How To Protect Yourself When You Subcontract

By Geoffrey James

Given the shortage of trained IT professionals, it’s not surprising that many software vendors turn to third-party firms for customer-specific integration and customization work. Studies have shown that as many as half of these outsourcing deals go sour, which can put you (as the primary vendor) in an uncomfortable position. Worst case, you could be blamed for the failure, thrown out of the account and even sued for non-delivery. Here’s how to protect you and your company against a subcontractor that fails to deliver as promised:

• DO your homework. Shop around and talk to your customers and contacts in the industry to see whether they’re happy with the subcontractor in question. Visit the subcontractor’s shop before you hire them. This gives you the opportunity to assess first-hand how they operate and whether or not their engineers and programmers are professional and capable. Finally, get permission to visit some real user sites, preferably where work similar to what you need has been successfully completed.

• DON’T forget to interview. Software vendors who are normally very careful in hiring permanent employees are often willing to let their subcontractor assign key roles to contractors, sight unseen. Be sure you understand how much time each consultant will spend on your project and whether the work will be done on site or in the consultant’s offices.

• DO demand a “needs analysis.” Before signing any contract, ask the subcontractor to do a detailed needs analysis of the project at hand. The vendor should be able to identify exactly what changes need to be made to your software in order to make it effective for your customer. This allows both you and the subcontractor to assess the total cost of the customization/integration work and gives you a chance to assess how the subcontractor approaches a project.

• DON’T depend upon your own lawyers. When dealing with subcontractors, some sales managers make the mistake of thinking that they don’t need a lawyer who specializes in outsourcing litigation or that they can simply draw on the experience of their company’s own lawyers. But software litigation is a relatively new field and few lawyers have either the legal or the technical training to understand the issues involved. Hire an expert.

• DO have regular status reviews. According to Gartner, only 44 percent of customers of IT outsourcing hold monthly performance reviews and almost 25 percent hold performance reviews only on an “as-needed” basis. That’s courting disaster, because the process of successful arbitration in software outsourcing deals depends entirely upon having complete records of what went wrong, and when, and what was done to correct the problem.

• DON’T limit the subcontractor’s liability. Avoid contract clauses that limit the amount of time that you have to bring suit should the project go sour. Many contracts written by subcontractors stipulate that you have "one year" in which to sue. A year, however, can easily be eaten up while the subcontractor tries to fix the problem — at which point it’s too late to sue. Also avoid contract clauses that limit damages to the amount that has been paid to the subcontractor. If your contract includes such a clause, you can’t recover consequential damages – money that the company lost as a result of the software project’s failure.

The above is based upon conversations with attorney Tobey Marzouk, a partner at Marzouk & Parry, a Washington D.C. law firm that specializes in outsourcing litigation.