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Commercial Update: a need for innovative terms

May 21, 2018

A weekly update on contract and commercial news and trends.

Outsourcing needs new contracts:  Greater leveraging of technology (i.e. Robotic Process Automation [RPA], Artificial Intelligence [AI], and Blockchain), plus a shift to DevOps/ Agile Development approaches, and greater use of output/ outcome based pricing models is forcing a change from traditional (people based) outsourcing agreements, reports Edward Caso, equity analyst at Wells Fargo. However, he observes that contracts are not adjusting fast enough to accommodate these new models.

A new form of Most Favored Customer? The availability of ‘voluntary administration’ as an alternative to bankruptcy is resulting in new contract clauses to protect healthy companies from competitive disadvantage. A feature of administration is that existing supply contracts are frequently renegotiated to generate better terms. Some companies are now inserting clauses requiring equivalence in the event a competitor benefits from this type of renegotiation.

Invoicing errors carry heavy cost: the latest IACCM research report reveals average errors equivalent to 4.3% of invoice value. While buyers increasingly focus on reducing overpayment, to what extent do suppliers undercharge? With new and more sophisticated technologies emerging, invoice accuracy is high on the list of areas for improvement.

Evaluating relationships: A research paper published in the MIT Sloan Review suggests four parameters for reviewing the strength of a supplier or customer relationship. The dimensions to be tested are trust, commitment, dependency and norms (e.g. of behavior). IACCM research has reached similar conclusions and also the extent to which selecting the right commercial model and terms influence these factors.

Learning from Carillion: the collapse of one of the UK’s largest construction and public sector outsourcing companies has inevitably led to many questions. The parliamentary report published last week sheds some light onto the overall lack of commercial insight and judgment by multiple parties. The warning signs were clear – and ignored. The critical need for enhanced skills is obvious, but also the importance of improved systems to automate reporting in today’s complex businesses. And a big question – what role should commercial staff have in challenging management when there is a clear lack of business integrity?



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