2.4. Summary

Contract law has been shifting from classical contracting through to neoclassical contracting to the present relational contracting. Relational contracting is extensively operational in the business context of long-standing relationships. Under the auspices of relational contracting the process-view as analysed by Pöyhönen (2000) has evolved. The process-view of contracting is well applicable to the project shaped undertakings dominating especially in software business. Williamson (1985) explicated the interdependence of contracting and governance with bilateral governance being appropriate to long-term contracting issues. However, as presented only few basic and quite generic contractual models exist, that do not give any further specific understanding for contracting in software business. Under the paragraphs of procurement and contract negotiations the situation in which the customer and supplier are in was described briefly, when they entered into a contract negotiation.

The contracting in software business is divided into three categories: COTS, tailored and MOTS business approaches, each have their own peculiarities that must be paid attention to in companies’ operations. The importance of IPR with copyright, patent and trade secret issues is gaining momentum with the Internet as well as with the globalisation of the whole software business. The main contractual tool for protecting the software company’s IPR is licensing. This is usually implemented by template license agreements that the customer takes or leaves. The customer side is quite well equipped with several standards and an abundant literature base for assessing the software supplier before signing the contract and during the software development process. However, as the perspective in this thesis is on the software company, the customer side is only treated briefly.

Ring and Van de Ven (1994) quote Atiyah (1979) that a paradigm shift prevails in contract law from single and discrete transactions toward more accommodating future risks by relationship management processes, instead of adhering strictly to the written contract and its wordings. Further they argue that over time the development of the formal and informal processes of negotiation, commitment and execution complements the formal contractual relationship increasingly with elements of personal relationships and the longer the cooperation the more clearly the formal agreements mirror informal understandings and commitments. They also correctly emphasize the fact that social-psychological processes will take far longer to develop than the formal contracting itself (ibid). The contract negotiating, drafting and writing process may take time but the psychological aspects of the partners mentally adapting during the cooperation will take more time.

In this overall software business context, the present developing relational contracting practice, especially with the process-view of contracting is an appealing approach to be used. The relational contracting practice, applied frankly by both parties, facilitates the whole life cycle of software acquisition, development and implementation processes. Furthermore, it increases the possibility to fulfil the contract successfully and to end up to an outcome that satisfies the customer as well as the supplier. Though, it must be understood that the legal thinking, practices and the law itself transform in much slower pace than the industry driven needs of software business. The contracting form itself does not depend on the development model that the software company applies, be it the linear sequential, spiral, or concurrent development model. All development models are constructed with feedback loops, as they include the step-wise approach that is needed when defining and building new software applications or parts of them in an iterative fashion.

From the analysis the conclusion that the software contracting is a multifaceted endeavour, can be drawn because the contracts must not only fulfil the legal-technical needs but it must cover the business as well as the software technical aspects. The main emphasis must be placed on the last part, not on the legal peculiarities. If the contract includes high sanctions against possible damages that the unfulfilled contract would cause to the customer, this would lead to a higher contract price. So, in the end it is the customer who pays this sanction. On the other hand, if the sanctions are too low then there is no extra incentive for the supplier to fulfil the contract.

New important factors dominate the software markets: 1) the development time of new applications is notably shorter, 2) importance of the time to market has increased and 3) stronger relationships between many small special skilled companies. In this context the mastering of the markets and anticipating future trends is extremely difficult. The relationships with various forms of cooperation, ownership and business models accordingly reflect more complex contracts (Klein, Crawford et al. 1978). To help to reduce this complexity some organizations and companies have drafted template contracts to be used in different contractual situations and with different customer segments.

From the above discussion it can be seen that pure juridical contracting and negotiation models do not give much help to the companies in formulating their own specific contracting practices as these general models totally lack line of business specific elements. Also they solely depict one contractual negotiation and software development round, leaving out the network of several contracts that actually form the company’s contractual sphere with all different contractual liabilities and the important relationship development over time.