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Legal Issues for Dealing with Application Service Providers (ASPs)

By Jay Hollander

Jay Hollander, Esq. is the principal of Hollander and Company LLC, www.hollanderco.com, a New York City law firm concentrating its efforts in the protection and development of property interests relating to real property, intellectual property and commercial interests, as well as related litigation.

The content of this article is intended to provide general information relating to its subject matter. Providing it does not establish any attorney-client relationship and does not constitute legal advice. Personal advice in the context of a mutually agreed attorney-client relationship should be sought about your specific circumstances.

Summary: Using application service providers, or "ASPs," is an increasingly popular way to host, manage and deliver computer applications from an offsite location. But ASPs raise special legal issues that any business should address before signing up for service. This article explains some of the common legal issues to discuss with any ASP.


Introduction

Try to figure this information technology industry.

First, they wanted you to buy computers to join the information revolution. Then, you had to buy more powerful computers to run ever-more-capable software programs. Then, you had to keep upgrading the software, which would do more and more, especially on these increasingly powerful computers. And, as your business grew, you had to hire an IT professional or even a staff to supervise the inevitable repair and upgrade issues. Before you know it, you've created your own little information services division right in your own company.

Now, after years of hearing "buy, buy buy," what's the next mantra of software and hardware implementation? "Rent, rent, rent."

Improvements in Internet technologies and the growing availability of high bandwidth at lower prices has created the latest "must have" in the industry" application service providers.

Just who and what are these "ASPs"? What are the benefits of dealing with them? How should you evaluate and ensure you get what you need from them while protecting your data? Let's tackle these issues one at a time.

What are ASPs?

Simply, ASPs are companies that remotely host, manage and deliver computer applications from an offsite location. ASPs exist to reduce or replace the ever-growing IT infrastructure that has taken up substantial resources at larger companies and has created a gulf between them and smaller companies that don't have the same resources.

But, whether your company is large or small, the main draws of ASPs are that they become a company's outsourced IT department, providing all necessary hardware and delivering applications remotely, thus saving customers substantial time, effort and, due to the presumed efficiencies of the ASP, money. Further, since the ASP assumes all these functions, the risk associated with them is transferred to the ASP as well.

Since an ASP essentially becomes the software delivery system, the software is kept up to date, with all modifications, patches and new features usually integrated, as they become available. And since the applications as well as the data are stored on the ASP's servers, employees can access the application and the data anywhere they have Internet access.

Using an ASP to its fullest potential also minimizes the need for in-house IT staff, since software support is performed at the remote location where the application is housed.

More and more, an ASP can provide a wider assortment of applications and services, everything from e-mail hosting to customer-relationship management to data warehousing and even traditional "desktop" applications such as calendaring, word processing and spreadsheets.

Some ASPs cover everything from soup to nuts, providing your Internet connection, hardware and application service, while other ASPs themselves rely on partners to fulfill one or more of the functions. So, one ASP could deliver your "always on" connection together with your e-mail software, or your ASP could contract with another service provider to provide the connection, while it hosts the application. In this way, the ASP acronym is shorthand for reference to various types of service providers such as network service providers, management service providers and even storage service providers, among others.

Whichever flavor of ASP you pick, there are certain fundamental legal protections that will need to be addressed.

Service Level Agreements

The contractual relationship between your company and your ASP will be contained in a document called a "Service Level Agreement," an agreement that typically lasts for one to three years.

It is in such an "SLA" that you will cover all the main legal issues that need to be resolved, such as specific services to be provided, data security and financial consequences of breach of the agreement.

Before discussing the most common and important issues, however, be aware that, just as there is more than one kind of ASP, there is also more than one kind of SLA. In fact, the same ASP can offer different kinds of SLA for different customers and situations. So, the very first question to be asked when presented with a particular ASP's SLA is whether the offered agreement is the only one available and whether it is negotiable.

Since, at its core, a service level agreement is a contract about usage of an ASP's services, it is typical to have different grades of available service as well. Essentially, you can contract for as little or as much service as you need. Keep in mind that the more comprehensive the services your ASP provides, the more you will need to ensure that the provider has the skills, funding and expertise in the areas involved.

Core Contract Issues

Since there are an ever-growing variety of types of service providers, each with some issues all their own, let's confine this discussion to the basic issues that are central to an SLA.

Description of Deliverables

The most basic involves agreement on the description of services to be provided. Here is where extreme care needs to be exercised to make sure that no misunderstandings in jargon cause problems. There is nothing more basic to an SLA than agreeing precisely and comprehensively on what the ASP will be -- and won't be -- responsible for under the agreement. Hand in hand with this is making sure you have a clear understanding of how much of the promised services to be delivered by the ASP will actually be delivered by the ASP itself, as opposed to other providers with whom your ASP may have relationships.

Since the whole point behind entering into an ASP arrangement is to avoid doing things yourself, make sure your agreement spells out the hardware, software and connectivity required for proper performance and who is responsible to ensure that this infrastructure is provided and operational.

Build Out

If a certain infrastructure is required, and it usually is, the technical specifications, as well as the due date for the system to go live, must be adequately spelled out in the SLA. Here, an astute customer will want to include monitoring and progress reporting and testing to provide adequate safeguards that the project is proceeding apace.

If the hosted application will be interacting with legacy applications at the user's site, representations about interoperability, and responsibility for ensuring it, must be properly set forth in the agreement.

Also, since one of the main points of going to a hosted application model is to allow growth without involvement of the user's resources, assurances regarding scalability of the application also must be addressed. Here, a customer will want to be concerned with issues such as the ability of the ASP servers to handle the company's anticipated growth in data and users, as well as whether the growth will affect the hosted application's performance.

Proper Performance

When an ASP hosts a critical business application, there must be a clear description of what constitutes acceptable performance in terms of speed, accessibility and guaranteed "uptime." In a typical SLA, agreed-upon levels of uptime are at least 99%, with separate specified levels of user-perceived response time, known as latency.

But the inquiry cannot simply end there, because a guarantee of performance doesn't mean much unless it's backed up by similar guarantees on the things that provide such performance. That means customers must pay attention to getting an acceptable comfort level on the components that allow performance, such as power backup, server redundancy and network capacity. The SLA also must provide for how the ASP will monitor these systems and what lengths it will go to in order to redress and resolve any discovered problems.

Pricing

The pricing model in the typical ASP SLA has been modified somewhat since this type of service began a few years ago. What began as a predictable pricing policy based on the number of users has sometimes been giving way to pricing structures based upon the actual amount of usage. This can be measured in several ways, only one of which is actual time spent. Predictability of usage cost is the flip side of the savings engendered by having your application hosted remotely by an ASP, and no SLA should be entered into unless both parties understand and have comfort about the usage costs of the service, particularly as they may be affected by growth in data and users within the customer organization.

Maintenance and Support

Just because an application is hosted by an ASP, it doesn't mean there can't or won't be the same types of problems that customers likely encountered with applications previously maintained themselves. For this reason, the SLA should spell out clearly the level and response time for service and support in the event of a malfunction or system problem. Customers also will need specific representations regarding the nature and extent of data back up at the host site and the available degree of redundancy made available to ensure smooth operation in case any component suffers a breakdown.

Technical support is one of the areas where extreme care needs to be taken, since most ASP contracts don't include telephone support as part of the standard fee, but rely instead on e-mail. What's more, if your business operates "24 x 7" and requires the same type of support, you'll likely have to pay an additional fee. Either way, getting the specific parameters about the type and responsiveness of technical support can be critical to the usefulness of a hosted application.

Security

Although the importance of security cannot be overstated, the ways in which security must be provided for in an ASP contract are often not well-understood. The threats to data security are multi-faceted and must all be provided for in any well-written ASP contract -- things such as viruses, denial-of-service attacks and other hacker attacks.

While virtually all ASPs understand the importance of the security issue and have taken elaborate steps to deal with the most likely sources of attack, the protection needed by particular businesses goes far beyond this. For data that is not only mission-critical but possibly proprietary or trade secret, provisions are needed to provide for acceptable confidentiality and for the nature and extent of efforts an ASP must take to recover wrongfully obtained confidential information. Clauses like these are extremely context dependent and, before entering into any ASP contract, care must be taken to identify the most likely avenues of data loss and what preventative steps will be taken to recover any lost data.

Data Ownership

Speaking of data, those entering into an ASP SLA can't forget whose data will be entered into the hosted application. Strict provisions governing non-disclosure of sensitive end-user company data must be a priority in negotiating an SLA. Part and parcel of this is a specific understanding regarding where data will be stored, who will have access to it, what the password-protection architecture is, as well as a number of other concerns. Clauses regarding data ownership also must confront the consequences of breach of the provision and what the relative responsibilities of each party will be with respect to sensitive data that is lost or stolen.

Termination and Penalties

When you license a software program or purchase hardware for installation on-site, you can always decide you made a mistake if you don't like it and either return it to the vendor or absorb the cost and replace it. But what happens if you're unhappy with your ASP? Since the ASP not only hosts your application but has control over your data as well, termination provisions need to be thought through carefully. Care must be taken to ensure that terminations for cause are adequately defined and financial consequences of early termination are agreed upon. Further, provision must be made so that customer data cannot be held hostage in the event of dispute and that the ASP does not keep any copies of any data returned.

In the event of a breach, calculation of damages to data can be difficult to discern. Moreover, courts often frown on damages provisions that appear punitive in nature and, therefore, it is common to include "liquidated damages" provisions (for predetermining the cost of potential damages) in an ASP SLA. As the customer, you must determine whether this adequately protects your interests. For some, ASP insistence on this alone may be enough to dissuade the customer from the ASP model.

* * *

As you can see, while there are many perceived benefits to the increasing use of the ASP model for running applications for one's company, the devil is in the details when it comes to understanding and negotiating for the specific terms and conditions that will help you make a reality of those perceived benefits while still giving you the protections you need at a cost you can afford. Contracts for ASP services should be viewed the same way that substantial software licensing or integration services are viewed. As such, consultation with a knowledgeable professional is highly recommended.

Copyright © Jay Hollander, 2007. All Rights Reserved.

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