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Locking down the-value of ICT services contract

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The dynamics involved in selling or leasing ICT equipment, and related support, continues to change at a rapid rate, the pace determined by innovation.
Experts in ICT services and solutions point out that over time vendor/client contracts, lease periods, migration of PBXs into the cloud and licensing has changed – and decision makers need to be up to speed on developments.
Karl Reed is the chief marketing and solutions officer at Elingo, a Johannesburg-based ICT firm focused on services and solutions within the multimedia contact centre, business process automation and enterprise IP telephony space.
Reed explains how long term contracts governing lease agreements for ICT equipment present a challenge to both the vendor and the client.
“Let’s look at this from both ends. The vendor has entered into a long term contract in order to ‘pay off’ the supplied technology, so if the contract ends early without a penalty or pay back on the remaining term, then the vendor sets to lose i.e. paying back what they supplied, someone has to carry this cost,” he says.
“Then you have the customer … the customer entered into a long term agreement so that they didn’t have to pay a bigger agreement amount over 3 or 5 years, but extended it to 10 years, thus drawing out the financial burden of what needs to be paid, thus a longer term is better for the customer,” he says.

A fair deal
The market today has moved from ‘sweating’ technology for up to a decade and possibly even extending support. As Reed says, the term is now between three to four years.
As a result most supported support contracts have been reduced from five and 10 years to one and three years, with a possibility of five years as an extension of the three-year by an additional two years, but this is rare.
“Add to this majority of contracts that are three or five years have “out clauses” in order to get out of the contracts if the technology landscape has changed radically that it’s impacting the customers’ business,” Reed says.
Another critical facet of the modern ICT services space is the impact of the cloud. According to Elingo there are pros and cons to premise-based solutions and cloud hosted solutions, and each organisation has different reasons for wanting to stay on premise or moving to the cloud – but cloud is not the answer for all and it depends on customer fit, technology and the overall solution.
“A major factor pushing towards cloud is financial. Does the company have the Capex (upfront costs) to spend up front or do they prefer to have the cost for the technology on an Opex model (monthly costs). Majority of vendors do not mind either which way the customer wishes to go, as long as the customer is fully made aware of the pro and cons to both offerings – the pros and cons are different per solution/technology stack,” Reed adds.
The question of licenses for the number of users per company has also transformed the services space and the degree of flexibility built into these contracts impacts significantly on the growth of companies.
“Licensing in the past was based on the number of users you had and not on usage and thus the support agreements were directly connected to that. That is coming to an end in majority of environments / solutions / technologies that era has ended. Now is based on usage, this applies to both on premise and cloud solutions – here the technology looks at the sustained usage over a given period (say month to month) and then you are billed / charged for that usage and so the support agreements are then aligned to that usage,” says Reed.
It is important to remember that vendors/suppliers use the support agreement costs that are charged for R&D, without R&D nothing new is be produced, Reed adds, and so in order for a customer to stay ahead and on top and on the forefront of the technology R&D is required, hence support agreements are required he says.