IT Contracts and Sweep Clauses
Sweep Clauses are called so, because they, like a broom, sweep in more responsibilities for a service provider. More than what they actually intend to deliver.
Sweep clauses are like icebergs. What we see in the SOW and Schedules are just the tip of the iceberg and while actual delivery the real matters come out.
As with an iceberg so with the sweep clauses too, the Service provider meets with an eminent danger of delivering more than it can thus causing financial losses and sinks the revenue ship for that deal. One has to really be cautious while preparing the SOW and Schedules for Service Agreement or else will end up with a sinking ship.
What role does a Sweep clause play? Certainly, it does not play a positive role in regard to a service contract that we have in place.
Initially it does bring all those items to our plate which we did not agree to deliver. And in the process of delivering the agreed and not agreed deliverables we start straining our relationship with the client. This leads to disagreements and disputes and subsequently puts a big question mark on the credibility of the service provider.
Apart from creating those earlier mentioned issues Sweep clause negatively affects the deal revenue by lowering the margin and profitability.
Delivery quality, many a times, goes down as more delivery needs to happen in the short span of time.
Overall Sweep clause is a blunder committed, while drafting the agreement, that puts a heavy burden on the Delivery team.
In the next lesson, we shall talk about the Origin of the Sweep Clauses but before that let us understand a vicious cycle that goes around related to Sweep Clauses.
A badly drafted Statement of Work full of Sweep Clauses, leads to overstretched scope of delivery. This puts a constrain on the timelines and employment of extra resources to deliver the new items without any additional pay.
Due to the income leakage, the margins starts falling down and subsequently results into a RED Account.
Since there is less profit hence there would be less bonus or salary increment for the employees creating more dissatisfied employees, who may not be working so diligently.
So, it makes all the sense to have a robust statement of work without any sweep clause.
Sweep clauses originated in the early days of data centre outsourcing where the customers started handing over the “glass house” to the vendors. The expectation was that the vendor would deal with the glass house as mother would deal with a baby, meaning doing anything and everything for the Customer.
The other origin which we find even today is the expectation by the customer and affirmation by the vendor on performing the lesser, incidental and related functions to the main contract, especially the functions performed by the earlier staff.
Some of the inappropriate cases for sweep clauses are as follow;
One, Where the customer is willing to outsource some selective functions, typically selected by them.
Two, Standard branded manged services of the Customer without the due diligence done by the vendor.
Three, New IT offering like Cloud wherein the industry is yet to mature and understand all.
And Four, the second generation outsourcing form the third party. This one is undeniably the dead trap.