In this first installment of Tips on Tech Contracts we will focus our attention on some of the most common types of information technology agreements – software licenses and IPR assignments, cloud agreements, professional services and managed services agreements and hardware agreements.
Software licensing agreements and IPR assignments
At the core of each software licensing agreement sits the license grant. Through this key provision the vendor grants certain limited rights to the customer but keeps ownership and title of the software. In this way, a software license resembles a rental agreement – you can use a flat (the piece of software) as long as you pay the rent (license fee) but ownership always stays with your landlord (the software vendor). Usually, the two main rights granted through a software license are the reproduction right (the right to make copies) and the right to use/run the software. As per statutory law, the reproduction right is an exclusive right of the copyright holder and thus the only way for the software user to have it is through a license grant. Unlike it, the right to use or run the software does not have a statutory nature. However, its rationale flows from practical reasoning – what would be the value of having a copy of the software if you cannot use that copy? Obviously, when you pay for a copy of a book you don’t also ask for a right to read that book. Therefore, it could be argued that the right to use the software is implied by the mere grant of the reproduction right. Nevertheless, the majority of software licensing agreements tend to explicitly mention the right to use/run the software. The license grant could also include additional rights – the right to distribute the software, to modify and create derivative works, to sublicense, etc. Those however are optional and largely dependent on the will of the vendor and the nature of the deal.
Quite often, software licensing agreements come hand in hand with a maintenance and support agreement for the licensed product. Simply stated, maintenance is the provision of updates and upgrades to the software against a recurring fee. Support is the provision of technical help from qualified vendor employees via phone or email when it comes to questions regarding the proper functioning of the software. When it comes to software, support is a reactive service (after an issue is encountered by the customer) while maintenance is a proactive one (the vendor replaces minor bugs on its own initiative through a newer version).
Finally, the software vendor may decide to transfer all IP rights to the customer instead of granting a license. This can take place in the scenario of customized software that is tailored to the specific needs of the customer. Such IPR assignment entails a permanent transfer of all intellectual property rights in the given software towards the customer who will then become the new owner of the IP rights. As the vendor will no longer be able to commercialize such software the charge for the IP assignment will be significantly higher than a license fee.
Cloud services agreements
In short, “cloud” is a specific service delivery model. Under that model, the end user obtains on-demand access to various computing resources that are provided by a vendor over a public network – the Internet. There are three distinct service models under the cloud umbrella – Infrastructure as a service (IaaS), Platform as a service (PaaS) and Software as a service (SaaS). The difference between the three lies in the scope and breadth of computing resources that are provided by the vendor.
Under IaaS, the customer obtains remote access to hardware resources (equipment located in a data center operated by the cloud vendor). This includes servers, storage, network and virtualization.
Under PaaS, the customer obtains access to all above-mentioned hardware resources but also with a platform on top of them with an installed operating system and middleware. This platform could be likened to a sandbox where software developers can show their talent – it provides all the necessary tools for creating and running software applications.
Finally, the SaaS model provides the end user with access and use of a software application that is entirely managed by the cloud vendor (i.e. in the SaaS model all 3 layers – hardware, platform and application are managed by the cloud vendor). Prominent SaaS examples include Netflix, Gmail, Dropbox, Office 365, Salesforce.
There is an important difference between the SaaS model and the traditional software licensing model. In a traditional software license the end user always receives a copy of the software – either through physical media (CD or USB drive) or through an installation file that is downloaded from a server of the vendor. Under SaaS, you do not have a copy of the software installed on your computer. Instead, you access the software through a web client over the Internet just by using a username and a password. Accordingly, the software application is installed and running on servers that are “in the cloud” (i.e. in a data center operated by the SaaS vendor). In such a model there is no need to create and distribute copies.
Cloud vendors of all three service models mentioned above comply with a SLA policy that sets the quality parameters of the services that they provide. (See below for an explanation of the term SLA)
Professional services agreements
These are agreements that are focused on project work. They address a specific problem or challenge for an organization that is usually tackled with a one-time effort (no matter short or prolonged in time) and not with ongoing involvement. For example, if an organization wants help from a vendor to roll out new hardware, implement a new security solution or reorganize its network, this will be dealt with through a professional services agreement. Other typical examples of professional services are software development and customization, consulting and advisory services, training. In general, professional services allow for very high degree of customization so that specific customer needs can be met. A frequent component of a professional services agreement is the rate card – a document that sets the hourly rates for the types of professionals that will be involved in the project work. The actual rates vary based on the experience level of the positions and their geographical location (on-site, near-shore or off-shore).
Managed services agreements
Unlike professional services which denote a one-time job, those are agreements focused on ongoing work and they can cover multiple aspects of the IT needs of an organization on a daily basis. The managed services vendor is providing a capability across a term for a recurring charge. To go back to our previous example, let’s say that you have successfully reorganized your network but now going forward you need regular 24×7 network monitoring and alerting. In this case you will need help from a managed service provider. Or you have rolled out your new hardware or installed your new security software but now you need ongoing maintenance and support for them. Once again you will need to sign an agreement with a managed service provider. Unlike professional services where you pay for the completion of the project or dedicated task, in managed services there usually is a recurring monthly charge. Additionally, the managed service provider will have to comply with a SLA (service level agreement). This is not a separate contract between the parties but a technical document within the framework of the main agreement. The SLA deals with the availability or uptime of the provided service, which is usually measured in percentage (such as 99.99% availability). It can also deal with specific requirements for support services such as required response time and required resolution time in case of an IT incident. If the levels set in the SLA are not met, the vendor will usually have to pay penalties or provide service credits to the customer.
Hardware agreements
Hardware agreements deal with obtaining IT equipment such as servers, desktop machines or laptops, routers, switches, firewalls, power supply units etc. Unlike software, there is an actual physical delivery when it comes to hardware. This could entail additional requirements when it comes to the delivery of equipment for data centers or internal departments where the hardware will not just be delivered but will also have to be installed and configured. Frequently, hardware is not purchased from the manufacturer (the actual term being OEM – original equipment manufacturer) but from one of its authorized resellers or channel partners. There are various financial strategies available when it comes to obtaining hardware – direct purchase, finance lease, operating lease, etc. The right choice depends on the needs of an organization and its internal capabilities. In the same way as with software licensing agreements, hardware also comes with support and maintenance options provided either by the original manufacturer or its reseller. The maintenance takes the form of repairing or replacing a failed unit while the technical support is usually provided via phone or email. Many vendors provide different tiers of support and maintenance which are accordingly packaged into different service plans (for example, silver and gold packages with extended working hours for technical support).
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