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Pricing structures, relationship models and the contracting process: it’s time for a re-think

November 30, 2010

“This paper challenges the established view that IT has to be a capital and people intensive industry. In this new decade, business survival and performance will be driven by business leaders demanding agile technology, fast procurement, speedy delivery, opex-funded transformational initiatives that payback within the financial year and the delivery of value deep into their business’ frontline.”

This statement comes from a paper produced by Intellect, a UK-based body representing the technology industry. The paper calls for a ‘ creative re-think of business models in key areas, such as pricing structures, relationship models and the contracting processes,’ and suggests that without these, the industry will not be ready or able to deliver against customer needs. 

Although the focus of Intellect’s research was on the outsourcing industry, its comments ring true for many sectors. Once more, they reflect the importance of the work being undertaken by IACCM and its members to re-orient commercial and contractual focus and practices. The paper endorses the point that the key risk we face is a lack of creativity, a failure to develop economic value propositions that are attractive and affordable. Intellect suggests there are  three ‘revolutions’ – technological, commercial and financial – which must be addressed through new processes and offerings.

 Today’s market and business conditions call for a new balance of risk and responsibility. Long-term relationships cannot be taken for granted. That implies suppliers must think about new approaches for funding their customer offerings and projects. This may mean greater standardization, with customization through pre-configured options.  It also suggests more use-based offerings with flexible call-off mechanisms. And, as I have discussed in past blogs, it signals the end of the ‘caveat emptor’ principle for a growing number of contracts – which means accepting responsibility for the quality of outputs and outcomes.

But the changes implied by this new world are not limited to suppliers. For the new economics and performance requirements to work, customers must look at how they can better manage risks through a more open and collaborative interface with their suppliers. This suggests the need for better and more holistic assessment of supplier selection; today’s narrow, price-based judgments frequently result in the wrong choice. Customers must think about the right form of contract and the right economic balance, rather than using some ‘off the shelf’ contract that may bear little resemblance to the realities of the deal. They must also ensure clear internal processes for implementation and enable rigorous performance reviews which are mutual in their nature. The world in which customers sign the contract and then sit back and watch the supplier perform (or fail) must come to an end. If the nature of the contract demands an on-going relationship, then like all relationships, it will succeed only if there is a commitment by both parties to make it work and to apply time and resource.

This requires more thought about on-going governance. What types of information do the parties need to enable them to perform their responsibilities? What types and regularity of review are required? Who needs to be involved in those on-going discussions, not just to ensure performance or to make amendments, but also to support improvement or innovation? Past blogs have touched on many examples where this thinking has been successfully applied. But in general, I have cited individual exceptions. What we need is embedded practice.

If Intellect is right and if we are indeed facing revolutionary times (and personally, I agree that we are), then the solution will demand new organizational structures and motivation systems (internal and external) that mirror today’s business goals. Foremost among these changes is the need for greater clarity over who is responsible for relationship outcomes and reward mechanisms that incent successful performance. Such changes do not imply increased costs; in fact, they would enable far greater speed and efficiency than today’s contentious procedures and functional structures, which were designed to deliver the business offerings of a past era.

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