The Fine Print of Cloud Contracts

Mary ShacklettPresident, Transworld Data

A 360 Degree View of Contracts

• What’s in it

• What’s not in it

• What you need to know includes some working legal knowledge of contracts

Elements of Contracts

• Offer

• Acceptance

• Consideration

• Clear terms• Parties• Price• Item• Time

Important First Steps

• Read the contract

• Remember the legal concept of adhesion in contracts

• Consult an attorney

What Are Common Fine-Print Issues?

• Termination, opt-out clauses, and automatic renewals

• Penalties• Intellectual property and security• Product and performance warranties• Information sharing with partners • Disagreements, arbitration, and venue

What if You Need to Modify The Contract?

• The concept of the “boilerplate” contract and the vendor legal department

• Use of appendices, addenda

• Cover letter to indicate that the enterprise’s document (and letter) constitutes a total integration of the contract between you and your vendor

Common Modification Topics

• Pilot and acceptance tests

• SLAs and SLA review process

• Work coordination

• Security and confidentiality

• Anything else missing from contract that needs to be addressed

What’s Not in the Contract

• The “people” side of doing business

• Service-level agreements the way you expect them

• Input into the product or service

• Audit and compliance measures

• Unforeseen events

The People Side of Doing Business

• Account/project manager designation for implementation and post-implementation

• Chain of communications and “single point” person on your side

• Reporting and monitoring• Employee hiring practices• Disaster recovery and business

continuation testing

Service-Level Agreements The Way You Expect Them

• SLAs have to meet the needs of the business

• You should have your own expectations before you talk to any vendor about them

• Common areas are uptime, performance, problem response, problem resolution

• SLAs work best when they are clearly documented in an appendix to the contract

• Include periodic reviews and leave room for SLA modifications

Input Into the Product or Service

• Understand vendor’s R&D commitment before you sign anything – and frequency of new product releases

• User/executive committee participation

• If you are an early adopter, opportunity to pilot test and give input

• Explore commercial opportunities with vendors for apps you develop internally

Audit & Compliance Measures

• SAS70 audits and financial viability

• Comprehensive IT audits

• Ability to satisfy your regulatory and policy/business rule needs

• Does vendor have its own datacenter?

Unforeseen Events

• Disasters (vendor liability limits)

• Security and data breaches

• Vendor change of management control (acquisition, merger)

• Need to de-convert (set up performance expectations in contract)

Attorney Review: Why Do It?

• You won’t know everything

• Attorney review puts “teeth” into your negotiation

• Preventive step

Possible Problems: Misplacing the Contract

• Company wanted to review vendor contract and couldn’t find contract• Keep a file and assign someone to maintain it• Have your attorney keep a copy• Have a copy in an appendix of your DR plan• Benefits are you avoid losing leverage with

your vendor, you stay on the good side of your auditors, and you have a readily available written record of your agreement

Possible Problems: No Clear Termination Clause

• Company wanted to terminate vendor and couldn’t find a termination clause in the contract• Make sure there is a termination clause

(typically 30-90 days)• If you want an “opt-out” provision, include it• Penalties for terminating early, etc., should be

clearly understood

Possible Problems: Account Rep Changes

• Company had smooth launch of new cloud service with great account rep / project manager; the person was reassigned, and the new person wasn’t effective• Negotiate for the right to interview/approve key

vendor personnel before they are assigned• Incorporate the performance of this person in

your SLAs and vendor evaluations

Possible Problems: Vendor Goes Around IT

• Vendor and end-users started conferring and left IT out of the loop• Establish clear lines of communications upfront• Team with end-users• IT shouldn’t be a “glass house”

Possible Problems: SLA Modifications

• Company wanted to modify SLAs because of changing business conditions, and the vendor declined• Establish regular quarterly meetings with

vendors and discuss your business needs• Make SLAs a “living” portion of your contract –

within reason

Possible Problems: De-Conversion

• Company wanted to terminate vendor’s services and move to another vendor; and vendor became hostile, uncooperative• Include SLAs and penalties for de-conversion• Make sure you have an excellent

understanding of this with your vendor• Overcome the human tendency to not want

to discuss

Possible Problems: Vendor Stops Performing

• Company contracted for service that wasn’t delivered but kept paying• Stay on top of your contracts• If there is stoppage of performance, withhold

payment and immediately contact vendor• If service can’t be resumed in reasonable time,

terminate contract for breach• Have an attorney involved

Possible Problems: Employee Hiring

• Vendor hired away one of company’s key employees• Reach an understanding and document the

ground rules upfront

IT Realities• Unless you are a large shop, contract

management and negotiation is no one’s top-line responsibility

• With the movement to more cloud services and packaged vendor software, contract and vendor management are becoming mission-critical skills in IT

• The contract is the written agreement that establishes the playing field for IT and vendor interaction

• IT managers, directors, and CIOs need basic legal and negotiation skills

What You Need to Know• What constitutes a contract and what

constitutes a breach• What the vendor warranties and/or

quality-of-service commitments are• What your communications channels

with the vendor are• How to modify and terminate a contract• What your contract dispute avenues are• When to get an attorney involved

What if You’re an SMB?

• Don’t be afraid to modify a contract, present SLAs, or use an attorney

• Participate in vendor product planning

• Know the ins and outs of the contract

• Know where the contract is!

Concluding Remarks• In today’s environment, great skill in

managing vendor relationships is essential for IT

• The contract is the foundation of the vendor relationship

• Having a basic legal understanding of contracts is essential

• Identify what’s not in the contract that needs to be addressed

• Always read the fine print