Suppliers should work for free, correct?
Author: Tim Cummins, CEO, IACCM
"I don't really know what I want, but give me xyz and then if I decide I really wanted abc you'll do the conversion work for free."
A good way to do business? One sided, you might think! But an example of what some firms are facing in the world of 'outcome-based contracting."
With markets and technologies developing as rapidly as they are today, a number one priority for many customers is flexibility and change. But should suppliers shoulder all the risk?
Take for example the customer that was quite specific about the work they wanted done, but then added a clause that essentially gave them carte-blanche to enforce on-going rework at no cost. They specified requirements, but essentially said that if the outcome they achieved was not in line with whatever they needed at the time, the supplier had to undertake work to deliver that outcome.
This situation means we must analyze the potential sources of uncertainty and assess their severity and impact. All parties must review the right contract model – for example, the blending of performance-based, outcome-based or agile.
Suppliers still have to bear their share of responsibility, however. Few have worked on developing appropriate contract models or assessing the shift in internal competencies needed to negotiate or manage these kinds of agreements. They also resist changing their own measurement and motivation systems – even though they create incentives to accept commitments and risks that are unrealistic and unaffordable.
In September IACCM launched a survey in partnership with two business schools. We've seen much interest from Marketing in this area. The survey, titled MBA in Contract Management for the outsourcing industry, resulted from our partnership with Sheffield Hallam University and Rebidding Solutions to explore development of an MBA in Contract Management for the outsourcing industry as a next step for those completing our Contract & Commercial Management certification. We have also designed new approaches to negotiation and guidance on producing relational outcome-based contracts through either internal or multi-party workshops.
Without decisive action, suppliers are indeed right to fear many outcome-based contracts and the risks associated with them. But the answer is to help educate and develop the market because the forces driving this need for change will not go away. Ignoring them is an even bigger risk than responding with the wrong solution.
See also my Commitment Matters blog.