Court action is costly for all parties, so not surprisingly CIOs are getting smarter about contract management. Sydney Airport Corporation Limited (SACL), for example, has had a database of contract precedents under development for the past two years. Expected to be completed in 2005, the database will steer the organization through all of its IT contract negotiations, ensuring that the correct procedures are followed, and where it makes sense, make use of tried-and-tested contract components. According to SACL CIO David Luong, this will help ensure that nothing is overlooked during negotiations.
Issues such as intellectual property access and ownership are addressed by the precedents, along with the use of escrow to guarantee access to source code, and the precedents ensure commercial liabilities of the parties are properly explored for each contract. "Over the last year or two that library of contracts has been built up and developed in partnership with our in-house lawyers and procurement specialists," says Luong.
Acknowledging that there can be no single contract precedent for IT products and services because of the fast changing nature of the beast, Luong nevertheless believes it is possible to define a precedent-based framework that can be harnessed for any contract negotiation. An important element of that framework, he says, is the technique to identify and quantify risk. "Say it was an implementation project, we would look at the timing risks: What are the likely effects of being late? What are the cost risks of the project? What happens if it's running late - are there any holding costs and who is liable? What are the quality risks - how well does the contract capture the responsibility of our suppliers and ourselves?"
If the risks are not appropriately identified and accounted for in a standard contract, then a team made up of procurement specialists, project managers, technologists and lawyers needs to analyze them and ensure that any newly developed contract does account for them. Again, by following the framework for contract negotiations, the chance that any risks may be overlooked is reduced.
Luong says he has noticed that in the past five years suppliers are a great deal more risk averse, which has tended to make contract negotiations more complex and lengthy. "They are increasingly asking more questions such as: 'Is what we are asking for fair and reasonable?' You can try and offload all the commercial risk onto the supplier, but suppliers are now prepared to walk.
"I remember a time when supply outstripped demand and customers had more clout. Certainly around 2001 - customers had more leverage then."
He says there is still some leverage to be had when doing deals with tier-two suppliers who tend to be more innovative and less risk averse. "Perhaps they are driven by the need to win market share," says Luong. "There have been times when with larger suppliers we have felt we weren't really the customer. We felt we had no leverage. That is something that the larger suppliers need to be aware of."
Larger customers meanwhile enjoy more clout. Michael Jamieson, director of Nike's supply chain in the Pacific, says his company's global brand delivers him a strong bargaining position. "With rapid application and infrastructure development, vendors are very keen to get the latest tools into businesses like ours, therefore providing an increasingly negotiable contract environment."
Management of IT contracts at Nike is quite devolved at present. So, for example, the country manager with responsibility for network support manages the network contracts, the manager with responsibility for application development manages contracts related to that function, and so forth. Shortly this will change, as Nike is about to move all component applications and supporting hardware to the US where they will be managed and supported.
For the moment, however, Jamieson says accountability for contract management, in totality, lies with the relevant senior managers. "Strategic direction and consultative input and final approval is always given by the CIO," he says, "but the autonomous model of contract renewal and renegotiation by senior managers is preferred. Adherence to activity, financial, and support and maintenance-related milestones and KPIs, driven by a regular functional performance management process, provide the visibility the CIO requires from month to month."
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