Outcome-Based Contracting Requires Contract Management
Outcome-based contracts are becoming increasingly popular in B2B contracting, and their use is likely to continue growing — making the adoption of contract management software even more imperative than it already has been.
An outcome-based service contract doesn’t require a customer to pay until a specific outcome, as defined in the contract, is achieved by the service provider. Rather than billing for activities and tasks, the provider bills based on the results. The CEO of Novartis recently told The Wall Street Journal that he considers this approach to contracting to be the wave of the future.
This shift toward outcome-based contracts isn’t bad news for anyone. It’s becoming popular for good reasons — it can improve efficiency, spark innovation, and strengthen mutually beneficial supply-chain relationships.
“Outcome-based contracting is much more than just a new approach to contracting. If implemented correctly, it can lead to the transformation of organizations for the better, whether service provider or customer,” concludes the Advanced Institute of Management Research, a UK-based academic research organization.
But the shift does mean that contract management becomes more important, and more complex, than ever.
“Among the challenges [of outcome-based contracting] 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,” says Tim Cummins, the founder and CEO of the non-profit National Association of Contract and Commercial Management.
These challenges won’t be met by providers or customers without automated contract management to provide the communication tools — as well as the constant, always-up-to-date measurement and reporting of contract execution — that are essential to achieving the collaborative and business-intelligence benefits of outcome-based contracting.
For effective collaboration to happen, all parties to a contract must be able to conveniently access the contract at any time. Enterprise contract management not only provides that capability, it ensures that the contract being accessed is always the latest version. And any changes made to the contract are tracked, so that all stakeholders can easily see what has been altered.
Contract management software also will automatically route contracts to the appropriate people for approval at each stage, shortening the contract lifecycle, benefiting both providers and customers.
To avoid collaboration breaking down because of schedule miscues, contract management software will provide alerts for key dates and milestones.
Beyond enabling the operational advantages of collaboration, contract management software provides value by allowing an enterprise to comprehensively analyze contract performance to yield data that can be crucial in the structuring of outcome-based contracts.
“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,” Cummins says.
With the data aggregated and analyzed by contract management software, an enterprise can enter into these negotiation debates with accurate evidence of cost and performance to back up its position.
But the essence of outcome-based contracting is cooperation between providers and customers to realize added value for both. With the business intelligence made possible with contract management software, contentious negotiations can be avoided. The picture will be clear, and both the supplier and contractor can work together to create a contract that sufficiently rewards both parties and reasonably shares risk.
Outcome-based contracting can result in better contract performance for both service providers and customers — but only with automated contract management to facilitate collaboration and improve cost and performance visibility.