Procurement contracts are increasingly used in both Canada and the United States (US), particularly with respect to technological services. Federal procurement expenditures for Canada amount to an average of CAD $22 billion in goods and services annually. Further, the US typically awards USD $500 billion in contracts annually, with Canadian companies actively participating in that market.
Where an acquirer is purchasing or investing in a vendor selling to government entities, the diligence process and subsequent transaction documents should carefully consider the risks arising from such dealings. Government contracting with respect to technological services, such as cloud computing, provide unique risk factors, including stipulations on whether the government owns the intellectual property (IP) that is generated or sold by the vendor by way of part of the contract and the incorporation by reference of onerous information security practices. An acquirer also needs to ensure that if the vendor is competing for a bid (or was recently awarded a bid), those bids are structured to accurately reflect feasibility and are competitive so that an award if granted (or recently granted) to the vendor is not the subject of dispute further down the road.
Canadian Cloud Strategy
Canada has taken active steps as a digital services leader towards improving the procurement criteria for government use of cloud computing. The Government of Canada has adopted a cloud-first strategy in which the preferred option for delivering IT services is through cloud services and the preferred choice for cloud deployment is public cloud. Technology acquirers (and vendors) will want to be especially mindful about standard procurement clauses related to IP ownership which are often times incorporated by reference into RFP documents. This becomes more relevant if the vendor is providing services where the government customer exercises greater development control of the products, such as where the vendor provides new features or a customization.
In addition, as cloud service security is a key concern, the RFP and related documents will often impose standards that vendors must abide by. The Canadian approach to security currently mirrors key standards set by the United States. For example, current information technology security risk management guidance has been taken through the Communication Security Establishment and the United States National Institute of Standards and Technology (NIST). In addition, a number of government agencies both in Canada and the US are adopting agile procurement processes. Before agile, pricing for the whole project was typically set at the outset, subject only to scope change. In contrast, agile procurements follow a less documented process whereby the government agency’s needs, rather than being known upfront (e.g. through a detailed specification), are generally explored and updated as the process progresses through iterative cycles. The parameters and ongoing obligations with respect to these RFPs and the associated contracts for services should be thoroughly reviewed by an acquirer.
Competitive Risks in the Technology Procurement Process
Acquirers must also be mindful of future bids and how those are being structured. An emerging risk, given the large dollar value of government technology contracts and the shift to agile (and faster) contracting processes, is that an unsuccessful bidder disputes the competitiveness of the successful bidder in the bid process. As a result, an acquirer needs to understand what these risks are and what rights to any claims it may be acquiring or what claims it may be exposed to if successful.
- Fair and Equal Treatment. Vendors in the Canadian landscape can benefit from a history of jurisprudence governing procurement which promotes competition. Canada’s approach to procurement clarifies that Canadian suppliers have the right to demand equal and fair treatment through the procurement process.
- Flexible Terms. While this landscape can provide comfort amongst competitors, technology contracting does carry added burdens in terms of the flexibility of the bidding language and parameters. Vendors and acquirers, as well as customers, need to ensure that a contract clearly stipulates the parameters around which the work is to be done, particularly when dealing with the feasibility of a cloud or other technology service in respect of a price scenario.
- Operational Feasibility. As the security requirements for handling government data are significant, this means that for vendors a cloud processing service, whether through software, platforms or infrastructure, needs to meet and maintain security settings throughout at any given price which would impact the level of liability a vendor, and potential acquirer, takes on. This may also present a risk of future claims or challenges if operational feasibility is overstated.
Targets that provide cloud computing or other forms of contracting can be attractive as these contracts present a significant and stable revenue stream. These contracts can also be long term which provides further stability to a vendor’s bottom line. Acquirers must ensure: (i) that they are not inadvertently relinquishing valuable IP assets following the transaction, and (ii) any projected or recently awarded bids are properly structured to be competitive and feasible so that the acquirer is not assuming potential liability due to an inadequate bid.
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