Outcome-based contracting

I believe one of the key trends this year will be a growing focus on outcome-based contracting. There are already clear signs of this – for example, in the last week there was an article in the Wall Street Journal quoting the CEO of Novartis, who sees this as a key trend in the pharmaceuticals industry. In the UK, the Government has announced a new wave of outcome-based outsourcing contracts to support improvement in the criminal justice system. Across the professional services community, there is ever-increasing discussion about shifting from traditional hourly rates to payment based on outcomes.

The logic is inevitable. it is now 20 years since the big move towards ‘solution contracts’, in which suppliers started to take greater responsibility for the packaging of goods and services and entering commitments of inter-operability, even ‘fitness for purpose’. That marked a major departure from the ancient principles of ‘caveat emptor’ (Let the buyer beware).

But while such solutions represented a major step in the level of supplier responsibility, this still resulted in many acquisitions ending in disappointment. Neither side is blameless; both customers and suppliers could have taken additional steps to improve performance. However, one solution is to push even more responsibility onto the supplier and to make some or all of their compensation depend upon the output or outcome of the contract.

This has many implications and at IACCM we will be explaining these over the coming months. Among the challenges are the implications to funding and cash flow, the shift in measurement and motivation systems and the need for new systems for tracking and reporting. There will be many debates over what represents a fair price or charge relative to the increased supplier risk – and what rewards there should be for out-performing the committed targets.

Another major shift will be in operational management of the contract – the need for skilled resources, the importance of mutual tools and forums to oversee and improve performance. For the contracts and commercial community, this represents a major opportunity and it will be important that we are at the forefront in understanding such offerings and advising senior management about the implications and the steps needed to make outcome based contracts a success.