Out clauses

I’m seeing an increasing number of IT buyers try to negotiate “out clauses” in their contracts — clauses that let them arbitrarily terminate their services, or which allow them to do so based on certain economy-related business conditions.

People are doing this because they’re afraid of the future. If, for instance, they launch a service and it fails, they don’t want to be stuck in a two-year contract for hosting that service (or colocating that service, or having CDN services for it, etc.). Similarly, if the condition of their business deteriorates, they have an eye on what they can cut in that event.

We’re not talking about businesses that are already on the chopping block — we’re talking about businesses that seem to currently be in good health, whose prospects for growth would seem good. (Businesses that are on the chopping block, or wavering dangerously near it, are behaving in different defensive ways.)

Providers who would previously have never agreed to such conditions are sometimes now willing to negotiate clauses that address these specific fears of businesses. But don’t expect to see such clauses to be common, especially if the service provider has an up-front capital expenditure (such as equipment for dedicated, non-utility hosting). If you’re trying to negotiate a clause like this, you’re much more likely to have success if you tie it to specific business outcomes that would result in you entirely shutting down whatever it is that you’re outsourcing, rather than trying to negotiate an arbitrary out.

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Posted on May 7, 2009, in Industry and tagged . Bookmark the permalink. 1 Comment.

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