Trevor W Nagel and Lee Van Blerkom of White & Case LLP assess recent and emerging trends relating to technology transactions and how the landscape has changed. They address the proliferation of 'as a service' offerings and the viability of cloud computing, the re-emergence of vendor forms, the relationship between buyers and sellers and other matters.
Over the past several years the corporate landscape has witnessed an accelerating wave of technology innovation, with the rise of cloud computing and social media as two prime examples. As a result, how IT services and products are procured and integrated into the commercial market place is being fundamentally rethought.
This paper briefly overviews several key recent trends relating to technology transactions. These are: (a) evolving commercial paradigms, in particular the move toward more flexible commercial frameworks that are shorter in duration and contain fewer (if any) minimum commitments by the corporate customer; (b) the establishment of standards, driven in part by the proliferation of “as-a-service” offerings and increased viability of cloud computing; (c) the re-emergence of vendor forms as off-the-shelf offerings gain traction and suppliers seek to capitalise on innovation and leverage to off-load more risk to customers; (d) the blurring distinction between buyers and sellers as disruptive technologies moot the traditional roles of customer/supplier; (e) smaller, more numerous transactions, as more customers shun the monolithic long-term outsourcing mega-deals of the past; and, finally (f) the customer emphasis on developing both automated dashboards and more sophisticated supplier panel regimes to manage what is often a disparate set of relationships.
These trends cue three distinct themes that are critical in taking full advantage of the promise of this period of innovation. First, it is imperative for customers and suppliers to recognise the importance of developing an “integration function” that is responsible for pulling together various supplier (and often internal) inputs into coordinated, value added products and services for both internal and external customers. Second, today’s successful deal makers must have a solid grasp of not only the transaction at hand but also the complete supply chain or “cloud” landscape of which that deal is but an element. Finally, “governance” has been a catchword for a while but there is now real competitive advantage in developing more sophisticated and transparent frameworks which anticipate likely friction points among parties, align the suppliers’ incentives with the customer’s business objectives and explicitly address collaboration among suppliers to develop the optimal solution for the customer.
Evolving Commercial Paradigms
Cloud computing has enhanced the prospect of more agile, on-demand commercial models. Rather than being “locked in” to large, long-term deals with significant management fees, minimum purchase requirements and “penalties” if terminated early for convenience, corporations are seeking cloud computing solutions based on a true utility model where they only pay for the services consumed, with the ability to switch providers if and when better or cheaper offerings are available without any penalty or other consequence. Although this is still a work in progress at the enterprise level, the uptake is trending in one direction as corporations see the advantages of cost-effective, more flexible IT services.
A similar trend is mirrored in the frustration of many CIOs with the entrenched licensing models of established business management software vendors. They find the audit and similar provisions of these complex licensing schemes to be little more than means of squeezing additional revenues out of large corporations, particularly when certain components of the software are included in the price of more than one bundle of services. These CIOs are encouraging new, disruptive players to provide alternative enterprise applications in the cloud to avoid paying for bundled services which they are not fully utilising.
Several legal challenges arise with this paradigm shift to the cloud. For example, there is a need to confirm that data can be moved readily from one cloud to another without any loss or decay when swapping providers. There are also the added security and privacy issues associated with the co-mingling of data from different enterprises if it is not a “private” cloud, topics that are all the more pertinent for regulated industries such as the financial sector. New software designed to comb Facebook and Twitter offer insurance companies innovative ways to discover leads and assess risk profiles, but again pose privacy and data protection concerns that must be addressed with prudence.
Establishment of Standards
The “as-a-service” movement often manifests itself in the combination of various products and services into a single coordinated offering such as “infrastructure-as-a-service”. This fusion of IT requires agreement within the technology community as to what standards will apply to enable the final products to operate in a consistent, seamless manner with a common level of quality. Moreover, this standardisation, necessary to participate in a cloud, contributes to substantially shortening the product development cycle in cloud environments. It also enables different corporations to build a unique, value added “front-end” on what is often a common set of “back-office” operations. Standardisation is also driving industry acceptance of common operating processes, such as ITIL. Of course, to the extent that competing standards initially emerge, ultimately customer adoption will determine winners from losers.
Re-emergence of Vendor Forms
Historically, hardware and software arrangements were typically documented on vendor paper. The advent of the large-scale outsourcing deals, together with detailed sui generis RFP processes, led to the evolution of customer template documents. Now most major corporations have their standard forms for licensing and sourcing arrangements. Not only has cloud computing broken up these large mega-deals into more discrete, smaller service bundles but part of rethinking the procurement process, in particular shortening deal schedules, has been the re-emergence of vendor paper for cloud computing deals. When it is viable to switch quickly between cloud vendors, neither party has the appetite for a protracted transaction. Serious questions have been asked as to whether major corporations, particularly in the regulated industries, are sufficiently protected when they sign vendor paper which has often reallocated a substantial component of risk back to the customer. Moreover, suppliers with overly draconian forms are finding sophisticated corporations disinclined to proceed with significant relationships if the heightened risk profile outweighs cost savings or other benefits. Although cloud deals for non-critical processing and mid-market companies often close on supplier paper without extensive negotiations, vendors recognise that major enterprises may appreciate that the cloud computing model has shortened transaction duration but still need to negotiate many of those concerns relating to liability, damages and data protection in the event that things go wrong. This, in turn, requires commercially oriented judgement calls by legal advisers at to the key provisions warranting detailed attention.
Blurring the Distinction Between Buyers and Sellers
The flexibility offered by the “as-a-service” movement has broken down or “clouded” the traditional distinction between vendor and customer. Whereas in the traditional licensing model this distinction is unequivocal, “as-a-service” offerings often enable the customer to fold both its data and unique systems into the end product, rendering the distinction between buyer and seller no longer as clear as it once was. And when these “as-a-service” offerings are then extended to the corporation’s own customer base, further integration and blurring occurs. It is necessary to carefully review and analyse how the corporation is integrating its own proprietary information and services with those from its vendor community, and then how that package is passed on to its own customers, in order to assess the liabilities and risks associated with these new technologies. This restructuring of the liabilities/risk matrix is only further exacerbated when dealing with social media as these technologies raise a whole set of issues relating to the interactions between the corporation and its customers, on the one hand, and the members of the overlapping networks to which those customers belong on the other.
Smaller but More Numerous Deals:
If the 1990s were the era of the large-scale, long-term deal with a single IT vendor, these new technologies have resulted in the disaggregation of these monolithic arrangements and the recombination into an ever-changing set of new “as-a-service” offerings. These new smaller and shorter deals offer considerable flexibility, such as substituting or adding new vendors or moving from one cloud provider to another without any penalty. Nonetheless, this set of transactions must be highly coordinated. And for most, this change has shifted responsibility from the prime IT outsourcing partner to the corporation itself to understand and manage how this range of services and products are combined to construct the optimal solution.
Rather than just focusing on the relationship with its prime IT supplier, the corporation must now deal with many providers in a dynamic multi-vendor environment. The resultant need for “real-time” information has led to the development of IT dashboards to enable corporations to monitor the performance of not only the vendors but often themselves as well. The corporation does not have to spend equal time with all its vendors. Some may be “high-touch” suppliers addressing critical core processes. This may involve a detailed set of arrangements at several levels within the organisation. Others may be “low-touch” providers supplying basic processing and storage and may require little ongoing management above and beyond that occurring virtually via the automated dashboard. The multi-vendor IT environment creates a number of panel management concerns which the corporation must be prepared to address.
Importance of Integration
Cloud computing and “as-a-service” offerings require combining various supplier and customer inputs into coordinated products. This, compounding in complexity with new technologies, creates a crisis if this integration should fail or, as has often been the case, is simply ignored. The integration function should be elevated to a higher standing and is critical to the ongoing success of sophisticated IT products both within the corporation and when these offerings are provided to external customers. There are a number of important questions relating to this integration function. For example, is it technology, process or data driven? What aspects of integration should be retained by the customer and what should be undertaken by one or more suppliers? How is the integration function monitored and managed? Does it require a skill set beyond than that traditionally found in the IT world, whether vendor or customer? Finally, savvy CIOs have used this opportunity to redefine their role from the back office to sitting with the heads of key business units as the company’s products and services are now inextricably entwined with its technology.
Implications for Deal Makers
Traditionally, deal makers focused on the transaction at hand and perhaps how it interfaced with one or two other major corporate projects. Deal makers in this age of new technologies, however, must have a road map of not only matters at hand but the complete supply chain or “cloud” setting in which the transaction is located. Moreover, they must also anticipate how other actors in these interrelated, sophisticated environments may react and adapt their products and processes in the light of the impact of the new transaction. The reallocation of risk and liabilities between the corporation and its many vendors in an “as-a-service” package, and the complexity of navigating social media, underscore the need for close coordination among deal makers and legal advisers. Complex risk analysis and commercial judgement are necessary to assist the corporation to achieve its goals and overcome the challenges associated with stepping outside its “natural” boundaries into “clouds” and ubiquitous social networks.
Governance as More than “Lip Service”
In the past, contract administrators were often charged with managing large sourcing or enterprise-wide software arrangements. Over time, the dynamic and ever-changing nature of these long-term deals led to a recognition that optimising these arrangements was more than simply confirming that contractual obligations were being met. Accordingly, more sophisticated management mechanisms began to emerge, albeit somewhat slowly. The advent of the cloud and social media, together with the involvement of an increasing number of suppliers, have made corporations recognise that governance is not just a nice “touch” but essential to running complex IT environments that are constantly in flux. Pointedly, this is governance rather than contract management. As suppliers play more and more of the roles that were once internal to an organisation, the conversations with them not only have to take place simultaneously at different levels but also require those providers to be in dialogue with each other in a way that benefits and advances the corporation. Moreover, the achievement of enterprise-wide goals requires at least the major vendors to have a relationship with the corporation that extends beyond the four corners of the mere contracts at hand. The age of sophisticated panel governance has arrived.