It is undeniable that technology has become integral to our everyday lives. Beyond our personal lives, we also use technology in our work tasks, almost certainly on a daily basis. Businesses and corporations everywhere in the world have long accepted the fact that technology adoption is crucial in boosting productivity, which in turn drives revenue and business growth. From fundamental productivity tools such as Microsoft 365 subscriptions and customer relationship management softwares, to state-of-the-art and complex cloud infrastructure solutions and mainframe software, different types of software or technology would be sought after by customers from different industries, sizes and profiles.
Due to the increasing demand for technology adoption by companies, in-house legal that we have spoken to have generally experienced a gradual increase in the technology outsourcing contracts that they are tasked to review and negotiate on behalf of their employers. To facilitate the work of our in-house legal friends, we have put together a breakdown of the common issues that companies may face in technology outsourcing contracts that the legal teams should pay more attention to while trying to protect the interest of their employers.
1. Understanding the Vendor’s Capacity
The vendor in a technology outsourcing contract is often assumed to be the software principal or the owner of the technology. This may not however be the case, given that most technology or software owners deploy their solutions through resellers or channel partners. As such, the vendor that is entering into a technology outsourcing contract with customer may not actually have any ownership of the underlying intellectual property rights being licensed. It would be crucial for in-house legal to ascertain the capacity of the vendor up front, as this will affect the extent of the contractual warranties that the vendor is able to provide, and where resellers or channel partners are involved, the customer may actually be required to separately enter into an End User Licence Agreement (or more commonly known as “EULA”) with the actual solution owner, in order to derive its rights to use the technology or solution. More often than not, the terms of a EULA would be non-negotiable.
2. Data Ownership
In cases where the customers’ owned data would actually be inputted into the software or be uploaded onto the cloud, or where the vendors would be tasked to manage and process the customers’ data and that the technology will be used to generate some form of analytical output data based on the customers’ inputted data, regards will have to be paid to the ownership of these data, particularly the analytical output generated. In today’s age where big data is the new oil, data holds significant value to a corporation. Depending on how the data is being processed and analysed, it can potentially show how effective a company’s advertising effort is, which product of a company is generating the most revenue, what are the new features that consumers want a company to introduce in its products, etc. As such, it is important that companies address the ownership of any data it feeds into a software or cloud, as well as the output generated by the software or technology after having processed or analysed the inputted data.
3. Availability of Escrow
Software escrow, while not in itself a common offering, can be very crucial in the event a company is licensing a piece of software to be used for its mission critical operation. The company has to rely on the software vendor to provide timely maintenance and consistent update and upgrade to the software. Given that the stake is high if the software is not maintained adequately or where the software vendor goes into liquidation or stops maintaining the software due to obsolescence, the company licensing the software may want to consider requesting for a software escrow arrangement to be in put place. The escrow will clearly spell out the conditions under which the source code of the software will be released to the company, allowing the company to step in to maintain the software on its own. Bankruptcy or liquidation of the software vendor, or cessation of maintenance or support to the licensed software, are some of the more common release triggers in a software escrow arrangement.
4. Intellectual Property Indemnity
Given the speed at which new patches, updates or upgrades are being introduced to a piece of software, and how software and technology owners are constantly looking to improve their products with new or enhanced features, there will always be risks that the newly implemented changes to a software may infringe upon third party intellectual property rights. For this reason, software vendors would usually offer intellectual property indemnity to customers, committing to indemnifying the customers for any losses and damages they may suffer in the event of third party intellectual property infringement claims against the customers. The intellectual property indemnity may however be conditional upon the customers having notified the software vendors of the claim promptly, customers agreeing to allow the software vendors to have full control over the defence of any potential claims, the claim is not a result of misuse of the software by the customers, etc. In some circumstances, in addition to intellectual property indemnity, customers can also ask for a commitment by the software vendors to procure rights to continued usage of the infringing software or replace the same with a different product with similar features.
5. Service Level Agreement
Service level agreement, or more commonly known as “SLA”, is without a doubt one of the most heavily negotiated components of any technology outsourcing contracts. Depending on how stringent the requirement and expectation of a customer are, and how sophisticated and complex the vendor’s products are, the software vendors may be reluctant to commit to the service levels imposed by the customers, as failure to comply will likely lead to service credit, and potentially triggering rights to terminate the contracts by the customers in the event of repeated failures. Creative structuring of SLA, such as the introduction of progressive service level, service credit holiday, earn-back mechanism, etc., may help to incentivize the software vendors to commit to the service level requested. (For more information on how to structure an SLA, you may refer to our earlier article titled “Structuring Effective Service Level Agreement” at https://hhq.com.my/posts/structuring-effective-service-level-agreement/).
Clearly, reviewing and negotiating a technology outsourcing agreement is not as straightforward as some might think, due to the intricacies of the technology industry, and the ever-evolving trends and practices adopted by technology and software providers. As such, it is important for in-house legal to be equipped with some understanding of the industry, or for them to work with technology lawyers who are very well-familiar with the industry, to ensure that the organisation’s interest is well safeguarded.
Should you have any enquiries or if you need any assistance in reviewing and/or negotiating any technology outsourcing contracts for your organisation, please do not hesitate to contact the partners from the Technology Practice Group:
About the authors
Lo Khai Yi
Partner
Co-Head of Technology Practice Group
Technology, Media & Telecommunications, Intellectual
Property, Corporate/M&A, Projects and Infrastructure,
Privacy and Cybersecurity
ky.lo@hhq.com.my.
Ong Johnson
Partner
Head of Technology Practice Group
Transactions and Dispute Resolution, Technology,
Media & Telecommunications, Intellectual Property,
Fintech, Privacy and Cybersecurity
johnson.ong@hhq.com.my
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