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Key Information Technology-Related Contracts

Over the past decade, the market for information technology and IT enabled services has expanded astronomically. IT service providers rely on fairly elaborate documentation that governs provision of services to their clients. Apart from end-user license agreements (EULAs), which are prevalent for software, there are several other contracts used in the IT industry for different kinds of IT services. This chapter discusses some of them. Cloud computing agreements are a relatively recent phenomenon – we will discuss these next, in a separate chapter.


Master Services Agreements (MSAs) and Service Level Agreements (SLAs)

Information technology service providers may provide different services related to operation and maintenance of IT-related infrastructure, equipment, files, software and resources. This may include leasing hardware, software, storage, backup, recovery services, data-centres and related IT services.

Typically, an SLA is executed for specifying the general terms and conditions on which such services are available. The SLA also contains various performance metrics to measure the quality of the services in a separate annexure or schedule at the end of the agreement.

MSAs typically contain broader terms pertaining to the relationship with the service provider, instead of service-specific metrics which are more often contained in an SLA (although there is no rigid rule that metrics cannot be contained in an MSA). MSAs may be coupled with an SLA or specify service levels themselves. Any services that are availed under an MSA are usually requested on the basis of a ‘purchase order’, ‘work order’ or ‘statement of work’ from the client.

MSAs and SLAs are frequently standardized (although a business which is able to effectively leverage its bargaining power against a service provider may be able to specifically negotiate some requirements). While the terms of the standardized document are usually chosen by the service provider, large companies may require service providers to agree to a ‘standardized’ version of their requirements, which the service provider must match if he is to provide services to such companies.  For example, see here the standard MSA which GE Energy requires service providers in Brazil to execute.


You may go through a standardized MSA and SLA of an entity providing data centres.


An MSA may also be used in international outsourcing transactions – in such transactions the MSA works as a framework agreement. Separate contracts (all based on the MSA) are executed with different service providers for each jurisdiction (see discussion on outsourcing below), so that the customer is able to obtain local expertise for each location.

Often, the difference between an MSA and an SLA may simply be one of title. An MSA may also specify service levels for different services that are being provided pursuant to a purchase order.

Outsourcing Agreements for BPOs and KPOs

Outsourcing contracts, especially for Business Process Outsourcing (BPOs) and Knowledge Process Outsourcing (KPOs) can be extremely complex. There are a variety of contractual models that are used for outsourcing, depending on the objective of the clients, some of which are discussed below:
Services Agreement
A vanilla services agreement will merely require a third party to perform a particular function for the customer – the agreement will specify service levels that are acceptable for the outsourced services (see the above discussion on SLAs and MSAs for this purpose). The business may transfer certain IT assets (such as data centres, etc.) and employees through a secondment or similar arrangement to the outsourcing vendor for the duration of the agreement, but this is more common in a joint venture or a captive outsourcing model. High value BPO or KPO outsourcing transactions could involve a joint venture or captive outsourcing structures.
  • Joint venture

In another model, the customer and the service provider incorporate a separate legal entity (in the form of a joint venture), for providing necessary services.  This entity is jointly owned by the customer and the service provider. Often, these feature a transfer of employees and IT assets of the customer. The outsourcing services provider is able to complement the transferred resources of the company with its own technical resources and employees.

A joint venture model could have several variations – for example, one customer could enter into a joint venture with multiple suppliers. This structure is adopted when one supplier is not adequately equipped to handle all the outsourcing needs of the customer alone. Hence, the customer may require multiple entities to come together and perform the desired services in a coordinated manner (in the form of a single joint venture) to meet its needs.

Alternately, multiple customers could incorporate a joint venture together to form an entity providing outsourced services to all of them. This enables pooling of resources and reduces costs for the customers. Sometimes the seller may also provide services to other customers

  • Captive outsourcing entity

In a captive outsourcing model, the customer (i.e. the entity which desires to outsource services) owns the entire capital of the service provider. The unit provides services to the customer on an exclusive basis. While some local professionals and employees may be hired, the service provider is entirely controlled by the customer.

Common heads in outsourcing agreements

Typically, outsourcing agreements include provisions on a variety of issues such as transfer of assets, staff, pricing and payment, intellectual property matters, and information security, monitoring provisions, service levels and credits for failure to meet service levels, termination, etc.

How does the service provider benefit?

Different types of remuneration mechanisms may be built into an outsourcing contract - the remuneration may be assessed on per transaction basis, or on the amount of resources that are dedicated to the outsourcing process by the service provider. Alternately, sometimes a profit-sharing method is used, if the performance of the outsourced process is extremely critical for the overall business of the customer.

Implementation and monitoring in outsourcing arrangements

Since an outsourcing agreement typically envisages a long-term relationship, managerial staff of the business availing the IT service will have several administrative responsibilities to ensure the implementation and working of the agreement. Businesses usually appoint ‘contract managers’ and entrust them the overall responsibility of ensuring that the vendor’s services are of acceptable quality – they may be required to measure the vendor's service levels at periodic intervals, handle change requests and payments, communicate with senior representatives of the vendor to address any problems, etc. If the agreement has been drafted well, administration can be easier.

Outsourcing in India

India has been a destination for outsourcing by foreign companies and multinationals for over a decade. Now, Indian companies have started outsourcing non-core operations of their business to other local (or even offshore) entities. Typically, such functions are administrative in nature, such as ensuring compliance with labour laws, data entry functions, telemarketing, HR services, pay-roll management, etc. In this regard, financial sector regulators have issued guidelines and regulations which permit banks and insurance companies to outsource various services to third parties, as long as they do not outsource their ‘core’ functions.

For example, banks cannot outsource functions such as internal audit, decision-making functions like according sanction for loans and management of investment portfolio, etc. Certain restrictions are also placed in outsourcing to offshore jurisdictions. The manner of outsourcing must be in accordance with directions issued by the regulators – for example, RBI requires banks to frame a policy which is approved by the Board of Directors of the Bank for outsourcing, and prescribes certain terms which must be included in any outsourcing arrangement entered by the bank.


RBI - Guidelines on Managing Risks and Code of Conduct in Outsourcing of Financial Services by banks, available here (See amendment for off-shore outsourcing here); Insurance Regulatory and Development Authority (IRDA) Guidelines on Outsourcing of Activities by insurance companies, available here.

Transition Services Agreements

In large corporate groups, the companies within the same group may often provide services to each other. Sometimes, aspects of a particular business operation may be performed by different companies. In some cases, the same legal entity may be into multiple lines of businesses.

For example, Larsen and Toubro was for a long time engaged in approximately nine different industry sectors, which were all under the same legal entity. In such cases, one business division/ operation often may be interconnected with another operation – it may be utilizing some services from another division such as customer support services or finance services.

Car manufacturers often have a separate automobile finance company to finance car loans by car buyers. In such cases, when one particular business unit is sold by the holding company to another acquirer (called a ‘
divestiture’), the services may be required to be provided by the holding company even after the transfer is complete, for a short period of time. This is often the case with respect to IT related services. In such cases, the entities enter into a transition services agreement (TSA).



For example, Dell may have a separate manufacturing company (
Manufacturing Entity) which manufactures and ships computers globally and another company which handles customer support operations (Support Entity). In this situation, any customer who purchases a Dell computer (from the Manufacturing Entity) may also be entitled to customer support from the Support Entity. The Support Entity would have agreed through a contractual arrangement to provide necessary support to customers of the Manufacturing Entity.

Now, let’s assume that Dell intends to transfer its desktop manufacturing division (i.e. the Manufacturing Entity) to an acquirer, e.g. IBM (but not the Support Entity). Even though documentation, valuation and payment for the acquisition may be complete, HP may require continued services from Dell’s Support Entity until it is able to set up its own operations to manage the new set of acquired customers. For this purpose it could enter into a TSA.

From the perspective of an acquirer (HP in the above example), a TSA is in a way similar to an outsourcing agreement, since certain services are ‘outsourced’ to the seller. It will have ‘service levels’ for different transitional services that will be provided by the seller. However, unlike an outsourcing agreement, a TSA lasts for a short period of time (e.g. 6 months to 2 years), it provides for remuneration to cover ‘costs’, the obligation is to provide the same level of service that was being provided prior to the transfer, and the seller does not provide the ‘transition services’ to third parties in the course of its ordinary business (it was only providing support to its own customers, or customers of its sister companies), unlike an outsourcing service provider.

Maintenance & Support Agreements

Large multinational corporations, banks and financial institutions, stock exchanges, even government ministries often commission complex software which is specifically designed to meet their needs. Software can be quite complex to implement and maintain – there may be extensive implementation work, the software may require to be modified to be compatible with newer systems, it may need upgrades, or there may be other bugs or problems which require troubleshooting. Such work often requires deployment of skilled professionals who are trained by the software manufacturer at the customer’s site. Therefore, at the request of the purchaser (who may be the owner or a licensee, depending on a contract between the software developer and the purchaser) the vendor may have a contractual responsibility to provide additional support and maintenance services, updates, or send trained staff to the customer’s premises. The terms of these services are usually recorded in a ‘maintenance and support agreement’.

Some of the key terms in a software services agreement are described below:

  • times at which support will be available to the customer (e.g. business hours on working days, 24 x 7, etc.)
  • the modes of support (e.g. telephone, internet, by sending personnel or by any other mode), whether remote access can be provided to the client’s computer
  • the method by which request for support should be made,
  • applicable fees for the support (including payment of any travelling costs in case the vendor sends personnel directly), mode and dates of payment
  • the obligation to provide new releases of updates and supporting documentation
  • response time of the software vendor for support
  • obligation of the vendor to fix bugs and defects, and remedy available to the user in case service provider fails to provide adequate support
  •  intellectual property in any upgrades (usually vests with the software provider)
  • circumstances when the obligation to provide support is not valid – e.g. when any unauthorized modification is made to the software or if the software is installed in on a system that is not compliant with its compatibility requirements

At other times, maintenance and support may be very simple, in the nature of a telephonic helpdesk or a call-centre. In these circumstances, a separate clause outlining the maintenance and support responsibilities can be included in the End-User License Agreement (EULA) itself. EULA is discussed in a separate chapter in this course.

Apart from the clauses discussed above, certain standard provisions pertaining to confidentiality, notices, dispute resolution, allocation of taxes, force majeure, liability for indirect losses, ownership of intellectual property, etc. will be included in all of the above contracts.


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