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Two Essential Parts for Service Contracts by Joe Auer

If you’re drafting a contract for a vital ongoing service such as outsourcing or telecommunications, business continuation and transition clauses should be essential parts of the deal. The business continuation clause gives you the right to continue receiving services after the contract expires. The transition clause establishes criteria for a smooth, well-organized, nonantagonistic end to the contractual relationship.

Imagine how vulnerable a customer can be if it’s totally dependent on an incumbent vendor and then decides to switch vendors: It has no negotiating power, no endgame protection and no time. The incumbent vendor could decide to maximize its profits on the way out by increasing postcontract service changes and holding vital components hostage. Do we need anymore nightmare scenarios as an incentive to insist on relationship continuation and transition clauses?

The business continuation clause is especially valuable to have when you’re in a dependent relationship with any outside party. The clause is a pressure-release valve to conclude new contract negotiations with the incumbent vendor, gear up internally and take on the service yourself or transfer it to another vendor. Regardless of the direction you take, you won’t have to scramble to get an agreement in place just because the agreement with the original vendor is expiring. Time pressure has been removed, and your negotiation leverage has been increased.

A clearly defined business continuation clause can allow you to continue receiving services at previously contracted rates and at agreed service levels. Make the clause a contract extension or renewal clause so you can avoid a price increase or reduction in service levels. Most vendors will agree to business continuation, but a vendor’s first offer will most likely be at the “standard rates” in effect at the time the extension begins. Ensure that you preserve the hard-won pricing structure and service levels previously negotiated with contract language such as the following:

Contract continuation: Upon expiration of this agreement, provided the supplier makes such service generally available to other commercial customers, the customer may elect to extend the terms and conditions of this agreement for not more than two additional consecutive six-month terms without liability for conversion fees. The customer agrees to pay supplier rates, charges and fees as prescribed in the pricing section of this agreement and to give the supplier 30 days’ notice of such election to continue services.

As is always the case in negotiating a good contract, clear and specific language is the key. It should leave no doubt that you have the unilateral right to continue the contract for a specified period. Some suppliers may attempt to base business continuation on mutual agreement rather than make it an absolute customer right. Don’t do it! If it’s not your unilateral right, business continuation can be in jeopardy at a time when it’s needed most – and you could be subjected to highway robbery, courtesy of your vendor.

The second essential is the transition clause. Although the transition and business continuation clauses can work together, they should be viewed as separate entities, each with its own purpose. A transition provision gives you the right to an orderly transition of service, while the business continuation clause gives you breathing room and some negotiating power.

Transition cooperation: The supplier agrees that upon termination of this agreement for any reason, it shall provide sufficient efforts and cooperation to ensure an orderly and efficient transition of services to the customer or another supplier. The supplier shall provide full disclosure to the customer of the equipment, software and third-party supplier about the services required to perform services for the customer. The supplier shall transfer licenses or assign agreements for any software or third-party services used to provide the services to the customer or to another supplier.

A complete transition clause would normally continue beyond that one paragraph, covering many more details, but the sample provisions capture its essence. Detailing both parties’ rights and obligations beyond this paragraph is well worth the effort.

The continuation and transition clauses should reduce the likelihood of the nightmare of losing needed services. So, sweet dreams!


JOE AUER is president of International Computer Negotiations Inc. (www.dobetterdeals.com), a Winter Park, Fla., consultancy that educates users on high-tech procurement. ICN sponsors CAUCUS: The Association of High Tech Acquisition Professionals. Contact him at joea@nulldobetterdeals.com.

Copyright by Computerworld, Inc., 500 Old Connecticut Path, Framingham, MA 01701. Reprinted by permission of Computerworld.

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