IT Outsourcing Contracts: Practical Issues for Management

A good contract is often the key to a successful IT outsourcing relationship. The contract defines the rights, liability, and expectations of both the outsourcing vendor and the outsourcing customer concerned and is often the only solid mechanism for regulating the relationship of the parties. Outsourcing contracts are often of high value and last a relatively long time. It is therefore of particular importance to get them right first time. Research on IT outsourcing contractual issues tends to be mostly theoretical and very limited in scope. There is relatively little literature available on the systematic and practical treatment of issues relating to IT outsourcing contracts. Lacity and Hirschheim's seminal work (1993) represents a major step in that direction, offering important lessons learnt in contract negotiation. This article builds further on that direction by presenting a practical and systematic overview of some key IT outsourcing contractual issues, exploring and highlighting management implications where appropriate. Issues such as service level, transfer of assets, staffing, pricing and payment, warranty and liability, dispute resolution mechanism, termination, intellectual property matters, and information security are discussed in this article. Practical advice on pre-contractual negotiation and postcontractual management is also given. By discussing these issues systematically from a management and practical perspective, this article contributes to bridging the gap between theory and practice and offers useful information to management considering IT outsourcing.