriate for front-end work or ongoing consulting services. After the front-end work is complete, the systems integrator will have been heavily involved in developing the specifications and requirements and should be able to commit to a fixed or capped fee for many (if not all) of the subsequent phases of the project.
Change Control. Even with detailed specifications and requirements, there will inevitably be some modifications along the way. Some of these changes will have an impact on the system integrator’s cost of providing its services and its ability to meet scheduled completion dates. However, a “materiality” standard should be triggered—either a general principle of materiality or a defined threshold—before the systems integrator can require that any adjustments be made to fees or timelines. In addition, the contract should provide that any adjustments be strictly limited to addressing the impact of the event or circumstance that triggered the adjustment.
Acceptance of Deliverables. Any acceptance of interim deliverables should be conditioned upon final acceptance of all related deliverables for the project to ensure that the deliverables operate properly in combination with each other and with all systems with which they are intended to be interoperable. In most cases, the customer will not have sufficient knowledge or expertise to fully evaluate whether an interim deliverable has deficiencies that will impact the final integrated work product. Customers should reserve the right to require re-performance of component parts that were previously “accepted” but later found to be defective or deficient (e.g., through systems integration testing). The one exception might be the customer’s business and functional requirements, where it is reasonable to expect the customer’s sign-off to be final.
Excused Performance. Customers should not agree to either (i) a broad assumption that it will do everything it promises to do in a timely manner or (ii) a vague description of its retained responsibilities. While a systems integrator should not be held responsible for unavoidable delays caused by a customer’s performance failures, the circumstances under which it is granted relief need to be carefully circumscribed.
Rights and Remedies. Both “Plan A” (continued performance) and “Plan B” (contract termination for cause or convenience) rights and remedies should be available to the customer. When the systems integrator fails to produce a deliverable in a timely manner, the preferred option (Plan A) is usually to have the systems integrator remedy the failure as quickly as possible at no additional cost. The contract should include mechanisms to ensure that it is motivated to do so, such as holdbacks, milestone payments and financial credits for delayed performance.
If the failure is significant and the schedule slippage material, the customer may lose confidence in the systems integrator and decide to invoke Plan B, which is to terminate continued participation in the applicable phase of the project (or terminate the project in its entirety). Thereafter, the customer should have the right to:
Relationship Management. The systems integrator’s performance should be proactively managed by the customer through (i) progress reporting, (ii) milestone monitoring and (iii) acceptance protocols. The systems integrator should appoint a relationship executive and commit to the continued participation of key personnel approved by the customer. Any subcontractors should be approved by the customer and the systems integrator should remain primarily responsible for the performance of subcontractors under the contract.
The contractual elements outlined above are not intended as a substitute for following non-contractual “best practices,” including due diligence on the systems integrator and the delivery team it proposes to use on the project and a competitive procurement process. When engaging a supplier to perform a systems integration project, however, securing strong contractual protections and robust rights and remedies are essential elements of risk mitigation and successful outcomes for customers.