Managing risk in IT contracts

By Lilia Guan
The recent bankruptcy filing of Kodak Eastman showed that even well established companies are susceptible to financial problems.

This means that government agencies must factor in risk management with all of their IT contracts – no matter how long the vendor has been around for.
Ovum Australia public sector IT research director Kevin Noonan, told Government News there were a number of things agencies must consider with Kodak’s recent Chapter 11 filing.
“I think Kodak’s position watched carefully position parent company filed is Chapter 11, doesn’t necessarily going out of business, it can also be protection from creditors,” he said.
“If any agencies have a hardware supply contract, they must ensure that their own supply of equipment is confirmed and services contracts can be moved with no problem.”
Mr Noonan said two big questions agencies must ask in the Kodak situation are; what is their legal contractual position? The other question is what are the practical steps needed to ensure there’s no disruption to the agency.
“In a legal sense there are usually clauses within a contract specify deliverables then that’s reason for terminating a contracting, signed with an entity if the entity changes can.”
However termination for convenience might be considered if either the agency or supplier in the relationship can’t continue.
“There are ways of severing the contract, the government department must be aware of their contractual position,” Mr Noonan said.
“Where Kodak is being used for equipment maintenance make sure there’ll be a service provider that will be able to pick up the work.”
When a supplier goes through an upheaval with their business, it really signals a time for an agency to really start thinking about plan b and it would be important for all concerned to consider alternative plans, Mr Noonan said.
“If you look at the practicalities of government contracts – they are valuable assets and in any wash up another company will have some interest in taking up that work making it less likely agencies will be left high and dried,” he said.
“However if services can’t be guaranteed then agencies need to start to think about alternatives immediately.
“The Kodak situation was an important reminder that no matter how big or established a supplier is – over the period of a contract there might be significant of problems that arise.”
Mr Noonan said there are three levels of risk for a government agency; services –  are other service providers be able to step in (level of risk isn’t that great); provision of hardware – problems could arise if access to alternate supplier and maintenance aren’t available however so long as agencies have been assured of alternate suppliers.
“The big challenge in risk management is software contracts, because it requires significant investment to train staff in use of software and there’s long term investment involved – depending on the size of the install base,” he said.
“Alternate suppliers could take over the software contract if there are open standards, but a clear migration path might be much more difficult depending on the level of customisation.”
Mr Noonan said high agencies are very much locked into existing software contract and it will be difficult to find ways around any disruption to their contract.
“Kodak’s bankruptcy filing was a timely reminder that no company is 100 per cent safe and departments must really consider risk as part of any tender evaluation.
“Risk management is looming large as today’s big issue for IT contracts.
“In the past it was thought that a government agency could keep on running without technology, but those days have long passed and now become a
ridiculous scenario.”

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