USA Trends and Developments Contributed by: Jeffrey Harvey, Randall Parks, Andrew Geyer and Cecilia Oh, Hunton Andrews Kurth LLP
the broader Democrat agenda (eg, Protecting Election Administration from Interference Act of 2023, Ameri - can Confidence in Elections Act, Freedom to Vote Act, etc), while also scratching the surface of legislation pertaining to the intersection of cybersecurity, AI and personal information. Similarly, algorithmic pricing and its potential for anti-competitive applications has any number of trade groups and agencies pushing for comprehensive legislative reform. As threats and regulations multiply, firms are rely - ing more heavily on managed security services and “security as a service” offerings to replace or augment their in-house capabilities. Given the sensitive subject matter and potentially catastrophic consequences of a service failure, these transactions often are heavily negotiated and require a holistic liability management structure, supplementing contractual liability alloca - tions with vendor and buyer insurance coverages and operational changes (such as broad-scale encryption) to manage risks. Reworking of Contracting Models The shift in buyer preference to procuring functionality rather than assets is mirrored in contracting models. Strategic buyers prefer contracts that prioritise and incentivise delivery of services that are tightly tied to positive business outcomes. For example, instead of charges based on a build-up of hardware, software and labour costs, a customer might prefer to pay by the transaction or even based on its revenue in the business line supported by the vendor. Similarly, where AI is used to drive efficiencies and cut down on costs, customers may base some portion of the charges (or, bonuses) on savings actually achieved. The pace of change also continues to put pressure on contract durations. Since technologies, delivery models and costs evolve so rapidly, both vendors and customers are reluctant to lock themselves into long-term agreements. This reluctance manifests itself in “as a service” agreements that permit the vendor to change or update the service without the custom - er’s approval and typically have terms of three to five years, possibly with renewal terms that are subject to price escalators. Sectoral economic conditions
continue to drive shifts in transaction volume and to influence the balance between transactions focused on value/innovation and cost savings. As noted in the section below, the rapid adoption of AI is placing even more pressure on contract durations, but customers currently determine the approach, given how crowded the field is. Short-Term Developments The rapid adoption of various AI solutions has had a material impact on IT transactions as a whole. While “as a service” and large-scale outsourcing deals are still prevalent and build-operate-transfer (BOT) and global capability centre (GCC) arrangements are growing, smaller proof-of-concept AI deals account for a good deal of the daily contract volume. These short-term, limited agreements for AI solutions gener - ally represent a “testing of the waters” by companies with internal directives for AI adoption (even where there may not be a need!). As with the introduction of new technologies in the past, the most effective solutions will survive. The uptick in BOT/GCC transactions was somewhat unexpected given that a number of companies had both “been there and done that” decades ago. How - ever, the uptick is undeniable and interest seems to be somewhat sustained. As part of a BOT/GCC transaction, a customer engages a provider to Build a GCC, staff and train the GCC, Operate the GCC, and Transfer the operations and services to the customer once certain metrics are achieved. This approach pro - vides customers with easy and relatively low-risk entry into new (and, typically, more cost-efficient) markets, assists the customer in avoiding certain of the riskiest aspects (ie, transition and transformation) of most out - sourcing relationships, and may permit the customer to avoid initial capital and operational expenditures. In addition, this model ultimately provides the customer with a level of control not available to it in a more traditional outsourcing model, thereby permitting the customer to adopt and apply new technologies more quickly, without being hamstrung by the outsourcing provider’s existing set of tools. As noted above, this is not BOT/GCC’s first radio and whether this is a short- term or long-term development will be monitored.
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