The rapid onset of Digital business models is having a number of implications for developing a service provider – client contract, including:
- Lack of defined outcomes: Engagements are starting to have a more open ended nature: the end result is not clearly defined nor are the steps needed to get there. Experimentation and agility are key characteristics of many new engagements.;
- Challenges of embracing new tech: Accelerating change driven by more and more emerging technologies that affect the operating environment of enterprises and service providers;
- Setting future milestones: Plotting a detailed course of action (and relevant KPIs!) over multiple years has become virtually impossible: one simply cannot know what one needs in 2 years’ time, let alone look 5 years’ ahead
I see service providers and buyers struggle to deal with this new reality.
Existing commercial models and contracting practices are no longer viable to capture the outcome of the engagement, let alone the spirit of collaboration, co-innovation and partnership.
The old way of contracting is not sustainable and leads to sub-optimal results in a Digital, As-a-Service world. What should the sales process, the contract, governance, contract duration and responsibilities then look like?
The big issue here is trust. In a situation that calls for innovation and new ways of working, there is a double trust dilemma. It’s the classic “agency problem” times two: neither party has an information advantage in the relationship and aligning interests is very difficult in situations with a lot of moving parts and uncertainty about goals and how to get there. Trust requires mutual understanding of people’s and companies’ interests and culture. A huge part of trust is predictable behavior, knowing what to expect from the other. Understanding each other and customers’ customer is critical in creating mutually beneficial relationships.
In typical (legacy) engagements today, many parties have failed to contract in a way that cements trust.
Thick documents, dozens if not hundreds, of KPI’s to measure performance, and other metrics, which all create a (false) sense of certainty. This hasn’t been terribly effective, as business environments change and KPIs often don’t as they are part of the contract, and it is even less satisfying from a perspective of really solving business problems. Business cases are often based on a best estimate or just plain guesswork as the glass ball gets more foggy as tech driven change accelerates. Enter even more uncertainty, velocity and tech driven change and it becomes almost undoable to define the goals and terms of contracts.
So what is the way forward for contracting in an age of uncertainty and novelty?
HfS is going on an ambitious journey to answer the key questions:
- What ways are there to tackle the double trust dilemma?
- How to deal with the open-ended engagements?
- With more risk involved, is there a tendency to share risks? If so, how does that work out, what works, what doesn’t
- What ways of contracting are actually enabling innovation rather than hindering innovation, new ways of working, collaboration and co-investing?
One solution we are exploring is that of an “Uncertainty premium” for the service provider taking on more risk in new commercial constructs. This uncertainty premium could be in the form of an “Innovation bonus” which entails achieving innovation and/or cost savings (with the savings earmarked for innovation). This approach could then drive budget for additional innovative work, benefitting both parties. One increasingly popular measure is the introduction of Robotic Process Automation into an engagement – one oil and gas firm stipulated that if the service provider can hit a 20% saving, that 20% will be added to a budget earmarked for innovation projects.
Another I’ve heard is along the same lines but with the savings being earmarked for more industry talent / SME’s to be paid for by the client, and so introducing more quality and higher value work into the engagement.
We have launched our research initiative recently with selected buyers and providers. We will report back to the industry in twofold: a report and a session at the HfS Buyers Convention in New York September 14-16 2016.