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A 2012 survey by one of the “big 4 consultancies” showed that more than 30% of clients were dissatisfied with their Service Provider’s performance.
Whilst not all of the issues could be avoided, many could if the Service Contracts were properly reviewed and then subject to an annual health-check. For example, one of the most prevalent issues in IT Service Contracts is finding out that activities that the client expected to be in scope are either excluded, forgotten, or are subject to additional charges. That is usually an avoidable issue.
It is not just the customer of IT Services that suffers when the contract is unclear or has omissions or commercial/operational errors. In many cases the Service Providers themselves are badly impacted through lost revenue, increased costs, low customer satisfaction, and loss of contract renewals.
Nearly every company has a contract reviewed for legal integrity and risk minimisation before they sign it. Service Contract Reviews are not a substitute for that – instead they complement the legal review by taking into account the practical commercial and operational elements that only wide-ranging experience of IT and IT service contracts can provide.
Here are 5 major pitfalls that could be avoided if the IT services contract is properly worded.
#1 Does the contract describe what the customer requires or what the service provider usually offers? The biggest area of problems in an IT Service Contract is when the customer discovers that they are not signed up for what they need. It is essential for the supplier and the customer to make sure the customer is getting the services they must have.
#2 Does charging start on a) a fixed date or b) when the service is available for use or c) when the customer starts to use the service or d) when one or more milestone events have been achieved? Make sure the correct criteria for “service commencement” have been clearly described.
#3 Is the “fixed price” really fixed? At least one well known IT Service provider has a clause in their fixed price contracts that allows them to stop work when they have used up the estimated number of days (irrespective of whether the work is completed or not). The customer may then have to pay more than the “fixed price” to complete the work or the supplier is entitled to walk away.
#4 Are the service standards and milestones clearly described? Many IT Service Contracts don’t have performance standards set out in language that both parties clearly understand and which are binding. There needs to be clear Service Levels – note there is a big contractual difference between a Service Level Agreement (SLA) and a Service Level Objective (SLO). The SLO may not be binding.
#5 What are the implications if the Service Levels are not met? Camlas Consulting has come across a number of IT Service Contracts where it was cheaper for the supplier to pay a non-performance penalty than to put in the time, effort and money necessary to meet theagreed service levels.
IT service contract reviews should be performed during the negotiation process and certainly before contract signing. The whole point of such a review is to reduce risk exposure for both the supplier and the customer. That increases the chances of a successful and mutually beneficial agreement.
Some organisations do conduct contract reviews after signing but that may be a case of “stable doors”. For agreements that are already signed, it may be more effective to consider a Health-Check review instead. In a Health-Check the major assessment is how does the performance under the contract compare with what was planned in the business case or the expectations.
Our supplier and customer clients have often learned the hard way that legal, sales, and purchasing reviews of contracts are simply not enough. Avoiding major problems on IT Service contracts need expert review from a commercial and practical IT perspective.