EN 17371-2:2021

SLOVENSKI STANDARD
01-januar-2022
Zagotavljanje storitev - 2. del: Pogodbe o storitvah - Navodilo za oblikovanje,
vsebino in strukturo pogodb
Provision of services - Part 2: Services contracts - Guidance for the design, content and
structure of contracts
Dienstleistungserbringung - Teil 2: Dienstleistungsverträge - Leitlinien für die Gestaltung,
Inhalt und Struktur von Verträgen
Prestation de services - Partie 2 : Contrats de services - Recommandations pour
l’élaboration, le contenu et la structure des contrats
Ta slovenski standard je istoveten z: EN 17371-2:2021
ICS:
03.080.01 Storitve na splošno Services in general
2003-01.Slovenski inštitut za standardizacijo. Razmnoževanje celote ali delov tega standarda ni dovoljeno.

EN 17371-2
EUROPEAN STANDARD
NORME EUROPÉENNE
November 2021
EUROPÄISCHE NORM
ICS 03.080.01
English Version
Provision of services - Part 2: Services contracts - Guidance
for the design, content and structure of contracts
Prestation de services - Partie 2 : Contrats de services - Dienstleistungserbringung - Teil 2:
Recommandations pour l'élaboration, le contenu et la Dienstleistungsverträge - Leitlinien für die Gestaltung,
structure des contrats Inhalt und Struktur von Verträgen
This European Standard was approved by CEN on 21 June 2021.

CEN members are bound to comply with the CEN/CENELEC Internal Regulations which stipulate the conditions for giving this
European Standard the status of a national standard without any alteration. Up-to-date lists and bibliographical references
concerning such national standards may be obtained on application to the CEN-CENELEC Management Centre or to any CEN
member.
This European Standard exists in three official versions (English, French, German). A version in any other language made by
translation under the responsibility of a CEN member into its own language and notified to the CEN-CENELEC Management
Centre has the same status as the official versions.

CEN members are the national standards bodies of Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia,
Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Norway,
Poland, Portugal, Republic of North Macedonia, Romania, Serbia, Slovakia, Slovenia, Spain, Sweden, Switzerland, Turkey and
United Kingdom.
EUROPEAN COMMITTEE FOR STANDARDIZATION
COMITÉ EUROPÉEN DE NORMALISATION

EUROPÄISCHES KOMITEE FÜR NORMUNG

CEN-CENELEC Management Centre: Rue de la Science 23, B-1040 Brussels
© 2021 CEN All rights of exploitation in any form and by any means reserved Ref. No. EN 17371-2:2021 E
worldwide for CEN national Members.

Contents Page
European foreword . 3
Introduction . 4
1 Scope . 5
2 Normative references . 5
3 Terms and definitions . 5
4 Purpose of a service contract . 6
5 Service contract structures . 6
6 Content of a service contract . 7
6.1 General. 7
6.2 Who is entering into the service contract? . 7
6.3 What are the services – how are they specified, ordered and what are the service
performance targets? . 8
6.4 How are charges calculated and paid? . 13
6.5 What legal system governs the service contract? . 16
6.6 How will the contracting parties deal with disputes? . 16
6.7 What is the exposure? . 17
6.8 What intellectual property rights are there in, and to, the service outputs? . 18
6.9 When does the agreement commence, how is it terminated and what are the
consequences of termination? . 19
6.10 What considerations relate to information/data? . 20
6.11 Making changes to the agreement and the contracting parties’ relationship . 21
6.12 What other terms need to be considered? . 22
Annex A (informative) Service scope and description . 25
Annex B (informative) Pricing models . 28
Annex C (informative) Exit management . 30
Bibliography . 33
European foreword
This document (EN 17371-2:2021) has been prepared by Technical Committee CEN/TC 447 “Horizontal
standards for the provision of services”, the secretariat of which is held by BSI.
This European Standard shall be given the status of a national standard, either by publication of an
identical text or by endorsement, at the latest by May 2022, and conflicting national standards shall be
withdrawn at the latest by May 2022.
Attention is drawn to the possibility that some of the elements of this document may be the subject of
patent rights. CEN shall not be held responsible for identifying any or all such patent rights.
This document has been prepared under a Standardization Request given to CEN by the European
Commission and the European Free Trade Association.
Any feedback and questions on this document should be directed to the users’ national standards body.
A complete listing of these bodies can be found on the CEN website.
According to the CEN-CENELEC Internal Regulations, the national standards organisations of the
following countries are bound to implement this European Standard: Austria, Belgium, Bulgaria, Croatia,
Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Ireland,
Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Norway, Poland, Portugal, Republic of North
Macedonia, Romania, Serbia, Slovakia, Slovenia, Spain, Sweden, Switzerland, Turkey and the United
Kingdom.
Introduction
This document is part of a series of European Standards that address different phases in the provision of
services (see Figure 1): the service procurement phase (EN 17371-1), the service contracting phase
(EN 17371-2) and the service execution phase (EN 17371-3).
Each part of the series can be used individually or in combination with the other parts.

Figure 1 — Phases in the provision of services
The drafting of the series was initiated after CEN presented the findings of a study on the potential and a
possible impact of horizontal service standards on the EU single market for services. This study was as a
response to mandate M/517 from the European Commission for programming and development of
horizontal service standards. The objective of this mandate was to encourage the development of
voluntary European Standards covering issues common to many service sectors. Such standards should
aim to facilitate compatibility between service providers and improve information and the quality of
services to the recipient.
This document addresses the service contracting phase and has been developed to provide organizations
with guidance on the design, content and structure of service contracts. No part of this document is
intended to be mandatory for inclusion in a service contract; rather it is structured to enable
organizations entering into a service contract to identify the solution best suited to achieve the intended
business outcomes. The guidance lists the key contents of a service contract that organizations might
consider as part of the broader solution being contracted. Based on the nature of services being
contracted, the service buyer and service provider can decide upon the specific content for their service
contract. This document does not provide guidance regarding the applicable legal rules and regulations.
1 Scope
This document provides guidance on the design, content and structure of service contracts. It is aimed at
service buyers and service providers entering a contractual relationship who do not necessarily have
legal training. The guidance set out in this document does not constitute legal advice.
This document is applicable to:
a) service buyers and service providers regardless of type, size or the nature of the services;
b) service providers who may be inside or outside the service buyers' organization; and
c) any interested parties who are directly or indirectly involved in or affected by a procurement
process.
This document is not applicable to service contracts where the service buyer is a consumer, nor for works
contracts.
NOTE 1 “Works contracts” are contracts that have as their object the execution, or both the design and execution,
of a work are not covered. Contracts having as their object only the design of a work are covered.
NOTE 2 “Work” means the outcome of building or civil engineering works taken as a whole which is sufficient in
itself to fulfil an economic or technical function.
NOTE 3 “Consumer” means an individual member of the general public purchasing or using services for private
purposes.
2 Normative references
There are no normative references in this document.
3 Terms and definitions
For the purposes of this document, the following terms and definitions apply.
ISO and IEC maintain terminological databases for use in standardization at the following addresses:
• IEC Electropedia: available at https://www.electropedia.org/
• ISO Online browsing platform: available at https://www.iso.org/obp
3.1
contracting parties
contracting party
service buyer and service provider which conclude a service contract
Note 1 to entry: Each service buyer/provider is considered a contracting party.
3.2
service buyer
organization that buys services from a service provider
Note 1 to entry: In public procurement, the service buyer may also be known as the contracting authority/entity.
3.3
service contract
agreement between a service buyer and service provider setting out their legally binding rights and
obligations for the provision of services
3.4
service performance target
target level of a key performance indicator to express the need, expectation, or obligation of service buyer
3.5
service provider
organization that offers or delivers one or more services
4 Purpose of a service contract
Service contracts form legally binding agreements between the service buyer and service provider that
enter into them and have the key purpose of providing clarity on who is ordering a service, who is
providing the service, what service should be provided, where and when and for what remuneration. The
service contract should be in writing, as well as dated and signed by the service buyer and the service
provider.
What a “good” service contract looks like will vary depending on the circumstances (in most situations
there is no such thing as a “standard contract”). The contracting parties should strive to ensure that
whatever clauses are included in the service contract, those clauses are drafted using straightforward,
clear and concise wording. The service contract should aim to be as short as possible but as long as is
necessary.
5 Service contract structures
It is important that the necessary contents of a service contract are brought together into a clear
structure. While there are certain basic elements that should be present in all service contracts (as
mentioned in Clause 4 above), the length and structure may vary considerably.
Service contracts based on common law systems (such as English law) tend to be longer than in civil law
systems (like much of the rest of Europe) as few provisions are implied by law therefore the service
contract tends to be more comprehensive in setting out all of the terms which will govern the supply of
services. In civil law systems much of the law is codified and will apply to contracts they govern unless
otherwise specified.
The service contract may take the form of a framework which provides a structure and mechanism for
ordering and providing services from time to time on the terms established under the service contract.
Often this mechanism involves completing a template document to the service contract which sets out,
within the terms under the framework, the specific services, specifications and obligations in respect of
the services, service standards, economics and other considerations that determine and impact the
delivery of services.
In order to keep larger and more complex service contracts easier to read and manageable, specific
elements of the service contract are often dealt with in schedules, exhibits or attachments to the main
agreement such as with lengthy service descriptions, service level and credit mechanisms or charging
mechanisms.
There is no fixed rule on which party will establish the basis of the service contract. In some cases, it may
be established by the service buyer possibly through and as part of the service procurement process
(see EN 17371-1) while in other cases it may be established by the service provider.
6 Content of a service contract
6.1 General
This Clause provides an overview of the key content that may be found in a service contract, their function
and purpose.
In order to enable the contracting parties to approach discussions from a business-orientated standpoint,
the contractual content to be considered has been grouped under the following themes:
— Who is entering into the service contract? (subclause 6.2);
— What are the services – how are they specified, ordered and what are the service performance
targets? (subclause 6.3);
— How are charges calculated and paid? (subclause 6.4);
— What legal system governs the service contract? (subclause 6.5);
— How will the contracting parties deal with disputes? (subclause 6.6);
— What is the exposure? (subclause 6.7);
— What rights are there in and to the service outputs? (subclause 6.8);
— When does the agreement commence, how is it terminated and what are the consequences of
termination? (subclause 6.9);
— What considerations relate to information/data? (subclause 6.10);
— Making changes to the agreement and the contracting parties’ relationship (subclause 6.11);
— What other terms need to be considered? (subclause 6.12).
6.2 Who is entering into the service contract?
In general, the obligations, rights and remedies under a service contract will apply to, and be enforceable
by, only the contracting parties to such agreement. Therefore, it is important to clearly identify which
legal entities are entering into the service contract.
Where the contracting parties are not identified or are not correctly or sufficiently identified, then there
is a risk that the service contract is either not enforceable or that it is enforceable but against an
unintended party. This could happen, for example, where one of the contracting parties is referred to as
XYZ and is a member of a group of companies with similar names, meaning it is not clear if the contracting
party refers to XYZ the subsidiary company or XYZ the parent company.
Service contracts should clearly identify the contracting parties to such service contract. To do this it is
useful to include any registration details such as a company registration number or registered office
where these are listed in an official database e.g. Companies House for English registered companies, the
German Commercial Register for German registered companies or the Registre de Commerce et des
Sociétés for French companies.
If there are more than two parties entering into the service contract (for example, more than one entity
on the service buyer or service provider side) then each additional party should be specified and thought
should be given as to which terms will apply to which parties. This document assumes there are two
parties to the service contract, the service buyer and service provider.
The service contract signed on behalf of an organization should be signed by authorized representatives
of the contracting parties and identified in the service contract.
6.3 What are the services – how are they specified, ordered and what are the service
performance targets?
6.3.1 Service description
A fundamental element of the service contract is the service scope and description which defines the
services which are being sourced by the service buyer from the service provider. In service contracts
developed by the contracting parties in a collaborative manner with the intent of building a positive
relationship, the service buyer specifies what it wants and shifts the responsibility of determining how
the work gets delivered to the service provider. Whilst this is a general principle, it should be
remembered that in the context of some services being contracted, the contracting parties need to
consider if there is a need for a detailed description of how the services are provided or whether the focus
should be on the composition of services being provided. In either context it is very important for
contracting parties to spend time to get this part correct as this would determine the services that
eventually get delivered by the service provider, not just what gets delivered but also its efficiency,
effectiveness and future transformation.
For each service being delivered the contracting parties should consider which party is responsible for
meeting the requirements, what they are required to do, where it should be done, by when and (where
relevant) in what manner (the who, what, where, when and how) and then detail this in the service
contract.
Annex A provides considerations to be kept in mind while designing the service scope and description.
6.3.2 Transition and transformation during the provision of services
For some service contracts there may be a need for an initial transfer of people, assets and/or processes
from either the service buyer or the incumbent service provider being replaced. Once such transition
activities have been completed, the incoming service provider would then be able to commence with the
supply of services to the service buyer.
Transformative activities entail making changes to the provision of such services so what the service
buyer then receives will be different to what was being supplied previously.
Where such activities are required within the scope of the service contract, the contracting parties may
consider:
— What the scope of such services are (see subclause 6.1).
— What the output or deliverables of the services are.
— When such activities should be completed by i.e. a milestone date.
— What the consequences of failing to reach such a milestone would be (termination, liquidated
damages, etc.).
6.3.3 Mechanism for ordering services
This subclause addresses the theme of how the service contract allows the service buyer to order
services.
Along with a description of the services being provided, the contracting parties should consider whether
the service contract needs to set out a process for how the services will be ordered throughout its
duration. For some service contracts it may be appropriate for all services to be provided from the date
the service contract becomes effective, while for others the supply of services may only be needed on a
project-by-project basis in which case the service contract should specify the mechanism for ordering
such services.
Another consideration which should be addressed in the service contract if applicable is whether group
companies of the contracting parties entering into the service contract may order and supply services
under the terms of the service contract using the same mechanism.
6.3.4 Service performance targets
6.3.4.1 General
EN 17371-3 provides guidance and a model for defining a service measurement structure to facilitate
service monitoring, measurement analysis and evaluation.
Service performance management is an important element in service contracts to ensure the robust and
efficient management of performance of services agreed between the contracting parties. In keeping with
the spirit of building a relational contract, this element is aimed at a collaborative exercise between the
contracting parties to achieve the desired performance levels. The allocation of responsibility outlined in
subclause 6.3.1 forms the basis for this element by outlining the performance levels expected of the
service provider on the assumption that the service buyer discharges its obligations.
Service performance management should be viewed as a means to provide insight into service delivery
and to drive continuous improvement. Too much emphasis on a large set of metrics could drive focus
towards the minutiae, losing sight of the bigger picture.
Cost and effort are also expended in tracking, measuring, collating and reporting performance metrics so
this effort should be focused on key metrics.
The service management framework in the service contract should be based on the following principles:
• Provide a comprehensive framework to measure end-to-end process performance;
• Align service metrics with the desired business outcomes;
• Establish transparent and clear allocation of responsibility and accountability for service delivery
between the service buyer and service provider;
• Establish governance protocols (including financial mechanisms) embedded in the service
management framework to ensure continuous performance review, ongoing course correction and
service improvement;
• Provide stability in service performance;
• Provide visibility and transparency of service performance to all stakeholders; and
• Drive behaviour to actively move service performance targets to higher global performance levels
over the life of the service contract.
6.3.4.2 Service performance metrics
6.3.4.2.1 Definition
Service performance metrics are indicators of the performance of services being delivered as part of the
service contract, including both those delivered by the service provider and the end-to-end service
activities retained by the service buyer.
The process of designing these metrics is covered in EN 17371-3. Once identified, the service
performance management mechanism to be included in the service contract should consider the
following:
— What is the service or event being measured?
— Over what period of time are the measurements to be assessed (daily, weekly, monthly, annually)?
— What is the standard of performance to be achieved e.g. 98 % of service availability?
— Will there be a burn-in period where the parties collect data and agree on a realistic baseline for
measurement? (see 6.3.4.3)
— Are there any exclusions from such measurements e.g. downtime of a platform while routine
maintenance takes place?
— Which party will measure and report against the service performance targets and how often?
— How can the contracting parties modify, add or remove any service performance targets over time?
— What is the impact of failing to meet a service performance target?
— If financial penalties (also termed service credits) apply, will they be deducted immediately or upon
request?
— Is there a cap on the amount of service credits?
— Are service credits the sole and exclusive remedy for a service performance target failure or are they
in addition to other rights (including termination)?
6.3.4.3 Data collection and baseline process
It is very important for the service contract to include baseline measurements for all metrics including
volume metrics. The importance of the baseline lies in being the starting point for all future
measurements over the term of the service contract. The baselines should be agreed by the contracting
parties using the agreed measurement definition and methodology. It is advisable for both contracting
parties to consider the need for undertaking a baseline exercise. While it may be expedient in the short
term, it can have significant adverse effect over the term of the service contract. Hence it is a decision that
should not be taken lightly.
Further, it is also important to agree and document in the service contract the baselining methodology.
For example, to arrive at a baseline for a metric measured monthly, would six months data suffice or 12
months, how would data outliers be handled etc.? Baselining is not just a one-off activity to be performed
at the start of the service contract but would need to be undertaken during the term of the service
contract should a new metric be introduced.
In some instances, historical data may not be available, either at the commencement of the service
contract or during its term. To address this situation, service contracts use a concept known as a
“Burn-In period” to enable the contracting parties to track and measure the metric for an agreed length
of time. At the end of this period, the contracting parties agree to a baseline derived from the
measurements during this period.
Some service contracts suspend the service penalty in respect of service performance metrics within the
duration of the burn-in period.
6.3.4.4 Governance of service performance management
6.3.4.4.1 General
Governance of service performance management relates to the way the contracting parties would
manage on-going service performance through the service performance management framework. It
comprises:
— Performance measurement and reporting;
— Service monitoring and review;
— Actions when service performance targets are not met;
— Changes to service metrics.
6.3.4.4.2 Performance measurement reporting
The service contract should specify the performance measurement and reporting obligations of the
service provider.
6.3.4.4.3 Service monitoring and review
Service performance should be monitored and reviewed by the contracting parties as per the protocols
established under the governance structure of the service contract.
6.3.4.4.4 Actions when service performance targets are not met
6.3.4.4.4.1 General
Over the term of the service contract, it is likely that the service provider may not achieve all service
performance targets as measured by service metrics. The service performance management framework
should clarify actions and implications of the service provider’s failure to meet agreed service standards.
Service contracts follow a two-step process to address this situation:
a) Root cause analysis and remediation plan;
b) Financial service credits.
6.3.4.4.4.2 Root cause analysis and remediation plan
When a service performance target is missed, the first action is for the service provider to perform a root
cause analysis to identify the source of the failure and obtain the service buyer’s approval. Along with
identifying the root cause for failure, the service provider should develop a remediation plan and
implement actions to remediate.
6.3.4.4.4.3 Financial service credits
The root cause for failure could lie entirely upon the service provider, or on the side of the service buyer
or a combination of the two.
For failures due to the service provider, service contracts often couple service performance targets with
service credits (either a fixed sum or expressed as a percentage of the service fees) as a mechanism to
penalize failures to achieve agreed service performance targets. Service credits are sometimes seen as a
blunt instrument to drive the right behaviour from the service provider but are still commonly used,
particularly in an outsourcing agreement.
6.3.4.4.5 Incurrence of service credits
Service contracts typically identify service metrics that are subject to an obligation for the service
provider to pay the service buyer a service credit if these metrics do not meet agreed service performance
targets. This obligation occurs only when the failure to meet agreed service performance targets is
entirely due to factors caused by the service provider. If the service provider fails to meet the agreed
service performance targets due to the service buyer organization, then the principle of fairness demands
that the service provider is excused of its obligation due to the failure to meet service performance
targets.
The intent of a service credit mechanism is not to place unreasonable burdens upon the service provider.
The typical construct of a service credit mechanism comprises the following:
— Amount at risk: Usually computed as a percentage of service charges corresponding to the reporting
period of the metric. For example, if the metric is measured and reported monthly, then the amount
at risk is computed as a percentage of the monthly service charges.
— Percentage amount at risk allocated to the metric – Service Metric Weight: Where there are multiple
service metrics being measured and subject to service credits, each metric is accorded a specific
weight. The weight reflects the relative importance of the metric within the broader portfolio.
— Service credit is then computed by multiplying the amount at risk by the Service Metric Weight.
In some service contracts, the concept of service weights is done away with, rather applying a standard
weight to all service metrics or by equating the service credit to a flat percentage of service charges.
Irrespective of the construct of the service credit mechanism, it needs to be recognized that in relational
service contracts the focus of the contracting parties needs to be on improvement and learning from
failures. Emphasis needs to be on remedying the failure and to initiate actions to prevent their recurrence.
6.3.4.5 Changes to service metrics
As the business evolves over the term of the service contract, it may become essential to modify the
original set of service metrics. It is advisable that service metrics are changed using the Contract Change
Control process. The process should follow the same steps as at the start of the service contract.
In line with the spirit of continually creating economic value over the term of the service contract, many
relational service contracts have a provision to automatically increase service performance targets each
year of the service contract. The methodology for the annual automatic increase is included in the service
contract and hence does not require the Contract Change process to record annual changes.
6.3.5 Business continuity and disaster recovery planning
6.3.5.1 The purpose
Where the services bring provided are business critical to the service buyer and any disruption to their
supply would have a material impact on the service buyer then it may be appropriate to require the
service provider to have in place and maintain a business continuity and disaster recovery plan (BC and
DR plan) describing the processes and procedures to be followed in the event of a disaster and/or
unexpected event.
The aim of such an obligation is to ensure the service provider is able to recover from a disaster and/or
unexpected event and resume operations within a suitable timeframe to minimize the impact of the
supply of services to the service buyer. The ability to minimize the effects of a disaster and/or unexpected
event is often preferable to having contractual remedies (such as damages) for a failure to provide those
affected services.
6.3.5.2 Contents of a business continuity and disaster recovery plan
A business continuity and disaster recovery plan should comprise the following elements:
— Business impact analysis — risk assessment to identify key services or aspects of services and sites
that may be affected, and the risks associated;
— Establishment of crisis management teams (service buyer and service provider) and contact details
to be notified in the event of a disaster and/or unexpected event;
— Roles and responsibilities of each, service buyer and service provider, under the BC and DR plan;
— Timescales for implementing the BC and DR plan;
— Back-up process and elements of the configuration;
— List of equipment and technology infrastructure to be provided by service provider in the event of a
disaster and/or unexpected event;
— Testing process and schedule;
— Training programme for both service buyer and service provider personnel;
— Governance process to documenting changes and updating the BC and DR plan.
6.4 How are charges calculated and paid?
6.4.1 General
This subclause addresses the question of how the contracting parties structure and manage the
economics of the service contract over its term. Across the different contract elements, this remains one
of the most contested and debated, not just during the initial negotiations but over the life of the service
contract. Disagreements between the contracting parties on pricing have led to the collapse of
negotiations, with the service buyers having to restart discussions with a new service provider.
Ensuring the economics of the service contract is correct is critical for the success of the relationship,
both from the point of meeting the objectives and intent, and to facilitate the creation of a positive and
healthy relationship between the two contracting parties. Whilst it is essential for each side to arrive at a
deal that is best for them, most contracting relationships fail to achieve this objective. Some of the reasons
for this are:
i. Fair return
For contractual relationships to be successful, it is essential that both sides earn a fair return to allow for
investments to transform, adapt and enhance the relationship. Service contracts whose economic models
are designed to drive to lowest costs often fail to create either the right behaviour or financial incentives
to grow and adapt, ultimately failing to meet the intended objectives.
In summary, it is essential for contracting parties to build an economic model that allows for a fair return
for both sides, creates flexibility to adapt to evolving business conditions, ensures transparency and
enables a healthy relationship to be built.
ii. Service contracts are uncertain
Service contracts are designed on the assumption that it is possible to identify and price all possible
scenarios for costs and revenue over the term of the service contract. Following on from this assumption
each side believes it can with a high degree of certainty compute the “best financial deal” for them at the
point of contracting.
The reality is that the future is uncertain and attempting to create a deterministic view of events is flawed;
there is a higher probability of being incorrect and the “precise” financials wrong at best. Attempting to
create a service contract with “all in financials” agreed up front is a wrong way to approach developing
service contracts.
Contract uncertainty is becoming more of an issue in an environment of fast evolving technology that
impact the way services are delivered and consumed. In a time when organizations are rapidly
reimagining the services they deliver to their customers, and technologies like automation, cognitive, AI,
mobility, cloud, and growing computer power are transforming delivery models, designing service
contracts on an assumption of a certain future is incorrect and flawed.
iii. Unfair risk allocation
All service contracts have inherent risk associated with the business and the relationship. During
negotiations, it is inevitable that the party with a greater bargaining power tends to shift risk to the other
side. Whilst this is only to be expected, problems arise when one side is forced to assume
disproportionate levels of risk. Many failed service contracts display a similar pattern. Service buyers,
because of their great bargaining power at the point of contracting, shift a significant proportion of risk
to service providers to arrive at their “best deal”. Over the term of a service contract, this unfair risk
allocation reduces the ability and flexibility of the service provider to adjust services to evolving business
environmental conditions. The adverse impact on the service provider is undoubtedly harsh, but
perversely, service buyers who believed they had the “best deal” are also hurt as service providers can
no longer deliver services to meet the emerging business needs of the service buyer, leaving the service
buyer stuck with services that are misaligned to business demands.
iv. Pricing for the unknown
Another common fallacy in service contracts is to attempt to price the unknown. Service buyers often
require service providers to price into the service contract transformation programmes and initiatives
that are yet to be conceptualised by service buyers themselves. With no economic basis to price, service
providers take a shot in the dark including buffers to mitigate against all type of eventualities. The
resultant price is a figure that is a figment of the service buyer’s imagination obscured by layers of risk
mitigation price elements. Whilst both contracting parties may have the satisfaction of developed a
comprehensive price, over time all this serves to achieve is lowered trust and transparency.
6.4.2 Charges/remuneration for services
There are several economic models to choose from, each being differentiated by the basic pricing element.
Examples of pricing models for service contracts can be found in Annex B.
6.4.3 Payment terms
Payment terms are a key element of the overall economic model. Typically, payments in service contracts,
are aligned to the business cycle. However, quite often service buyers align payment terms on service
contracts to their standard payment terms e.g. 30 days. It needs to be recognized that payment terms
offer an area of negotiation for both contracting parties and can be customized to suit the specific
requirements of the service contract. The EU adopted Directive 2011/7/EU to combat late payment in
commercial transactions and imposes time limits in which organizations have to pay their invoices. Some
EU countries have imposed stricter time limits so this should be assessed by the contracting parties in
accordance with the governing law of the service contract.
6.4.4 Taxation
Tax is an important consideration for service contracts. For cross border service contracts complex tax
issues may arise.
The contracting parties should determine what taxes could apply to the supply of services under the
service contract. These could be, for example, whether there will be sales taxes such as VAT (value added
tax), withholding taxes or otherwise. Once this is understood, the contracting parties should consider
whether to include any provisions regarding the applicability of such taxes, how potential liabilities
should be dealt with and whether the contracting parties will work together to achieve the most tax
efficient structure for the service contract under applicable laws.
For service contracts where VAT is applicable to the supply of services it is common for the service
contract to clarify that the charges are exclusive of VAT (unless the contracting parties have agreed
alternative commercial arrangements).
6.4.5 Price adjustment mechanisms — inflation, foreign exchange rates, benchmarking
During the term of a service contract, circumstances could arise which mean that the charges agreed at
execution of the service contract are no longer acceptable to one or both contracting parties. These
changes could be due to factors which are outside of the contracting parties’ control or influence such as
changes in foreign exchange rates or inflation (or both) or they could be due to other external factors
such as developments in technology which significantly decrease (or in some cases increase) the service
provider’s costs to provide the services. Where such risk exists, the contracting parties may agree
mechanisms in the service contract for adjusting the price.
Taking foreign exchange as an example, where the contracting parties are located in different countries
with different currencies and they specify one of those currencies in the service contract for payment of
the charges, one of the contracting parties would benefit while the other would suffer in the event of
foreign exchange rate fluctuations.
Where the service provider is located in a country which is prone to high inflation the service provider
may also make the case for the charges to rise in line with a published inflation index. They may be
national laws which limit the use of price index clauses, including for service contracts.
Benchmarking is a mechanism included in some service contracts with a long term to investigate whether
the services are being supplied at a price and at service performance targets which are competitive in the
market. A benchmarking exercise is a process whereby the services under the contract are compared,
usually by an independent third party, against similar services supplied by competitors of the service
provider in order to determine their competitiveness. The service buyer and service provider can specify
in the service contract what outcome (if any) there will be where a benchmarking exercise has been
conducted.
6.5 What legal system governs the service contract?
It is advisable to specify in any service contract which governing law will apply to it. The governing law
chosen will determine all questions in relation to the validity, interpretation, effect
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