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Offshore Software Development Companies: How to Negotiate Contracts?
Alongside multiple benefits, like saving costs or increased flexibility, offshore IT services also present challenges and risks, including compliance concerns. Thus, negotiating fair and transparent contracts and service level agreements (SLAs) with your offshore software development company is crucial for preventing disputes and ensuring smooth collaboration.
Don’t leave anything to chance - read on to familiarize yourself with vital elements of a secure IT outsourcing contract.
Contract, SLA, and NDA for offshore software development company
An ideal contract should accurately reflect the development progress, anticipate potential problems with proposed solutions and address any substandard code that could compromise the software functionality.
Here are several factors you can take into consideration when drafting a contract:
- Code quality: The contract should comprise a consensus on coding standards
- Intellectual property rights: Ensure that you have full ownership of your intellectual property rights. This measure safeguards your business from abrupt termination without access to source codes or modification controls. It also prevents the outsourcing firm from reusing your codes for possible rivals in the future.
- Maintenance and support: Specify the duration and the scope of items that will be supported by your tech partner following their delivery
- Project scope: Entail the deliverables based upon the iteration and the list of features/user stories, broken down into WBS and CPA. This inspires the dedicated software team to aim to build the best possible product instead of sorely focusing on meeting deadlines.
- Payment milestones: You can opt for various payment schedules such as monthly, quarterly, or tying payments to significant project milestones
- Termination clause: Define the necessary actions that must be taken in the event of termination, not only in the case of a successful project but also if the project fails to reach completion
- Indemnity: The term deals with the risk of shared liability and specifies who is responsible for legal fees and any potential lawsuits that may arise in the future
- Jurisdiction of resolution of issues: Given that software outsourcing is a global business practice, it’s crucial to identify the jurisdiction and applicable law that will govern any disputes that may arise
Service Level Agreement (SLA)
SLAs are common in the IT industry, where they are used to define the level of service that a company will receive from an offshore software provider. They also provide a framework for measuring and reporting on the offshore dedicated software team's performance, which helps identify areas for improvement and ensure that the provider is meeting its obligations.
In our opinion, it would be beneficial to have a distinct SLA document for significant contracts. This way, updates to the SLA can be made more frequently without having to modify the contract itself. Normally, contracts can span several years, whereas SLAs can be evaluated on a quarterly basis. This approach aids in reducing the frequency of contract reviews, thereby alleviating the related workload.
Non-Disclosure Agreement and Non-Compete Agreement
When dealing with offshore software development companies, NDAs and NCAs become particularly important due to the sensitivity of the shared information and the potential risks associated with outsourcing.
Best practices for contract negotiation with offshore software development companies
Conduct your research beforehand
Before negotiating, take the time to research their market position, competitors' prices and what companies like yours pay for comparable products/services.
Additionally, consider using vendor management services like Vendor or Zylo, asking your professional network on LinkedIn, or consulting online discussion forums such as Reddit, Hacker Noon, or Hacker News.
Clarify the agreement scope
To prevent issues with pricing and scope of services, also known as "scope creep," it is crucial for both parties to have an open and honest discussion during contract negotiations. Typically, vendors charge a base price for their services and add separate fees for any additional work, such as consulting for specific projects. If the vendor intends to negotiate subcontracts, it's important to discuss the scope of services early on in the process.
In the case of IT outsourcing agreements, if the customer requires ad hoc administrative services, it may be preferable to negotiate a hybrid model of fixed and variable fees.
Additionally, suppose the customer needs to modify the scope of services at specific milestones, such as an annual review based on usage patterns or a significant merger or acquisition. In that case, both parties should consider how adding or eliminating certain services will impact the margins. If the base service price combines low- and high-margin countries into a "blended rate", removing high-margin services could significantly alter the contract's overall value.
Involve the right person
When negotiating an IT contract, it’s not recommended to rely solely on a legal team. This approach can result in poor outcomes as lawyers may not have a deep understanding of your business context or project goals.
Instead, it’s advisable to assemble a well-rounded team that includes both product owners and legal specialists. The product owners can ensure that the contract accurately reflects the project’s reality and aligns with the goals of both parties, while the legal team can make sure of the deal’s legitimacy.
Negotiating a contract is a detailed process that demands precise planning and execution. Hence, it’s crucial that you find an experienced offshore software development company that can assist you in navigating the specifics of an IT contract, customizing terms, and creating an effective agreement that accounts for both parties’ interests
With over a decade of experience, we have partnered with numerous clients worldwide, including those in the US, Australia, Singapore, Malaysia, and beyond. Our expertise allows us to develop efficient collaboration frameworks that cater to our clients' unique requirements and needs.
If you’re searching for a reliable offshore tech provider that prioritizes mutually beneficial collaboration, get in touch with us.