The foundation of growth in a company is constant innovation, a sharp eye on consumer needs and a clear headed approach to business problems. In most business scenarios, there are several key players who have a role to play in driving this growth. Important business projects, especially those that have the potential to transform the existing way of doing business, are increasingly being outsourced to external vendors.
The traditional approach to vendor contracts was ‘Time and Materials’ project with vendor involvement on the ultimate business outcome. Hence the business shouldered the entire risk on the project outcome. While ‘Time and Materials’ projects still abound, this lopsided risk equation associated with them slows down innovation. In some cases it can be bad enough to create an innovation bottleneck in the long run.
The new paradigm of approaching such contracts is a partnership led, risk sharing, revenue sharing or outcome/performance based approach. This transfers a part of the risk that hinges on the successful outcome of the project to the vendors, brings in greater accountability, automatically reigns in disproportionate spending and increases the innovation appetite for a business
Not all risk-reward contracts may be successful and they should be approached carefully, by both businesses and vendors. To begin with, I feel, there has to be a high degree of trust between the vendors and client companies and a shared sense of responsibility towards business outcomes. Client companies must onboard vendors as partners and empower them through any support that is required from the client side that will help the vendor see through a successful implementation. Especially for large implementations, a client company must be very sure of a vendor’s capability and must have an excellent working relationship at a personal level, since the risk on the client side might even be the complete loss of a big business opportunity with the potential to set the business back a few years.
At the same time the vendors must assess three things before entering such contracts. One, they must ensure that they have an excellent understanding of the clients business. This is essential before signing off on the revenue or other risk projections on which their compensation may depend. Two, they should have a realistic assessment of their technological capabilities and project management expertise before they rush to close on a deal which may seem lucrative at face value. And three, they must ensure that they are flexible enough to plan for alternatives and have the financial stability to withstand the financial shock in case of a failed implementation or unfavourable outcome.
Do you think in these unpredictable economic conditions, with increasing competition and tightened purse strings we will see a rise of Risk-Reward contracts?