Virtualisation: Get the contract right

Virtualisation promises many business benefits – but only if you structure the agreement correctly. Lawyer Mark O'Conor offers some advice.

Virtualisation offers enhanced ways to use redundant processing power but because of the inherent ambiguity in the licensing structure, drafting implications for the agreement must be crystal clear.

The technology has enabled large service providers to offer shared platforms at a fraction of the cost of physical platforms. When applied across an enterprise or service provider network, this ability to scale means cost savings can be substantial.

This is attractive from a user perspective because there is no need for expertise or control over the technical architecture that supports the service, plus the costs are kept at a minimum because the hardware is never owned.

But, while the potential benefits of the virtual model are clear, it is worth focusing on the potential pitfalls.

One of the key challenges to strengthening the validity of a virtualised model is establishing a sensible licensing system, one that makes business sense for the vendors and is attractive for users.

The basic licensing dilemma remains the same as with all software – how do companies protect their intellectual property while allowing customers to benefit from the services?

This problem is exacerbated by virtualisation, as it can be unclear from how many points the software is being accessed. Regardless, virtualisation should be a cheaper alternative to fully-purchased software, so providers need to develop a creative pricing structure that benefits both parties. Virtualisation should represent a saving but this needs to be clearly quantifiable, and utility pricing should be checked against likely usage.

Another concern is that some organisations are finding that their existing IT infrastructure, reporting lines and governance are not suitable for the move to a virtualised environment.

For organisations that need a full re-engineering of business processes in tandem to implementing the virtualised service, much of the potential savings is wiped out. Uncertainty as to the value proposition offered by the new licensing model as well as security issues are also causing potential users to pause for thought.

When drafting a contract, it is imperative the agreement between a user organisation and virtualisation service provider is clear. The service levels within the agreement need to be measurable, and appropriate service credits need to be established as an estimate of loss or a diminution in price paid to reflect poor performance.

In addition, as with any outsourcing agreement, but particularly in the virtualised model, the provision of services by a (remote) third party requires active management to avoid problems arising.

Since virtualisation presents security concerns, provisions for disaster recovery and business continuity take on heightened importance and feature more prominently in the virtualised service provision agreement than they might in a traditional outsource model.

Overall, virtualisation is a good sales model for the provider and the customer, offering an effective use of existing hardware. Foresight and an emphasis on the initial agreement can address any uncertainty as to the value proposition offered by the new licensing model.

Mark O'Conor is a partner in the intellectual property and technology group at law firm DLA Piper.