Computerworld -
You've found an application service provider. You've talked about money, goals and partnership, and you're ready to sign up for a long-term commitment. But have you worked out the prenuptial agreement?
Lawyers who represent corporate customers while negotiating ASP contracts say it's important to map out an exit strategy to be used if the relationship turns sour and ends in divorce. You hope you'll never need it, but users must protect their interests - including their data - in case the ASP's service deteriorates or it goes out of business.
The risk is great. Gartner Inc. in Stamford, Conn., predicts that 60% of the 500 ASPs that existed earlier this year will be out of business by year's end.
Many customers had to scramble when Pandesic LLC, a highly touted ASP in Sunnyvale, Calif., ran out of gas a year ago. More recently, Alameda, Calif.-based security service provider Pilot Network Services Inc. closed in April, abandoning clients such as Sovereign Bancorp Inc., The Washington Post Co. and Providian Financial Corp.
San Francisco-based Providian sent several of its own IT staffers to Pilot's Alameda data center to work with the remaining Pilot employees to prevent disruptions and move to a different contractor.
"It was stressful because we didn't have a lot of notice and we had to get in there and scramble to keep things going," says Konrad Alt, Providian's chief public policy officer.
The path to a less stressful ASP experience begins, of course, with diligent research and careful selection of the provider before signing on the dotted line. It's important to study not only the IT capabilities, but also the finances of the prospective ASP - and to treat the ASP as if it were a potential merger partner during this due diligence phase.
In the contract, be sure to require a steady stream of key financial data from the ASP on a monthly or quarterly basis so you can monitor its financial condition and spot problems along the way, advises Peter C. Quittmeyer, a partner at the law firm Sutherland Asbill & Brennan LLP in Atlanta.
After all, ASP service problems can occur for business reasons as well as for technical reasons. Service can suffer as a result of understaffing, underpaid staff, faulty procedures, staffers distracted by business problems, layoffs or changes in business direction, or because the ASP has started catering to a new, bigger customer.
Even an ASP that's hitting its growth targets can be in danger of collapsing if it's living hand-to-mouth on venture capital.
Quittmeyer says he's leery of ASPs that are "giving away the service at very cheap rates, nowhere near close to covering their costs unless they reached very high volume levels.
"If the ASP isn't making enough money off you, that's a serious problem. You may have to pay them more to get their attention," Quittmeyer says. In fact, one analyst suggests that big corporate users consider investing in their ASPs, both to get priority treatment and to help keep them afloat.
Of course, the core of the ASP relationship is the service-level agreement (SLA), which spells out in measureable terms the obligations of the service provider, from guaranteed network uptime to the responsiveness of the help desk.
"Then we try to attach performance penalties" if the ASP fails to meet the service levels - typically a credit toward the next monthly payment, says John A. Funk, a partner at Jones, Day, Reavis & Pogue in Dallas. "Make the vendor put between 5% and 15% of their monthly revenue at risk for failure to meet service levels," Funk says. He advises that the highest penalty be placed "on the things you care most about."
And if the ASP fails to deliver important services for several months in a row, it's time to invoke the termination clause in the contract.
"To avoid becoming hostage to a poorly performing provider, users should require contracts that include an exit strategy," said analyst Christine Ferrusi Ross in a report from Forrester Research Inc. in Cambridge, Mass. But an exit strategy means more than just having a termination clause.
As a practical matter, the termination clause is virtually worthless unless the user can quickly hook up with another service provider or bring the data processing in-house. After all, the goal is to keep the business function running, not to win legal points.
The No. 1 rule in negotiating an ASP contract is to retain ownership - and access - to customer data, at any time and in whatever format the customer requires.
"If you're going to pick up and operate somewhere else, you need the data," notes Robert E. Zahler, an outsourcing expert at Shaw Pittman LLP, a Washington-based law firm.
Users should either get a copy of the backup data or make sure it's put in a vault where "you have the right to physically come and take that data out of the vault" if the ASP service is inadequate, Zahler advises.
But, warns Quittmeyer, "there are vendors that condition the return of data on receipt of payment or something else, which the user just shouldn't accept."
Of course, the data does you little good without application software to process it. Users can request a "conversion right" to the software license, in which the ASP license is converted to an end-user license.
Other options include licensing the software directly from the software vendor and taking the operation in-house, putting the software in escrow, or finding another ASP or outsourcing contractor who has the same software and signing up with them.
The contract should also detail the transition assistance the ASP will provide, including time frames and guaranteed uptime. Insist that the ASP provide a procedural handbook, too, so a different IT staff can make the application work the same way the ASP did.
The worst-case scenario is for the ASP to go bankrupt. Why? Bankruptcy courts give a fair amount of protection to the bankrupt party, so all those great contract terms are usually unenforceable and customers are near the end of the line of creditors.
So choose your vendor wisely. Because once your ASP is at the point of bankruptcy, says Funk, "you're obviously just doing damage control."
At that point, legal issues pale in comparison to salvaging the application and data. The best trick is to make sure you have a list of the ASP's key technical people - with addresses and home phone numbers, says Asmita Shirali, a lawyer at the Cleveland office of Jones, Day, Reavis & Pogue.
But short of an ASP disaster, the far more likely problem is a dispute over what insiders call the three Ps: power (electricity outages), pipe (carrier outages) and ping (Internet connections).
In fact, disputes between ASPs and their customers are so inevitable that the industry itself is gearing up for more dispute activity. Earlier this year, the ASP Industry Consortium in Wakefield, Mass., issued a set of dispute-resolution guidelines.
The industry supports alternative dispute resolution, such as arbitration, rather than courtroom litigation. Alternative resolution strategies are faster, less expensive and avoid jurisdictional disputes, says Paula Hunter, chairwoman of the consortium.
Using an alternative dispute-resolution procedure is in an ASP's best interests because the proceedings are confidential. Bad publicity about a client dispute could be disastrous for a fragile ASP seeking new capital and customers.
But is dispute resolution good for users? Maybe not, say lawyers such as Zahler and Funk, who represent users in outsourcing deals. They say that the deck can be stacked against users and that the complex procedures can be drawn out interminably. And the confidentiality of the alternative dispute-resolution system actually works against user interests.
An ASP wants to resolve any dispute as quietly as possible and not have it aired in open court. By threatening a lawsuit, the user gains leverage - leverage that can be used to get a settlement - because the ASP doesn't want a lawsuit to hit the news.
"The threat of having the dispute aired publicly will be better than actually having the dispute, in terms of getting increased performance out of your vendor," Zahler says.
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WHITE PAPER
Approximately 60 percent of data migration projects overrun time or budget, while some fail completely. Download this white paper, "Enhancing Your Chance for Successful Data Migration," to learn the critical steps you need to take to execute a data migration project with minimum cost and risk to your business.
WHITE PAPER
Read the Gartner research note to learn why the TCO of a server-based computing deployment used to deliver all applications to users is around 50% lower than that of an unmanaged desktop deployment.
WHITE PAPER
Economic downturns have a tendency to accelerate emerging technologies, boost the adoption of effective solutions, and punish solutions that are not cost competitive or that are out of synch with industry trends. This IDC White Paper presents the results of an IDC survey of 330 companies in Western Europe, Asia/Pacific and the Americas that measures the receptiveness to Linux and takes into consideration changing views driven by the disruptive economic environment that businesses face today.
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