Make responsibilities clear and avoid scope creep  Managed network services are a hot topic today. This article is intended to help users navigate the complexities of a managed network contractThe first rule is to be prepared before negotiating. Gather detailed information about what it costs your company to operate and manage its networks. Know what activities (e.g., staffing, hours of coverage) and what results (e.g., response times, uptime of 99.X%) you get for this investment. A wise company will bring in those with hands-on experience—typically operations, technical, and support teams—early in the process, to detail these activities and results. The Ins and Outs of ScopeManaged network contracts run the gamut in terms of what is within the "scope of services." At one end, they may include only the vendor’s equipment and management of vendor-provided transport. At the other, they can include onsite staff to maintain and manage the customer’s entire network, solicit and evaluate proposals for new services, engineer changes, and optimize network usage and performance.What is "in scope" (and the price you pay) depends on: Your needs. The vendor’s inherent skills and/or willingness to subcontract to meet your needs. The assumptions on which the vendor based its pricing. The fine print of your contract.Because managed network services are customized, a vendor’s standard statement of in-scope services is unlikely to meet your needs. The statement often imposes more obligations on you than on the vendor—odd, since you are the one paying. For example, the statement of work may go into great detail about your site preparation obligations or your obligations regarding connections to existing network management tools, yet say little about what the vendor will do once it arrives at the site or how it will integrate its management functions with your systems. Vendor responsibilities can be defined by reference to activity (the vendor will do a, b, c, d, and e) or results (the vendor will do what it takes to achieve 99.99% uptime). The latter is more satisfying to customers, but harder to negotiate. Recognize that the defined scope of services is basically a snapshot—things are sure to change over time. To deal with this, the contract should require the vendor to provide services and products that are substantially equivalent to those specifically detailed in the Scope of Work (which is usually an attachment to the contract), as well as any other services or activities that are not specifically detailed but are inherent in or substantially related to those services. Scope creep—cost increases that occur as the customer discovers that services it needs and thought were included in its monthly fee are not—is the bane of managed network deals, and fighting about it has been the death of many comprehensive agreements. You want the contract to establish rules of engagement and a process to resolve whether an activity is in scope, without going to war. The rules should ensure that, pending resolution, the vendor is required to perform the work in question when that is necessary to meet pressing business need. Without such a provision, you may be forced to pay whatever the vendor sees fit to charge. The vendor will seek to impose additional charges for any activity that is not specifically detailed as "in scope" (such activity is generally referred to as "Out of Scope" services), as well as for activities that turn out to be performed more frequently than the vendor assumed when pricing the deal (often referred to as "Incremental Services"). The contract should clearly distinguish between In-Scope Services (covered by the price), Incremental Services (for which additional charges will apply for additional units), and Out-of-Scope Services (for which the price is subject to negotiation). Scalability and CommitmentIdeally, a managed network contract would scale up and down seamlessly as your needs changed. Unfortunately, that’s not the way it usually works. Most vendors will try to get you to commit to a certain volume of services, based on revenue, sites, and/or percentage of spend, and will impose a significant penalty (termed a shortfall charge) if you fail to do so. The question is how to minimize the chances of owing money for failing to meet a commitment. First, make sure to keep an ample cushion between your expected use of services and your commitment. The vendor will push for 90%. Don’t buy it. You need the cushion to avoid shortfall charges if circumstances, your business, or technology changes. You may also want to negotiate the right to close some sites without eating into your cushion. Unanticipated shortfalls are the biggest problem, after scope creep, in managed network contracts. Second, preserve flexibility in how the commitment will be satisfied. Anything the customer buys from the vendor should count—although, not surprisingly, vendor forms don’t read this way. Third, fight the (inevitable) vendor push for exclusivity. The ability to use third parties to perform some or all in-scope work will increase your leverage as your use grows beyond the commitment, and will give you needed flexibility to peel off services that the vendor performs in a way that doesn’t meet your standards. Finally, make sure your contract reduces the commitment or releases you from exclusivity (if you agreed to it) in the event that:There is a business downturn. You sell a business unit or migrate to a new technology. There are chronic service problems. A force majeure condition affects the services or your ability to use them.Avoid MAC AttacksMoves, Adds, and Changes (MACs) occur with varying frequency depending on your company’s propensity to churn people, premises, and services. Lots of things fall into the MAC category, and the activities necessary to perform each differ significantly. The "soft MAC" versus "hard MAC" distinction is fairly well understood—the latter involves a site visit and physical manipulation of cable, the former is performed at a keyboard from a distance. But even within these categories there are differences—some subtle; others larger. The contract must properly address these distinctions, as MACs are generally billed per occurrence based on type (at least when their frequency exceeds the contract allowance). Negotiate with the vendor to get a complete list, with specific examples. Then check the vendor’s price proposals based on your knowledge of the time and expertise needed to complete the activity, and push for a price that reflects the average expertise and hours needed for a task—not the worst-case scenario. Hardware/Software ConcernsHardware and software are among the most difficult—and most important—issues in a managed network contract. The parties’ rights and responsibilities with respect to equipment (including both hardware and software) must be well defined. Who will provide the equipment? Will the vendor manage third-party equipment? Will it cost more if the vendor can’t manage the hardware with its existing systems? Is the equipment lease cost bundled into the monthly fee or separately stated? If you are purchasing the equipment, are there appropriate warranties covering defective equipment and software during a reasonable warranty period? If the vendor will lease the equipment, expect them to seek ways to minimize the risk associated with their up-front investment, such as by imposing required "in-service" periods—i.e., the time that you are committed to pay for the equipment or bundled service—or requiring you to buy out its lease even if you have terminated the underlying agreement for default. Resist any obligation to pay the full monthly recurring charge for the provision of service to a terminated site for the remainder of the in-service period. Instead consider an appropriate stranded asset charge. Include provisions that require the vendor to upgrade or replace software and hardware within the Scope of Services. Contracts often distinguish between routine and "forklift" upgrades, and require the vendor to keep software at, say, an n-minus-1 release level over the contract term at no additional cost. Software upgrades can lead to hardware upgrades if the software is not supported on the existing hardware. The key issue is never: Can you get the hardware and/or software upgrades, but: Who pays? That is subject to negotiation. Vendor software licences are particularly odious and frustrate your use of the software. They often grant only a personal, non-transferable, right to use the software for internal purposes only and permit you to make one copy of the software, but prohibit you from modifying or sublicensing it. You can’t assign the licences to successors or affiliates or sublicense it to an outsourcer; you have to buy more. The scope of your licences should expressly allow you (and your designated users) to use, copy, access, and (if necessary) modify the software as part of the managed infrastructure in support of your requirements during and, if you purchase the equipment, after expiration of your contract with the managed service provider. Intellectual Property, SecurityDetermining who should own what intellectual property is also a key issue in managed network contracts. Each party retains intellectual property rights to its pre-existing work—stuff that it owned or created before the deal—but may have to grant the other a limited licence so the vendor can provide and you can receive the benefit of managed services. This is usually accomplished with a pair of clauses—one acknowledging that a party retains ownership of its pre-existing work and another prescribing how the other party can use that pre-existing work. Ownership rights in "developed works"—custom interfaces, written materials, business methods, databases, etc. created during the term—is challenging, and the permutations are numerous. Three principles help frame the negotiations:You should own all developed works, including all data, derived from your pre-existing works. You should have very broad rights (either as the owner or perpetual licensee) to use, copy, and modify developed works created by the vendor for you on a custom basis. Your rights in a developed work should survive expiration or termination of the deal if the developed work is part of a system you will continue to use. Information security is also of great concern in managed network deals, especially where the vendor controls your technical security measures. The vendor should abide by your information security guidelines, not its own. Smoothing the ImplementationMoving to a managed network can be demanding and sometimes difficult. Vendors try to delay specifics about implementation until after the contract is signed. Don’t go along with it. Where time permits, include a detailed project plan and schedules for the transfer of network and operational functions and employees to the vendor in the contract. If time is short, include an outline of key activities and dates, with an obligation for the parties to complete the detailed project plan shortly. Either way, make sure the vendor has incentives to meet the key deadlines, by including remedies for its failure to do so. Finally, make sure you are kept abreast of how the implementation is progressing. Require the vendor to provide progress reports and meet with you on a weekly basis as part of its in-scope work. Managed Network RatesManaged network rates are complex and, like scope of work, run the gamut. There are a few general areas of concern. First, look out for Consumer Price Index rate escalators, and get rid of them. They mean you take all of the inflationary risk instead of the vendor building that risk into its business case, and they take no account of ongoing productivity gains, which are substantial. Second, get pricing that is sufficiently granular to let you scale up and down and change services at a predefined cost. Finally, seek an equitable reduction to your rates if certain events (such as de-installation of a site for cause or a business downturn) occur. The best way to keep a vendor on its toes with respect to rates is to let your sales rep know you will move services currently provided by the vendor to a competitor or to put the business out for bid as the term draws to a close. A vendor will typically offer what we call a "we’ll talk" clause. On careful reading these clauses offer nothing more than a conversation—the vendor agrees to talk with you about prices, but not to change them unless it feels like doing so. Instead of a "we’ll talk," seek a rate review mechanism with teeth. The best rate review provisions trigger reductions in the commitment if the parties are unable to agree on appropriate rate modifications, thereby giving the vendor a greater incentive to keep prices competitive. This type of rate review provision, however, is very difficult to get in managed network contracts. Third PartiesAlthough certain of your networking equipment may be out-of-scope, the vendor will need to cooperate with you—or a third party help desk—to troubleshoot problems. At a minimum, you will want a clause in the contract and/or the Statement of Work that requires such cooperation. The contract may also appoint the vendor as your agent for the purpose of managing third parties such as equipment maintenance providers. If it does, require the vendor to monitor, direct, and supervise the performance of these third parties, to seek available Service Level Agreement (SLA) credits, and to enforce assurances of performance. Contract Term and TerminationVendors typically seek longer terms for managed network contracts, usually 5+ years, than you are used to with telecom deals (which typically run no more than three years). The vendor’s reason is the need to recover up-front capital expenditures. Don’t fall for it. Even in the best deals, a vendor will get some combination of termination charges or stranded asset charges or shortfall charges if a deal ends early. These should adequately protect the vendor’s investment, especially if combined with a high commitment and/or exclusivity. Also keep in mind the term of the underlying telecom contract(s) the vendor will manage. Try for a term that is coterminous with your telecom contract(s), or four years, whichever is shorter. While no one buys a managed network expecting it to fail, you need to be protected should that occur. Most vendors won’t offer specific rights to terminate the contract without termination liability. Their standard contract will apply a termination charge if you terminate the contract for any reason, including the vendor’s material breach, before the end of the term. If you are lucky, the vendor may offer you the right to terminate without liability if it materially breaches the contract, but will give itself a 90+ day period in which to cure the breach. The proposed termination charges will be sky-high (along the lines of 100% of the vendor’s expected charges over the remaining term plus unidentified equipment costs and third-party costs). They should instead be based on the vendor’s unamortized investment plus a small profit. Finally, if you terminate the managed service contract or the separate unmanaged telecom transport contract, you don’t want to be stuck using the same carrier to provide half of your needs—the unmanaged telecom transport without the managed services or vice versa. Try to include clauses in each contract that permit you to terminate one contract without liability if you terminate the other for cause. Service Level AgreementsYour contract should include meaningful metrics—that is, service levels—tailored to your operating environment and needs. Carefully review the vendor’s proposed exclusions from calculations of its compliance with the service levels. Good service levels become bad when surrounded by broad exclusions. For example, if unscheduled maintenance is excluded, there is effectively no service level. The contract should also require the vendor to provide regular reports on actual performance against the service levels, and service credits when performance falls below key service levels. Service credits in a managed network contract are likely to fall far short of compensating you for the costs incurred when you experience service level failures, and trying to fix this is, frankly, a waste of breath. It’s much more effective to keep a fat cushion in terms of commitment, and move (or credibly threaten to move) services that are not performing. That said, if performance is a priority, you should get better than what the vendor initially offers. For example, the vendor’s initial offer will likely make its obligation to grant service credits contingent upon your reporting an outage and requesting a credit within a very short period after the trouble occurs. In a managed network deal, management is key, and part of that should include the vendor’s responsibility for proactively posting service credits to your account. Finally, the service levels should include partial termination rights and associated commitment reductions in the event of chronic problems—and the definition of chronic problems will be critical. At the end of the term, the contract should require the vendor to provide assistance in the transfer of management services back in-house or to a successor manager. The transition period may run six to nine months depending upon the time you need to complete the transfer. During the transition period, the contract pricing, terms, and conditions (other than any minimum commitments) should continue. Without this, if you get near the end of the contract, the vendor will try to force you to renew by threatening you with large price increases that will take effect the day your contract ends. Negotiation Advice First, when considering a move to a managed network, customers typically underestimate the time required to prepare and release an RFP, evaluate proposals, and negotiate the contract. Too many customers think that it can reasonably take six months to prepare an RFP, three months to get back and evaluate bids, and then three weeks to negotiate a 100-200-page agreement and attachments. That’s silly, and plays into the hands of the vendor, who will urge you to sign early if you are negotiating from its forms (which will be the case in all but the largest deals). Be realistic about time frames. While there is nothing wrong with setting reasonable deadlines, make sure the vendor understands that you are in control of the process, so that deadlines don’t work against you. Second, try to settle on the key business terms before exchanging contract drafts—ideally, before you have winnowed down to one bidder—but bring lawyers in early to review the business terms and help you spot critical details. Issues will arise that you did not foresee, but having a reasonably comprehensive agreement on the business terms before drafting begins will save you time and expense in the long run. Finally, present a united front. If management and your negotiating team each sends different signals to the vendor, your bargaining leverage will be undermined. Deb Boehling is a partner and Bonnie Lo is an associate in the law firm of Levine, Blaszak, Black & Boothby LLP, a Washington firm that specializes in telecom law and contracts. Reprinted by permission of Business Communications Review (http://www.bcr.com); the text has been slightly abridged.