Use of Service Catalogues in IT Outsourcing Contracts

A service catalogue means different things to different people.  In the world of IT professionals, service catalogues are closely associated with the software that streamlines the procurement processes.  In the public procurement field, OGC Buying Solutions has negotiated a suite of framework agreements for purchasing goods and services from on-line “catalogues”.  In addition, service catalogues, in the sense of an additional set of services or items which can be ordered to supplement the “core” IT services, are increasingly forming part of large IT procurement and outsourcing contracts.  It is in this latter sense that service catalogues will be addressed in this article.

Recent experience has shown that service catalogues can cause confusion amongst commercial managers, contract managers and lawyers.  This article sets out to address this confusion by:

·         describing the term ‘service catalogue’

·         identifying the benefits associated with service catalogues

·         explaining how service catalogues work (or how they should work)

·         outlining particular restrictions that apply to service catalogues in the public sector

·         identifying the relationship between the service catalogue and other terms of the contract.

What is a Service Catalogue?

A service catalogue usually comprises a self-contained schedule to the main contract, in many cases with its own distinct procedure for ordering catalogue items.  Once appended as an afterthought, the service catalogue is increasingly being viewed as an integral part of the main offering.

The service catalogue sets out a number of pre-priced additional services or pre-priced additional goods which can be purchased or “called-off” by the customer (usually) throughout the term of the main agreement.  In legal terms, the service catalogue will usually be structured to provide the customer with a series of unilateral options to purchase at a fixed or readily calculable price.  Originally used to purchase standardised items (for example, PCs, printers and, consumables), service catalogues are increasingly used to purchase a more complex mixture of goods and associated services (for example, software package implementation, support and maintenance).

Benefits of a Service Catalogue

Implemented well, a service catalogue provides benefits for both parties.  From the supplier’s perspective:

(a)      the supplier gets a ready made distribution channel (possibly exclusive) for a fixed period of time

(b)      the supplier is provided with a means to increase its turnover

(c)      the supplier hopefully gets to provide the catalogue items at the same margins as, or better margins than, it has negotiated elsewhere in the agreement. 

Whilst the service catalogue represents a significant opportunity for the supplier, perhaps this should not be overstated.  The service catalogue comes with risks for the supplier in the sense that the grant of an option means that the supplier is obliged to comply with a request for catalogue items.  The customer by contrast has no comparable obligations.  Furthermore, the supplier is not permitted to ‘book’ any revenue linked to the service catalogue on signature of the outsourcing contract.  The sale of such items will not be capable of being recognised under UK accounting rules until the customer exercises the option to purchase and the sale of the relevant catalogue item is completed.

The service catalogue can provide the customer with a number of advantages:

(a)      it provides the customer with the flexibility to call down multiple options at a time that suits the customer – this is particularly important where a large project may require a high degree of flexibility to deal with a range of options and where price certainty must be established at the outset for budgetary approval

(b)      linked to this last point, the customer gets budgetary certainty

(c)      catalogue items should, in theory, work seamlessly with other parts of the system or services purchased on the basis that they originate with the same supplier

(d)      there is the added advantage of simplicity of ordering

(e)      for public sector clients in particular, there may be the attraction of avoiding an additional and expensive procurement process

(f)      in a contract which has been subject to a competitive procurement, the service catalogue could also offer the customer advantageous pricing which would be cheaper than purchasing individual items in the open market.

How the Service Catalogue Works

The service catalogue should set out a number of services or goods which will be capable of being called-off by the customer.  It would be good practice to ensure certain attributes are detailed at the outset in respect of each service catalogue item:

·         technical description – a description of the service or product to be included in the service catalogue

·         price and payment profile – the savvy supplier may link its prices to a recognised index in order to ensure that it does not lose out when the relevant item is called-off in several years’ time; the customer similarly may wish to spread payment (and an element of risk) over several milestones

·         unit of measurement – while this may comprise CDs or licences for software, in the case of services, it may be man days or hours, usually referenced by a rate card or else a price per job

·         minimum lead time for delivery or implementation – including these details will be particularly important from the perspective of a supplier who may otherwise have timing obligations implied from the main terms and conditions which he would otherwise seek to avoid

·         minimum quantity – the supplier’s pricing may be premised upon a minimum take-up – If this is the case, the supplier should expressly set out the minima which are to apply

·         assurance criteria

·         maximum period of availability of the catalogue item – if the catalogue item is not to be available throughout the term of the agreement or is to be available only for a limited duration, this should be made clear.

In addition to setting out the items which can be called-off, the service catalogue should ideally detail the mechanism for implementing the items once selected by the customer.  One way to do this would be to require the supplier to provide a response to a request for a call-off.  This may provide inter alia for provision of a mini-project plan, confirmation of the price payable and details of the contact names and purchase order numbers that apply.  If any of the details set out in the bullet points above have been omitted, it would be good practice to require these to be set out in this document. 

Once the response has been agreed by the parties, we would suggest that it should normally constitute an amendment to the agreement (but see our discussion below regarding this point).  The process of the customer ordering an item from the service catalogue is analogous to a request for a change under the change control procedure and this point needs to be borne in mind when drafting.[1]  Provisions which would not normally be included in the change control procedure (eg distinct provisions applicable to ownership of intellectual property in catalogue items) should be critically reviewed in order to assess whether they have any place in the service catalogue. 

Since many service catalogues are described as applying for the duration of the term of the agreement, the supplier should be particularly alive to the implications of binding itself to provide specific products or services at a fixed price for a number of years.  In essence, the customer is seeking to transfer to the supplier any risk in the costs associated with providing the relevant catalogue item.  We would suggest that a supplier should consider limiting the items in the service catalogue by:

·         including specific time limits on the period during which the relevant item can be called-off under the service catalogue – in the case of software for example, this would normally be in line with the committed date for support and maintenance

·         offering support and maintenance on only the latest version of the then current software release

·         bundling items together – making their availability contingent upon the provision of other items (for example, a software licence should only be provided with the addition of support and maintenance)

·         having a right to substitute alternative products of broadly equivalent functionality and performance

·         including the right to subcontract where a particular service is no longer provided.

Ensuring Competitive Pricing

As noted previously, one of the perceived benefits of the service catalogue to the customer is lower prices.  Although this may be true at the outset, prices can move dramatically (particularly if the supplier has linked his prices to an index) and, to maintain price competition, the customer will need to include other measures.  This could include a price reduction calculation (for example, ‘you will provide the x services at 10% below your list price’), a best customer price guarantee (for example, ‘the supplier will not offer the services to another customer of the supplier on more advantageous terms without immediately offering those terms to us’) or the inclusion of market surveys and benchmarking.  The canny customer will usually seek to ensure that any benchmarking and value for money provisions in the main agreement cover the catalogue services as well.  The supplier should be alive to this possibility.  In return for price reductions, the supplier may insist upon an exclusive supply arrangement for that particular item on the service catalogue or minimum volumes.

Special Public Procurement Considerations

Where the service catalogue is part of a contract with a public body, a key issue is the applicability of the Public Contracts Regulations 2006.[2] 

On one view, the Regulations recognise that the exercise of an option may involve a purchase under an existing contract rather than amounting to a new contract, by providing for the value of purchases under an option to be considered in applying the rules on thresholds.  A unilateral option contained in an existing contract is unlikely therefore to require further advertisement.  Such an assumption presumes that the original advert and procurement documents were appropriately drafted to refer to the purchase of the relevant goods and services.  Failure to ensure that the original advert and procurement documents were sufficiently widely drafted may mean that items are not strictly capable of being purchased without re-advertisement.

An alternative view is that a service catalogue is akin to a framework agreement.  The Regulations impose restrictions on inter alia the duration of framework agreements (which should not exceed four years) because of their perceived anti-competitive effect.  Accordingly, courts may imply limitations on the duration of rights under a service catalogue incorporated into an IT outsourcing contract to ensure conformity with the spirit and purpose of the directives as they apply to framework agreements.

In any case, an option under a service catalogue may still amount to a purchase which requires advertisement depending upon the nature and scope of the purchases under the option relative to the nature and scope of the original obligations set out in the agreement.  By way of example, if the original contract envisaged the purchase of 100 desktop computers and associated software, but the service catalogue is used to purchase twice that amount, the additional purchases should generally have been subject to advertisement.

In practice, however, the purchase of additional goods or services using a service catalogue are likely to be at low risk of a challenge under the Regulations since, save where they are extremely substantial, competitors are unlikely to hear about any additional purchases made. 

Relationship With Other Terms of the Contract

One Contract or Many?

When a service catalogue item is called-off, does it constitute an amendment to the existing contract or a new contract?  To some extent this is a matter for the wording of the contract.  Certainly, from a supplier’s perspective, there would normally be a concern to ensure that any call-off under the service catalogue falls within the existing contract; in circumstances where a new contract would be created using the same terms and conditions as the main contract, failure to ensure this point could have significant disadvantages for a supplier.  In particular, the cap on liability in the main contract could be reproduced in the call-off contract with a consequent massive increase in the liability of the supplier. 

From a customer’s perspective, in circumstances where the customer is a public body, the creation of separate contracts would also appear to risk breach of the procurement rules (even if, as noted above, discovery of such a breach by a potential claimant is less likely because it will not be publicised).  The problem here is that the authority would be awarding a contract which has not been subject to advertisement.

The only party likely to benefit from the multi-contract approach is therefore likely to be a non-public sector customer.

Termination for Convenience and Caps on Liability

Assuming that the call-off is incorporated into the main contract, a supplier will also wish to ensure that any substantial purchases under the service catalogue will result in a larger payment to the supplier in the event of termination for convenience.  The point here is merely that the formula used to calculate payments to the supplier in those circumstances should take into account the items called-off and amounts due for payment pursuant to the service catalogue.  Customers by contrast will also be keen to ensure that any increase in the scope of supply by the supplier results in an increase in the cap on liability.  In many circumstances these points will be dealt with automatically by a broad definition of ‘services’ (for example, where the cap on liability is calculated by reference to all fees paid in respect of the provision of services over a 12-month (or other) period).  In others, specific drafting will need to be incorporated to deal with each of these points or else one party may feel the need to put the issue beyond doubt.

Other Provisions of the Main Agreement

As previously noted, a customer will normally seek to ensure that the other provisions of the contract apply to any catalogue item.  It follows that the warranties and indemnities in the body of the contract apply to anything called-off under the service catalogue.  Occasionally, it may be appropriate for the customer to introduce additional warranties; for example it may be justifiable to require a warranty that the service catalogue item will correspond with the description set out in the service catalogue.  Suppliers on the other hand should be alive to the risk of additional supplementary warranties being imposed upon them which would incrementally increase the protection afforded to service catalogue items compared to other goods or services provided under the contract.

The logic above means that careful consideration should be given to each catalogue item to assess whether such provisions operate as intended throughout the term.  Provisions in the body of the terms and conditions such as those relating to intellectual property rights, liquidated damages, service levels, service credits, price indexation and benchmarking are likely to apply.  A supplier should, for example, be aware of the possibility of a unilateral price reduction applying following a benchmarking exercise midway through the contract which may make the supply of the catalogue item inherently uneconomic.

Concluding Remarks

Used wisely, a service catalogue offers both the customer and the supplier significant benefits.  As stated, there are particular issues that relate to public sector bodies in the regulations.  Key for both parties however is the need to think through how each catalogue item (and any specific terms that apply to it) relate to the other terms of the contract and whether qualification or exclusions are required.  This should not be left to chance.  There are risks for both parties in getting it wrong.  The customer may not be able to call-off the desired catalogue items; the supplier may be obliged to provide the relevant item at a loss or else pay damages for breach.  In our view, service catalogues require more thought than is usually afforded them.

 

Andrew Withers is a Solicitor in the Technology Law Group at Field Fisher Waterhouse LLP; www.ffw.com.