Monday, 25 February 2013

How and When Should I Use Operational-Level Agreements (OLAs) in Business-Critical IT Procurements?

I thought that this week I could look back at some IT issues as opposed to investments of which I wrote last time, as after all, this is one of my all-time favourite sectors. So nowadays big data, agile methods and cloud computing with all complexities relating to privacy and data transfers seem to reserve the largest amount of coverage in seminars and press (as some of you may now - we also had a fair share of privacy lectures and discussions last spring!). However, perhaps due to that I decided that I will not speak about these "trendy" themes, but rather focus on contract models and business case structuring which I claim is still slightly neglected area in business-critical IT procurements. So I tell you some background and what we have been doing recently:

In information technology sector, there has been a clear trend towards multi-sourcing environments which is naturally due to specialization and fragmentation trends (these trends can also be recognized to apply generally to the Finnish technology industry, see for example Tuotekehitysverkostojen-uudet-toimintamallit, slightly old but still relevant). While some years ago, most of the deals were carried out with one single vendor. Today, there are several parties involved, and now the focus in on integrators and developing business models of the service integrators.

So where's the beef? Companies use more and more multi-vendor models with the intent to access best-in-class capabilities and improve their negotiation position. Another obvious driver behind this trend is the fact that different IT service providers have different strengths, capabilities and cost structures. From the legal side, the critical challenge caused by this development is to ensure that all suppliers will work together on the arrangement.

As a result, we have seen lots of talking and discussions on operational level agreements or OLAs trying to bind different suppliers participating in a single project to work together. For example, the following issues have been on the agenda:
  • Confidentiality;
  • SLA sanction mechanism;
  • Disaster recovery, testing and similar obligations;
  • Creation of ”Fix it first, argue later” – approach across the suppliers;
  • Intellectual property ownership questions;
  • Escalations and disputes;
  • Change management if more than one supplier is affected;
  • IT standards;
  • Exit; and
  • Retendering procedures.
These OLAs have not really been very popular in the past and that is partly due to the fact that IT vendors are naturally not keen on taking liability on their co-vendors' act and omissions (outside ordinary subcontractors of course). However, one of my old friends had a saying that "...if I can get my opponent to accept my contract template, they have already swallowed 90% of my hooks". So we went to consider this further and perhaps one reason why these OLAs have not gained footing could also be that customers have not sufficiently consistently required these already in their RFP or RFQ documents and planned their contractual models accordingly. So we decided to test this and implement novel OLA-based RFP and RFQ templates to be used in connection with collaborative models among multiple vendors with lists of joint carrots to be achieved!
Another solution could also to be to develop service integrators, in other words, companies who will take part of the cost-savings if compared to the multi-sourcing environment in its pure form, but who will take wider role and contractual responsibility for the integration if compared to the earlier system-integrators. It should also be noted that in part of the outsourcing deals there have been discussions on right KPIs to be measured and here the trends has constantly been more towards quality and business related KPIs than slightly old-fashioned “uptime” or “restoration time”. 

Next thing is to consider how service integrator models deviate from current existing system-integrator models, but in the meanwhile let's wait for lots of positive feedback from the vendors’ side from the first OLA-RFP/RFQ case!

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