Contending with IT Consolidation through Contracts

As outsourcing, ASP agreements proliferate, Gartner warns companies to negotiate terms that address possible M&A consequences

As outsourcing, ASP agreements proliferate, Gartner warns companies to negotiate terms that address possible M&A consequences

Los Angeles  June 26, 2003  With heightened merger and acquisition activity occurring among information technology (IT) providers, companies must have terms worked into their outsourcing and application service provider (ASP) contracts to address this consolidation, analysts from technology consultancy Gartner argued this week.

The ongoing Oracle-PeopleSoft-J.D. Edwards on-again/off-again acquisition/takeover, in addition to other recent merger and acquisition activity in the IT world, has prompted many companies to take another look at the exposure inherent in their dealings with IT providers.

Gartner analysts, who provided their outlook for the outsourcing industry during the Gartner Outsourcing Summit held this week in Los Angeles, recommend that companies protect themselves by incorporating appropriate clauses in their contracts with these providers.

"Enterprises should consider including a 25 percent acquisition clause into their contract, which allows the enterprise to get out of the contract if the service provider is more than 25 percent acquired by another company," said Ted Chamberlin, industry analyst at Gartner. "The enterprise should also include a competitive pricing clause that forces an ASP hosting provider to match a deal it gave to another enterprise if the enterprise with such a clause in the contract could qualify for the volume commitments."

Gartner recommends companies also examine including a guaranteed refresh clause that enables enterprises to upgrade the look and feel of the contract  for example, incorporating new applications without having to extend the term of the contract and with no major changes in price.

Other important clauses include a preset pricing clause that says anytime a new application, server or business modeling applications is added, there will be a new cost. These costs should be known upfront so that the upgrade will not be delayed in negotiations.

It can also be beneficial to include a service performance guarantee, which allows for credits and termination of the contract if the provider does not meet certain performance metrics.

Gartner is forecasting that by 2004, 70 percent of enterprises will selectively outsource applications using a variety of ASPs, traditional outsourcers, niche applications vendors and offshore providers. However, Gartner analysts said enterprises must use structured evaluation and selection criteria or risk engaging with the wrong ASP offering the wrong level of service.

"Enterprises entering into an ASP contract should not be doing so without first understanding what is available in the market today," said Chamberlin. "To do this, they need to develop their enterprise needs and requirements, specific evaluation and selection criteria around the services available in the market, and a list of providers competent to deliver to their required service levels."