Contracting in the Cloud: An Interview with Shawn Helms, Partner, K&L Gates [Part 1]

I’ve been saying for quite some time that buying and contracting for shared, multi-tenant cloud platforms is a revolution – not just for IT, but for legal, procurement and just about everyone else as well. Nowhere is this revolution more evident than in the contracting process. Transitioning from 1,000-page, custom contracts to 50-page, standardized agreements is a monumental shift for both buyers and sellers.

It’s this context that led me to interview K&L Gates Partner Shawn Helms. Shawn and I met at an Outsourcing Institute event earlier this year – his deep background in operational IT, his J.D., and his boots-on-the-ground experience in cloud immediately caught my eye. Here’s Part I of my interview:

Hi Shawn, can you tell us a little bit about your background?

Sure. I’m a partner in the Outsourcing and Technology Transactions practice group at the law firm of K&L Gates.  I’m a technology nerd at heart.  My earliest jobs were in computer programming.  I have three undergraduate degrees – Computer Systems, Economics and Business Administration from William Jewell College.  I studied technology law and got my J.D. from Georgetown University Law Center.  Before becoming a lawyer, I was the Director of Information Technology at the law firm of William & Connolly and an adjunct professor in the technology department at the University of Virginia.  I spent the past twelve years as a lawyer advising companies on technology law issues, specializing in outsourcing.  I’m also the co-author (with a partner of mine at K&L Gates, Jason Krieser) of a legal treatise on outsourcing law titled “Outsourcing:  Law and Business”.  In this treatise Jason and I give detailed treatment to all material legal and business issues in outsourcing deals and discuss how changes in technology (such as cloud computing) and deal dynamics are changing the outsourcing industry.

What really jumped out at me was your “contract size” demonstration at the Outsourcing Institute event – can you talk a bit about that and how you see that as a metaphor for what’s happening in the sourcing industry?

Today’s sourcing transactions are smaller and more targeted.  Consider the IT outsourcing deals of 15 years ago. These were full scope, exclusive, custom, long term high value deals, often with a single United States-based provider.  These deals also often involved the transfer of people and assets.  Deals look dramatically different in 2013.  ISG knows this better than anyone.  The ISG data and our experience shows that today’s IT outsourcing deals have a much shorter term (e.g., three years) with a smaller deal value.  These deals are almost never exclusive.  Customers are allowing providers to implement their “standard” solutions instead of inheriting the customer’s existing process and systems.  The transfer of people and assets is rare.  The scope of services is often divided between multiple providers, many times with an overseas company in the mix.  Competition in the IT outsourcing space is fierce with Indian and European providers now competing with US providers in every area, including tier-1 infrastructure deals.  This would have been unheard of 10 years ago.  Add to this maybe the single biggest change agent in IT today – the rise of cloud computing – and we find ourselves in an entirely new IT outsourcing environment.  Many short term, smaller deals, with multiple providers implementing standard solutions and cloud computing.

What does all this mean and how does it relate to the size of a legal document?  For one, these changes mean that IT outsourcing customers are doing more, short term, outsourcing transactions with smaller deal sizes.  As a result, customers are demanding a decrease in deal completion time and a decrease in the transaction costs related to closing an outsourcing contract.  Historically these deals could take one year to complete and cost millions of dollars in transaction costs.  That is completely unacceptable when deal terms are 3 years and deal values are smaller.  The current market realities demand fast closure and decreased costs.  We recognized that and started thinking about how, as lawyers, we could help streamline the contract process.

There’s a ton of conversation in the industry about this subject, but frankly, the actual implementation is still nascent on a large scale. How are you tackling this on today’s deals?

We started by looking at many different IT outsourcing contracts.  We looked at contracts from other law firms, consultants and even some providers.  What we found is that almost all standard master IT outsourcing contracts were bulky with too many bells and whistles.  As we looked closer, it was clear that these contracts don’t reflect market realities.  Do we really need a most-favored-customer clause?  How about an elaborate benchmarking process when the deal is only 3 years long?  Is a complicated intellectual property clause really necessary when very little IP is being created?  Why do all these form contracts anticipate a significant transfer of assets and people when this is often not a part of an outsourcing deal today?  These contracts are the result of years and years of experienced, smart outsourcing attorneys adding “helpful” provisions from their previous deal to the organizations form contract.  Sometimes these contracts are over 100 pages in 10 point font.  These contracts had grown into bloated monsters.  Using these monsters as a starting point for negotiations caused customers and providers to waste time and money.  We saw a dire need to push the reset button and build a more modern, targeted, streamlined contract that contained all the essential elements of an outsourcing agreement but recognized current market realities.

So, we took our standard form outsourcing agreement and then spent several weeks cutting, adding and revising.  We didn’t start from a blank sheet of paper, but we did challenge everything.  The result is a master outsourcing contract that is 32 pages long (in 12-point font) that contains all the necessary provisions customers expect in an outsourcing agreement.   In our experience, this streamlined contract is helping decrease the time spent negotiating the master agreement.

When a customer wants to adopt a more standardized cloud service, and expects to be able to negotiate terms and conditions like a traditional outsourcing contract, how do you counsel them?  What form of contract document do you use in pure cloud deals?

To use a worn-out phrase, it’s apples and oranges.  When a customer is looking to purchase a cloud solution (i.e., software-as-a-service, infrastructure-as-a-service, or platform-as-a-service) they are almost always purchasing a standard, leveraged solution.  Remember that most historical outsourcing contracts where built with the idea that the provider was taking over the customer’s IT environment.  A cloud purchase is exactly the opposite.  The customer is purchasing and using the provider’s IT environment.  Historical outsourcing contracts spend most of their words defining the scope and dictating the level of performance that is required.  Think of cloud service as a product.  You don’t need much scope definition or many performance guarantees.  The incentive to provide a strong and broad service that has high availability is inherent in the offering.   If the performance of the platform is poor, the provider’s entire customer base is at risk.

That is a long way to say that we never recommend a standard outsourcing contract as the starting point for the purchase of a cloud offering.  Instead, we start with our standard “cloud” agreement if the customer wants to use their own paper.  However, the provider knows the unique aspects of their solution and pricing model better than the customer and often has a solid contract that is the best starting point.  Therefore, most often, we actually advise the customer to start with the provider’s contract.  Crazy right?

Look for Part II of my interview with Shawn next week. In the meantime, we’d like to get your feedback – how are you addressing the cloud contracting process? 

About the author 

Stanton helps enterprise IT and sourcing leaders rationalize and capitalize on emerging technology opportunities in the context of the global sourcing industry. He brings extensive knowledge of today’s cloud and automation ecosystems, as well as other disruptive trends that are helping to shape and disrupt the business computing landscape. Stanton has been with ISG for more over a decade. During his tenure he has helped clients develop, negotiate and implement cloud infrastructure sourcing strategies, evaluate and select software-as-a-service platforms, identify and implement best-in-class service brokerage models, and assess how the emerging cloud master architecture can be leveraged for competitive advantage. Stanton has also guided a number of leading service providers in the development of next-generation cloud strategies. Stanton is a recognized industry expert, and has been quoted in CIO, Forbes and The Times of London. You can follow Stanton on Twitter: @stantonmjones.