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Home : Articles : Purchasing Software : Software Contracts

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SOFTWARE CONTRACTS

The term outsourcing seems to be popping up everywhere in business in recent years. Essentially, outsourcing refers to any instance where a company contracts another company to perform work that would traditionally have been done in-house. For decades, business areas such as advertising and payroll, have been outsourced to other companies in order to minimize costs and to maximize the quality of the services. Today, almost any position within a company can be outsourced, including its IT needs.

Outsourcing does have many benefits. First, the company can save money. For example, many businesses are outsourcing their customer service needs to be handled by companies that specialize in call centers. While the contract does cost the outsourcing business, the savings on equipment and personnel more than makes up for that expense. The same is true for IT and software development needs. Individuals with the required knowledge can be extremely costly to have on staff full-time.

Another benefit of outsourcing is quality. The old phrase “jack of all trades, master of none” is appropriate here. Businesses that try to do everything in-house typically fail to do many of these functions well. Hiring the talented people to take care of all of a business's diverse needs is next to impossible both logistically and financially. On the other hand, companies that specialize in only one type of service (i. e. advertising, IT infrastructure) know that recruiting specialized talent is their bread and butter. They usually go out of their way to get the best available. Plus, they keep their staff well-trained in the latest advances because it helps them stay ahead of their competition.

Outsourcing works well for specialized needs; things the average worker simply wouldn't be able to accomplish effectively. These types of contracts are also appropriate for services that may not be needed at all times. For example, payroll services are needed only once per week or once every two weeks so it doesn't make sense for some companies to hire one person to handle the payroll full-time. Likewise, many IT departments are only needed to implement new technology, conduct employee training, or correct problems. Therefore, most of them don't need to be present from 9 to 5.

Despite the advantages of outsourcing, there are some pitfalls that many companies have found the hard way. One of the biggest of those pitfalls is forging a vendor relationship that ends up becoming a disaster and having no good way to get out of it. Thankfully, there are some ways to avoid this trap.

For one, businesses need to plan their exit strategy even before they sign on the dotted line. After the contract is signed, it's simply too late because the strategy needs to be included in the actual contract in most cases. One example is the change of control termination clause which essentially states that if the vendor is bought out by another company, the buyer has the option of continuing with the new company or ending the contract without penalty. This type of clause is especially critical in the volatile IT field. Another example is a clause used by one company which required the vendor to pay its replacement if the buyer fired them for a failure to perform up to expectations or if the vendor quits the project. Because over half of all outsourcing contracts end prematurely, these types of clauses offer buyers significant protection.

Another important pitfall for businesses to avoid is not letting the vendor know its expectations. A strong outsourcing contract should include the key milestones for the project, such as the date of software architecture completion, as well as the penalties the vendor will incur if those milestones are not met. Not only does this protect the buyer from becoming involved with a vendor who simply has no intention of completing the job, but it also ensures that both parties will be on the same page as far the project requirements, time line, and expectations.

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