Why Long Term Vendor-Client Relationships Inhibit Outcome Based Contracts


capioIT has long written about the shift towards outcomes based pricing for the management of infrastructure, application and business process engagements. This has been a slow but one directional shift that is critical for enabling a more flexible and business orientated technology and process capability.

The shift has been frustratingly slow in some quarters because put simply, the process is complicated. Successful outcomes based pricing does not tolerate secrets between provider and client. A comprehensive and pragmatic understanding of a process, its drivers and functions is critical. Once all the process components, cost and measurement are laid bare, lawyers and accountants get involved.

What capioIT has noted is that the shift towards outcomes based pricing has accelerated in markets such as China that have an aversion to up front Capex deals, and a green field relationship due to the emerging nature of the market.

In mature markets many vendors have tried to shift existing fixed price or time and materials relationships to outcome based pricing. It has proven to be difficult. One of the key reasons for this difficulty is the relationship familiarity inhibits the change regardless of whether it is in the best interests of the client organizational objectives.

I recently met with a client of a tier 2 infrastructure services provider who had given up on a shift towards outcome based pricing. There was just too much “cosiness” and interdependence to make a shift from a numbers based SLA approach to the outcomes based requirements possible. To highlight the issue, the inability to drive to change was mutual.  This is not an isolated experience, it has been  a topic for many sourcing professionals and strategy teams looking to increase the value of internal and external service delivery.

These difficulties also apply equally to the shared services model. Familiarity breeds a lack of willingness to change and to expose outputs to a more onerous measurement of success.

Bottom line – If you have a long term relationship that is required to shift towards an outcome based model, you need to make changes to some key personnel, shake it up and remove the cosiness and complacency.

About capioIT - Phil Hassey

If you require further information, please contact Phil Hassey, CEO of capioIT. capioIT is an advisory firm focused on helping organisations to understand emerging technology as the world becomes Digital. Phil may be contacted easily in the digital and real world. phil@capioit.com +61422231793
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