© 2012 Winston & Strawn LLP
Top 5 Negotiation Points for Software, SaaS, and Outsourcing Agreements Brought to you by Winston & Strawn’s Advertising, Marketing, and Entertainment Law Group
© 2012 Winston & Strawn LLP
Today’s eLunch Presenters
Glynna Christian
Brian Fergemann
Becky Troutman
Intellectual Property New York
Advertising, Marketing, and Entertainment Chicago
Intellectual Property San Francisco
[email protected]
[email protected]
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Top 5 Negotiation Points
Defining your goals and measurable performance requirements Conducting due diligence Determining the pricing model Identifying key issues and potential resolutions Exiting the relationship
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Sourcing Strategy – Adding Value
Any project must have a clearly articulated value proposition to the business Value is measured in more than bottom-line results
Enabling the company to work at peak performance while respecting its culture and values Leveraging service providers’ capabilities Maximizing value for both the company and the service provider
If it does not add value, then STOP
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Defining Your Goals and Performance Criteria
There should be a business need that can be solved by sourcing To understand the scope of that business need, the company must examine its needs, such as:
Areas within the business that have divergent interests Technical, implementation, and project management requirements Project budget
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Business Case – Why?
Provide background Explain the business need and potential solution
Common examples – too many legacy applications, will not sustain future business requirements, proprietary software and process not conforming to industry standards, technology-driven rather than process-driven
Quantify the impact of transformation Obtain approval to move forward
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Business Case – What is it?
Documentation of current technology or process “as is” Review and consideration of the desired “to be” state Gap analysis between “as is” and “to be” Cost analysis of getting to “to be” and cost of not changing the process
Establish a baseline for cost management and future benefit tracking Estimate the costs, benefits, and other financial metrics of the potential solution
Establish measurable success criteria (e.g., cost, added value considerations, or both) Define a phase-based implementation plan
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Specifying the Business Requirements
Detailed requirements and defined deliverables
Any process flows to be changed or implemented? Data issues
Any new data to be collected or converted? Who will have access to data and how will it be used, stored, and transmitted?
Implementation planning
Capable of being measured, and The results analyzed and reported
Will the services be phased in? Will a pilot test be conducted?
Integration planning – what is the potential impact on other areas or processes?
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Performance Requirements
Service Level Agreements (SLAs)
Mechanism for ensuring quality service Measures the vendor’s performance of certain requirements
Review SLAs against published standards Avoid too many SLAs – prioritize by impact if the SLA is not met Service Level Credits
Objective and measurable
Vendor pays credits for failure to meet performance Should credits be sole and exclusive remedy?
Key Performance Indicators (KPIs)
Measurements that indicate success for the project No financial penalty to the vendor
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Due Diligence – Who is your partner?
Corporate structure Location – red flag!
Where will services be performed? Where will data be transferred, processed, or stored?
Key subcontractors Reputation, lawsuits, investigations Financial stability
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Due Diligence – What is provided?
Intellectual property
patents trademarks/brands copyrights trade secrets, confidential information, data
Software, database, Software as a Service Other Services
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Due Diligence – Intellectual Property
Is the IP registered in the relevant jurisdictions? Does the vendor own or have the right to sublicense IP and services in all relevant jurisdictions? Are there any restrictions on the vendor’s ownership or license rights in any jurisdiction? Are there any lawsuits relating to the IP or services?
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Due Diligence – Other Issues
Policies and procedures for protecting confidential information Data security measures, ISO certifications Disaster recovery plans Insurance Import/export restrictions
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CLE Presentation Code
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Pricing Models – SaaS
For software or pay-as-you-go services, you should know:
Consumption-based pricing models
How you will use the software, system, or services # of users who must access the software or services Transaction volumes for each application Transaction costs for each application Growth rates for revenue, costs, volumes, and users Per-user Per-transaction Percentage-of-revenue Fixed-fee model
Additional fees
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Pricing Models – Outsourcing
Usually a monthly or annual service charge
Incremental fee based on consumption Fee based on the number of users Fixed price and price caps Time and materials Cost-plus
Alternative models
Gain-sharing Incentive-sharing Shared risk-reward Revenue-sharing
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Pricing Models – Outsourcing cont’d
Gain-sharing
Based on the value delivered by vendor Gains are difficult to agree upon and measure Reluctance to fund without guaranteed payback
Incentive-based
Earn-back or bonus payments made to the vendor for achieving performance levels above SLAs Vendors may be paid for performance they already should be meeting
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Pricing Models – Outsourcing cont’d
Shared risk-reward
Jointly funded development of new products, solutions or services Vendor shares in rewards for a period of time Difficult to measure results or quantify rewards Issues around ownership, investments
Revenue-sharing
Vendor shares in your revenues from activities supported by the outsourced services
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Negotiating the Best Price
Seek competitive bids
“Best practice” is an RFP process focused on accomplishing the value proposition outlined in the business case Risks in a sub-standard RFP
Gaps in internal business processes Increasing costs and partially met expectations due to:
Disorganized, non-customized RFP process Inadequate planning and understanding of solution complexities Poorly structured contract not based on outcomes Poorly defined metrics and success criteria Vendor deficiencies in delivering against expectations
Obtain comparative pricing Understand vendor’s financial position
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Key Issues – Intellectual Property
Scope of license/access rights
Who needs to have use rights? What use rights are required? What restrictions are imposed, and are third-party materials licensed under additional terms? Does vendor need license to customer IP?
Ownership of developed IP – red flag!
“Work for hire” Joint ownership
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Key Issues – Confidentiality
Scope:
Mutual? How is “confidential information” defined? Is data privacy and security addressed?
What are the restrictions?
Disclosure, use, reverse engineering Employees, contractors, representatives
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Key Issues – Confidentiality
What are the exceptions?
Written authorization Made public through no fault of recipient Provided by third party without restriction Independently developed Compelled disclosure Disclosure to potential investors or buyers under a confidentiality obligation
How long does the obligation survive?
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Key Issues – Warranties
Ownership Noninfringement Performance of software/SaaS Performance of services Third-party software Malware Open source software DISCLAIMERS
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Key Issues – Indemnity Scope
Allocation of risk
What can go wrong that results in a third-party claim? Who should be responsible for the claim?
Scope: Defend, indemnify, and hold harmless
Who is indemnified?
Officers, directors, employees, contractors, agents Affiliates, customers
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Key Issues – Indemnity Scope
Requirements
Prompt notice Sole control over defense and settlement No acts/omissions that affect defense or settlement All amounts paid
Selection of counsel
Right to participate in defense
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Key Issues – Indemnity
Infringement
Bad acts
Exceptions Self-help remedies Breach of warranty, breach of agreement Acts, omissions Violation of law Fraud, gross negligence, willful misconduct
Exceptions
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Key Issues – Indemnity
Sample Vendor-Favorable Indemnity: X.1 Infringement Claims. If an action is brought against Licensee claiming that the Software infringes any United States patent, copyright or trade secret rights of a third party, Licensor shall defend Licensee at Licensor’s expense and shall pay the damages and costs finally awarded against Licensee in the action, but only if (a) Licensee notifies Licensor promptly upon learning that the claim might be asserted, (b) Licensor has sole control over the defense of the claim and any negotiation for its settlement or compromise, and (c) Licensee takes no action that, in Licensor’s judgment, materially impairs Licensor’s defense of the claim. This indemnity 1 will not apply if and to the extent that the infringement claim results from a correction or modification of the Software not provided by Licensor, a failure to promptly install an update, or the combination of the Software with other software, hardware or systems not provided by Licensor.
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Key Issues – Liability Cap
Does the cap apply to both parties?
What is the cap? Fees/multiple of fees paid during a certain period Flat cap
Are there exceptions?
Indemnity Breach of confidentiality/privacy Fraud, gross negligence, willful misconduct
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Key Issues – Disclaimer of Damages
Does the disclaimer apply to both parties? What is disclaimed?
Consequential & incidental damages Indirect, special, punitive damages All damages/all liability – red flag!
Are there exceptions?
Indemnity Breach of confidentiality/privacy Fraud, gross negligence, willful misconduct
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Key Issues – Disclaimer of Damages
Sample Vendor-Favorable Damages Disclaimer: LIMITED LIABILITY. THE MAXIMUM LIABILITY OF LICENSOR AND ITS AFFILIATED ENTITIES AND ITS AND THEIR LICENSORS AND SUPPLIERS TO LICENSEE FOR DAMAGES ARISING OUT OF THIS AGREEMENT IS LIMITED TO THE AMOUNT PAID TO LICENSOR BY LICENSEE DURING THE THREE (3) MONTH PERIOD PRIOR TO THE DATE A CLAIM ARISES. UNDER NO CIRCUMSTANCES SHALL LICENSOR (OR ITS AFFILIATED ENTITIES OR ITS OR THEIR LICENSORS AND SUPPLIERS) BE LIABLE TO LICENSEE OR TO ANY OTHER PARTY FOR ANY CONSEQUENTIAL, INCIDENTAL, INDIRECT, SPECIAL, OR PUNITIVE DAMAGES, HOWEVER CAUSED, INCLUDING, WITHOUT LIMITATION, LOSS OF PROFITS AND COSTS OF PROCUREMENT OF SUBSTITUTE GOODS.
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Key Issues – Assignment
Can each party assign to a third party?
Is a change of control an assignment?
Common limitations on assignment
Prior written consent Consent not unreasonably withheld Exceptions for affiliates, merger, asset sale Assignee agrees to be bound Ability to terminate
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Exiting the Relationship
Termination for convenience
Customer should have the right after a specified period of time for vendor to recover sunk costs Customer may have to pay early termination charge Vendor should NOT have right to T for C
Termination for breach
Generally limit vendor’s right to terminate only for material nonpayment of undisputed amounts Consider termination rights for vendor breaches that may cause significant impact to the customer
Examples: “Safety and soundness” of financial institutions, data breaches
Termination assistance, effect of termination
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CLE Presentation Code
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Questions?
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Thank You.
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