The IT/telecoms industry may be in the doldrums at the moment, but for those of us who work in the area, the ability of this market to generate new ideas, re-package old concepts and create new acronyms is boundless.
Despite considerable trumpeting of ASPs (Application Service Providers) in recent years, they are not a new concept in the IT industry. ASPs allow customers to rent applications on a pay as you use basis or on a standard rental fee. Customers can therefore use applications whenever they wish without incurring the set-up, support and running costs normally associated with implementing applications. IT lawyers who have been involved with the industry for long enough will recognise that this approach is not dissimilar to the bureau approach to the provision of IT services which operated in the 1970s and 80s.
More recently we have seen the introduction of MSPs (Managed Service Providers), again not an entirely new idea, although the industry markets MSPs as the latest concept. There is much uncertainty as to what an MSP is. The term covers a wide range of service offerings – from the provision of management services by means of an ASP; the delivery of a variety of IT services by one service provider (which in turn relies on strategic alliances – or ‘partnerships’ as the IT industry loves to call them – to deliver the services), or a service provider which contracts with a customer to manage the customer’s other suppliers.
The IT industry is presently very exercised by the emergence of both ASPs and MSPs. Customers need to be aware of what providers actally deliver when they contract for these service models. In our experience, there is much marketing and sales hype surrounding both ASPs and MSPs.
There is no doubt that ASPs providing remote delivery of applications can give enormous benefits to customers. Internal delivery costs can be greatly diminished. But the delivery and availability of services depends upon the stability of the networks involved, the service levels which have been negotiated, and the other terms and conditions that apply. ASPs are increasingly marketed as a viable method for outsourcing all of a customer’s application requirements, but it is vital for customers to ensure that the ASP in question can provide the services on offer. Significant issues also arise for service providers in the manner in which they contract with customers. In our experience many ASPs are at an early stage in their development and much has to be achieved by smaller ASPs before market rhetoric becomes reality.
An MSP can also include an ASP that delivers managed services. But equally an MSP might not rely on ASP concepts at all. In our experience most MSPs are likely to be service providers that provide a range of services to customers through strategic partnerships or alliances with other providers. In practice, this means that a customer will contract with an MSP for a variety of services – for networks; disaster recovery services; software and hardware and perhaps
an ASP offering. The MSP will in turn sub-
contract with relevant providers to enable it to meet some, if not all, of the services that are required – the hardware, software and ASP requirements.
As with the ASP model, care must be taken by customers to ensure that the suite of facilities offered by the service provider will be sufficiently reliable and secure to allow a seamless delivery of services to its end users. The traditional range of legal and practical sub-contracting issues therefore arises for the customer, as well as between the MSP and its various strategic partners. Underpinning the rhetoric of MSPs, however, are some very traditional contractual models.
Many of the legal concepts involved in the delivery of these new IT concepts are not revolutionary in legal and IT terms – even if they are new in marketing terms.
The legal issues that can arise in relation to ASP offerings depend on a number of factors. These include the type of ASP involved; whether it is to be an internet or dedicated line service; where the ASP is based; the services to be provided and to what service levels; how payment is to be made and how much sub-contracting is to take place. There are important interface issues (especially with telecoms networks) which should also be considered. In addition, sub-contracting is an issue with ASPs, and is possibly a bigger issue with regard to MSPs, particularly in relation to service levels applicable to customers and, if you are an MSP, those which are to be backed off to your strategic partners.
Clearly the legal issues raised vary enormously depending on whether you are advising a customer or a service provider. In an article of this length it is impossible to cover all of the legal issues which arise, but we suggest that the following are significant in relation to ASPs and MSPs:
lJurisdiction and cross-border issues
Many IT solutions are becoming global solutions. The new offerings make this more and more likely as significant savings and technical advantages are secured through contracting with developing countries. In addition, if 24/7 availability is to be part of the service offering, it is essential for service providers to contract with partners globally. The contract requires the parties to think about the governing law of contracts and issues relating to enforceability and litigation issues generally. These cross-border issues are critical to customers whose businesses depend on the ability to insist on excellent service.
lA written contract which is individually negotiated
It may seem absurd to remind customers to enter into properly negotiated written contracts. In our experience this does not always happen – especially in relation to strategic alliances or partnerships in relation to MSP arrangements between service providers. Even if written contracts do exist, it is frequently the case that they have not been individually negotiated. More often, service providers will rely on their standard terms, especially at a time when the market is tough. A battle of the forms must be avoided at all costs and terms and conditions should be carefully considered and negotiated in advance. This is especially relevant in the case of strategic alliances of suppliers in the MSP model.
lLimitation of liability
The importance of carefully negotiating limitation of liability provisions – even if you act for customers – is evident to most lawyers, particularly given the Court of Appeal decision in Watford v Sanderson. Liability issues are vital for both customers and suppliers, but in the case of ASPs and MSPs it is particularly important because liability is not just an issue that arises between customer and supplier but between co-venturing suppliers. The sub-contracting of services – as well as risk – means that collective insurance arrangements and the apportionment of liability (by means of appropriate indemnities) is an essential issue that must be considered well in advance of entering into a customer contract. Agreeing the pass through of liability and risk is an essential prerequisite for establishing an MSP offering.
lService levels & remedies for service failure
Service levels are notoriously difficult to negotiate, but are essential to the satisfactory delivery of services by both ASPs and MSPs. If ASPs and MSPs are to deliver real savings, satisfactory service delivery is essential. Clear, realistic and verifiable service levels must therefore be established. Customers and strategic partners should always try to negotiate bespoke service levels and appropriate remedies for service failures. Adequate remedies should apply in the event of critical service failures – including liquidated damages, as well as the ability to determine the contract and the ultimate customer.
lGovernance
Depending on the nature, term and size of the contract, it is vital to include effective governance provisions in the contractual arrangements. These can help to minimise cross-border and other issues between strategic partners.
The ability of the IT market to produce new products is not necessarily reflected by an enormous change in the legal issues which arise as a result. Indeed in the context of ASPs and MSPs we suggest that the legal issues raised by these models are familiar to most commercial lawyers. However, knowledge of the technical and legal issues will allow you to advise both customers and service providers of the benefits and risks of such contracts.
David Isaac and Angela Cha are both partners in Masons’ information and technology group.
