Is outcome-based contracting a trick?
“What should I read into the trend from customers to specify that they want an outcome-based contract. Is this just another way they want to load more risk onto the supplier?”
That was the question I faced when meeting with the Commercial Director for a large, international service provider this week. His experience of ‘outcome-based’ has not been good. He cited examples where the customer has been quite specific about the work they want done, but then added a clause that essentially offers them carte-blanche to enforce on-going rework at no cost. They specify requirements, but essentially say that if the outcome they achieve is not in line with whatever they may then need, the supplier must undertake work to deliver that outcome.
Clearly, this is indeed an unacceptable burden of risk. Essentially it abdicating responsibility for defining business needs and saying “I don’t really know what I want, but give me xyz and if I then decide I really wanted abc, you will do the conversion work for free”.
Given the speed of change in today’s markets and technologies, it is quite understandable that customers will struggle to define precise or static requirements. Indeed, in many cases, a key requirement is flexibility and change. It is not reasonable to expect that a supplier can absorb the consequence of that uncertainty. This situation demands a different approach to contracting and contract management.
In IACCM’s view, the first requirement is to undertake an honest and thorough analysis of the potential sources of uncertainty and to assess their severity and impact. We have developed a standard questionnaire to assist in this. Based on those findings, the parties need to review the right contract model – for example, the blending of performance-based, outcome-based or agile. This also predicts the level of collaboration and shared responsibility that will be appropriate.
However, suppliers are not absolved from responsibility in addressing today’s business environment. Few have worked on developing appropriate contract models or assessing the shift in internal competencies needed to negotiate or manage such agreements. Equally, they are reluctant to address the internal measurement and motivation systems that incentivize acceptance of unrealistic commitments and unaffordable risks.
In addition to the questionnaire, IACCM has developed new approaches to negotiation and guidance on producing relational 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 that are driving this need for change will not go away. Ignoring them is an even bigger risk that responding with the wrong solution.