Software Licensing & Master Service Agreements : Chicago Software Licensing Lawyer & Attorney : Sam Conforti Law Firm : Master Service Agreements, Negotiations, Outsourcing : Cook County, Illinois

Kathleen Goolsby, a writer for Sandhill.com, has posted a very interesting piece of her interview with C.K. Prahalad entitled C.K. Prahalad on the New Age of Innovation.  Prahalad is a noted author and current Distinguished Professor at the University of Michigan specializing in corporate strategy.  Prahalad’s new book, The New Age of Innovation, is prescient and lays out his vision of a new business model and how IT and the influence of consumers will shape the enterprise’s approach to competitiveness in the future.  Her article is not the typical interview peppered with questions that break up the flow of thought.  She deftly asks the right leading questions and allows the author to expound on his thoughts and ideas.

The interview begins with Prahalad laying out his vision for the future of competitiveness in the coming decade.  He has identified 4 trends that are converging in a way that will change the way we think about value creation. These 4 trends are:

• Connectivity: This is the foundation of the coming shift in the paradigm, be it through PC’s or cell phones.
• The Cost of digitization is declining and so deployment across borders becomes more attainable.
• The convergence of technologies: “Is your cell phone a telephone, a computer, a camera, a watch or all of the above?”
• The emergence of social networks.

Next Prahalad explains that there has been a shift in the balance of power between the company and the consumer.  It is the consumer who has as much, and in some cases, more power than the enterprise.  The enterprise of the future will not need to own the resources, but rather have access to a myriad of resources from around the globe.  Each consumer is unique and each consumer decides his or her content (i.e. “co-creation of a personalized experience”).

“Co-creation means two joint problem-solvers: the company and me. And it is about experience, not about products. So we have a co-created, virtualized experience real value instead of a product-centric real value.”

He explains that this is not a supply chain sequenced approach.  There is no pre-positioning of activities.  The enterprise must have access to many vendors in numerous locations in order to fulfill the unique customer request.

Goolsby asks the author to give concrete examples of how this new business model is working today.  I must admit that Prahalad details some excellent examples.  However, when I read the article I noticed one thing that was conspicuously missing.  His business examples all dealt with services.  His first example describes how a health insurance company is now able to insure people in high-risk categories with chronic conditions that require expensive medication on a continual basis.  His second example dealt with how a fleet management company of helicopters, jets, and other modes of transportation, with numerous customers requiring various services was able to cut its costs.  But what about manufacturing?  Won’t there still be a need for supply chain management with a predetermined sequence or positioning of activities and vendors.  I’m sure that the non-service industries will also be able to benefit from the 4 trends identified above, but I am not exactly sure how they fit into his new business model.

Prahalad goes on to say that enterprises must rethink their approach and realize that IT becomes a strategic asset.  Every company will be able to differentiate itself because now they will be dealing with personalized consumer experiences and not a commoditized product.

Finally, Prahalad puts forth the premise that enterprises will have to become consumer-centric global businesses and our IT systems must move to become citizen-centric public services.  I will tell you this; he had me until I came to this last part about consumer-centric and citizen-centric.  I began to think about “One World Order” and thoughts of all of us wearing that same gray Mao suit.  When he got to the point of stating his vision of “a platform as an ecosystem of large and small companies working together to common shared standards”, he lost me.  For me I began to view his discussion not in terms of IT and innovation, but rather as a quasi-political statement.  Maybe it is the coming election and my mind jumped from business to politics, but it just didn’t sit right with me.
 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

This article is meant only to posit the question above in relation solely to an existing Master Service Agreement (“MSA”).  For a very good discussion of the Parol Evidence Rule please see Scott Unger’s article What Is The Parol Evidence Rule?  Unger covers all the bases in his article.  He provides the pertinent citations where the court explains the purpose behind the rule and he also cites case law discussing the policy concerns supporting the rule. 

"The Parol Evidence Rule is a substantive rule which states that whenever contractual intent is sought to be ascertained from among several expressions of agreement by the parties, an earlier tentative agreement will be rejected in favor of a later expression that is final."

Or more succinctly

"the final agreement made by the parties supersedes any terms discussed in earlier negotiations"

Unger also points out that a good draftsman should always include a “merger clause” in the contract.  This is usually a clause found near the end of a contract, probably in a miscellaneous section, simply stating that the agreement is the final and complete expression of the parties to the agreement.  It is there to aid the court.  What should also be found in that merger clause is a statement allowing for modifications to the contract.  The language should read something similar to the following:

“This Agreement may be modified only by a writing signed by both parties.”

Let’s now consider the question above in the title of this posting.  When asked to make an adjustment to the MSA, one automatically thinks of an amendment or perhaps a Statement of Work (“SOW”) if that is how changes are contemplated.  A change can also be easily accomplished through a Project Change Request (“PCR”) form if such a form was contemplated in the initial MSA and suits the desired change.  These are all standard ways to change the original MSA.  However there are times when your client requests a change be accomplished through a Side Letter.  And so the question we must ask is, “Why?”  This is of course a red flag to the attorney.

First you must assure yourself that there is no fraud involved.  At the slightest hint of any fraud the attorney must stop at once.  The next steps are quite involved and I direct you to the Model Code of Professional Responsibility.  I am not an expert in this area, however I did come across a very interesting article by Boris Feldman entitled WHAT TO DO WHEN YOU FIND THE SIDE LETTER: GUIDELINES FOR CEO’S, CFO’S, AND AUDIT COMMITTEE MEMBERS IN INVESTIGATING ACCOUNTING FRAUD.  Feldman lays out a step-by-step approach which could be very helpful.

So absent fraud, the question remains “Why a Side Letter”.  I do not think there is a definitive answer to this question.  In my experience it could be that business people are more comfortable with a side letter.  It could be the “that is the way we do business” mentality.  There could be a distrust of lawyers and contracts.  Also the lawyers are usually seen as placing roadblocks in front of the deal and so for expediency sake the business folks prefer a letter.  In their minds it is quicker and easier.  Of course there is the ever popular notion that the cost would be prohibitive.  A more formalized document just looks more costly.

One’s knee jerk response might be that the Parol Evidence Rule prevents the introduction of such a Side Letter in the event that a dispute regarding the Side Letter finds itself in the courts.  But as Unger correctly points out, the exclusion of all evidence of discussions or agreements purporting to change the existing agreement pertains to prior writings and expressions.  I also have seen that the exclusion applies to all prior and contemporaneous writings.  In the question I posit above I state that the MSA is an existing agreement; and therefore, the Side Letter contemplated is a subsequent writing.  The mere fact that the date of the letter is later than the effective date of the MSA should be sufficient to allow the Side Letter into evidence to prove the modification.  However may I suggest the following:

• First and foremost assure yourself that no fraud is involved in the request.

• Absent fraud, then insert an “incorporation by reference” clause into the contract. This should allow the multitude of protections existing in the MSA to be applicable to the matter discussed in the Side Letter. It could be as simple as “This letter is hereby annexed to and made a part of the Agreement specified above.”

• Insert an Acknowledgement at the end of the letter after the signature block. I usually use the following language, “Please acknowledge your acceptance of the above terms by signing and dating this letter in the spaces provided below and returning a signed original to me at the address as provided above.” This helps us meet the “…may be modified only by a writing signed by both parties” language that should be found in the merger clause.

I’d like to know what you think. Have you encountered this type of request? Does the incorporation by reference and the use on an acknowledgement suffice? Is there more that needs to be inserted into the Side Letter? Should we simply say “no” to any Side Letter?
 

• Email This
• Print
• Comments
• Trackbacks
• Share Link

I have stated in an earlier article, Checklist Before Outsourcing Your IT, the high value I place on the use of a checklist before drafting an agreement. It is also obvious that a tool such as a checklist can provide invaluable assistance to the IT Project Manager when preparing for the implementation of a newly purchased software suite. In my research I have found a very interesting article in Wisconsin Technology Network News, WTN News, by Richard Marcus entitled Six things to consider before a major software implementation. Marcus presents a very useful list in his March 2006 article. Admittedly this article is over 2 years old and in this fast-paced high-tech environment the concept of what is “new” and what is “old” takes on different meanings from our traditional understanding of the terms. However, I believe his advice stands the test of time regarding this subject matter.

Marcus begins his article by cautioning the buyer on the critical nature of the purchase and that concentrating solely on the pricing could be a perilous mistake. He then provides his six points that the purchaser should take into account before forging ahead with the implementation. A brief synopsis of these six crucial points is as follows:

• The Software Vendor and the Customer are partners in this undertaking. Both parties must bring their knowledge and skills together in a committed relationship. Success depends on having sufficient resources. The Vendor should already have their team ready and the customer should have a comparable team prepared to spend the estimated time needed for the project. See also the February 15, 2008 post to this Blog, The IT Worker Shortage: Practical Considerations for Tech Buyers. 

• Communication is key. Insist that the Vendor set the correct expectations. Talking is not the only art form in this communication process. Listening is essential. Ask questions and let those answers lead you to more questions. Strive to learn not only what the software can do, but also what it cannot do. In the past, I was a consultant for a large software vendor. As a newbie on one of my first implementations, I learned the catchphrase consultants were often overheard to say to the customer when discussing the software’s capabilities, “The salesman said it could do what?” Make sure your requirements are well known and can be met.

• Pricing. Marcus’ admonition above is still valid. Price is not the only factor, but it is still a factor nonetheless. Negotiate a payment schedule that is tied to clearly defined and identifiable milestones that are realistic. Holdbacks dependent on successful acceptance test results should be discussed and inserted into the contract. Too much money upfront surrenders too much influence to the vendor. I was interested to read that Marcus warns the reader not to be swayed by the software vendor’s pleas and worries about revenue recognition. In my career I have discussed this many times, but only in a software license agreement negotiation. A Master Service Agreement is usually a time and materials agreement and hence revenue can only be recognized as it is earned. A Fixed Fee arrangement is a totally different case and will be a topic for a separate post to this Blog.

• A separate Master Service Agreement should be drafted. Marcus points out that it is common for the license agreement itself to contain sections pertaining to services such as ongoing support and maintenance. However, these services are not directly related to the implementation. I have come across license agreements that purport to contain the implementation services section within the license. This should be avoided. His article deals with a major implementation and so most major software developers and vendors already have their contract model set up to have a separate license agreement and a separate Master Service Agreement. This is the preferred approach. An implementation section contained within a license agreement may not address all the salient points of an implementation and also may not be clear and unambiguous on other necessary elements.

• The Master Service Agreement should contain Service Levels. This is a very important item and one that should not be overlooked. A service level agreement (“SLA”) can take the form of a separate schedule attached to the license agreement. Alternatively and depending on the complexity of the requirements of the customer, a separate SLA may be more appropriate. In the SLA the customer should make certain that all of its requirements that were fleshed out during its communications with the software vendor (see point 2 above) are memorialized for future reference.

• Know the use limitations in the license and plan accordingly. Many software licenses are User based pricing. Many vendors are willing to provide some form of price protection for future purchases of users. The Customer should verify that no further implementation work will be needed if more Users are added. However, if the Customer is faced with product based pricing and is not purchasing the entire software suite of products, then further implementation work will be needed if more products are added. This possibility should be fully explored and the consequences understood in the event of future growth.
  

Marcus concludes his article by stressing that the Customer must do their due diligence on the front-end. With proper planning the Customer can avoid mission-creep and other costly mistakes. Once a major implementation is set in motion it becomes cost prohibitive to put a complete stop to it or redirect your efforts towards another project.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

I have reported on several new technologies as they have entered the market, such as SaaS and SOA, and also the newest devices powered by the latest applications.  Jim Hemmer, an experienced CEO in the hi-tech and communications industries, brings this altogether in his cutting-edge Op-Ed for SandHill.com entitled The Mobile Bang Theory.  I highly recommend this article to my readers and it is a must read for the IT managers trying to get a handle on the security and control issues that mobile computing presents.  Hemmer begins his article by announcing the new shift in the archetype and identifying its 3 components:

“a mobile renaissance is afoot as a result of more powerful devices, faster wireless networks and broader use and acceptance of Web services and SOA”

Hemmer’s insight begins by recognizing the catalyst for enterprise mobility.  He labels this the “outside-in demand” phenomenon.  Consumer’s personal use of mobile services on mobile devices has forced enterprises to rethink their approach.  With this new approach come the challenges of providing access to the data and applications so the employee/user can optimize their efficiency.

For the enterprise the competitive advantage comes from the ability of the mobile user being able to enter data once into a mobile device which results in not one response but puts in motion a multitude of real-time business processes.  Hemmer identifies the trends in mobile computing and how the applications perform.  He then provides some real-life examples of how this approach works and the higher returns the innovative enterprises have experienced.

Hemmer’s advice to the IT managers is to develop a mobile strategy that supports multiple devices and multiple solutions.  The old siloed approach does not fit into this model. Its inflexibility is too costly.  He puts it succinctly by stating:

“The real game-changer is to mobilize diverse business processes, applications and data from a variety of internal and external sources — from one unified, cohesive platform.”

 

• Email This
• Print
• Comments
• Trackbacks (1)
• Share Link