Market Trends in Commercial Agreements
 

Market Trends in Commercial Agreements

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At the 2013 ISG Sourcing Industry Conference, a panel of experts from ISG, WilmerHale and IBM discusss how commercial agreements will evolve going forward.

At the 2013 ISG Sourcing Industry Conference, a panel of experts from ISG, WilmerHale and IBM discusss how commercial agreements will evolve going forward.

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Market Trends in Commercial Agreements Market Trends in Commercial Agreements Presentation Transcript

  • Copyright © 2012 Information Services Group, Inc. All Rights Reserved. No part of this document may be reproduced in any form or by any electronic or mechanical means, including information storage and retrieval devices or systems, without prior written permission from ISG, Inc. Market Trends Richard Fogel, ISG Vice President and General Counsel Robert Finkel, Partner - Wilmer Hale John Funk, Senior Counsel - IBM Thomas Young, Partner – ISG 9 September 2013 How will Commercial Agreements Evolve Going Forward?
  • 2Copyright © 2012 Information Services Group, Inc. All Rights Reserved Over the past decade, many sourcing decisions and projects have evolved to from the strategic to the tactical. The larger the company, the more this is true. Sourcing and the CxO CxO N-1 N-2 SourcingRelatedProjects Strategic Tactical Higher Lower Engagement Size Engagement Margins Lower Higher Competition CostofSales GeneralTrend For higher margins and better overall engagements, firms need to get back to the C-Suite to solve problems and address strategic imperatives.
  • 3Copyright © 2012 Information Services Group, Inc. All Rights Reserved MARKET TREND As technologies evolve, Functional Out-Tasking will become a more pervasive in the industry. The commercial contracts will have to evolve as well. Services Supply Chain Fragmentation Multi Tower One Neck To Choke Model Tower 2 Tower 3 Tower 4 Tower 1 1000 Page Contract 100 Page Contract As commercial arrangements shrink in size and scope, so must the legal and commercial framework of the relationship
  • 4Copyright © 2012 Information Services Group, Inc. All Rights Reserved Misalignment of Business Practices & Services In today’s market, the pace of change exceeds our pace of learning. The divide is noticeable and increasing at an alarming rate. Business Alignment Technology & Services Business Practices We are here Growing Misalignment
  • 5Copyright © 2012 Information Services Group, Inc. All Rights Reserved Where are we going? In 2012 ISG suggested that the RFP is dead (or should be) in today’s market. In 2013 it is time to explore a framework of Evolutionary Contracting RFP is Dead ► RFP is too prescriptive. ► RFP limits innovation. ► RFP’s are too formal and they do not foster trust or transparency ► Need something more flexible in the market  RFS process. ► RFS can yield more innovative solutions for the base contract. ► RFS with Collaborative Contracting, done well, can foster trust and transparency. Time for Evolutionary Contracting ► Contracts need to evolve over time. ► Static operating models for multi-year durations do not make sense. ► Base Contract is just the beginning of the business relationship – it must grow/evolve or run the risk of becoming outdated and irrelevant. ► Buyers and Sellers need to engage in Mutual Consent Commerce.  True win/win with easy on easy off terms.  Think handshake with 100 pages vs. classical 1000 page contract.  Think dating vs. marriage
  • Copyright © 2012 Information Services Group, Inc. All Rights Reserved Appendix Slides
  • 7Copyright © 2012 Information Services Group, Inc. All Rights Reserved Year 5/7 Contract Term Base Contract The focus of the Classic RFP approach is to get to the “perfect” Base Contract that will support a services agreement for a typical term of 5-7 years. Visualization of Classic RFP Process Classic RFP Approach Transition Phase Transformation Phase Steady State Service Provider Executing Solution Defined in Base Contract No Innovation or Limited Average Point Where Buyer to Rebid/Renegotiate Focus on Getting to “Perfect” Base Contract Process is Formal – Trust is Thin Approach is Closed Book Seller is Restricted in Solution Buyer is Prescriptive Slow/Expensive Buyer Solution
  • 8Copyright © 2012 Information Services Group, Inc. All Rights Reserved Year 5/7 Contract Term Base Contract The focus of the RFS is seek solutions from the market that fit your environment, but do not prescribe the solution. Visualization of Typical RFS Process Transition Phase Transformation Phase Steady State Service Provider Executing Solution Defined in Base Contract Initial Innovation Avg Pt Rebid/Renegotiate Generally further out than RFP Seller SolutionRFS Collaborative Contracting Faster Less Costly Buyer Unconstrained Seller Innovative & Creative Approach Requires Transparency Process Builds Foundation of Trust Focus on Evolutionary Contract Phase RFS
  • 9Copyright © 2012 Information Services Group, Inc. All Rights Reserved Foundation – Trust & Transparency Outcome Based Stage 3 Evolutionary Contracting Base* Contract 2.0 The primary focus of most sourcing initiatives is to get to the base contract. However, the value of a relationship is to be derived in the evolutionary contracting phase. Evolutionary Contracting: Key to Continuous Value * - Base Contract 2.0: Solutions may be different, but regardless of the approach (top down or bottoms up), a well run process will end up with similar T’s & C’s and market pricing. Input Based Stage 1 Transaction Based Stage 2 Contract Pricing & Terms Faster Less Costly Buyer Unconstrained Seller Innovative & Creative Approach Requires Transparency Process Builds Foundation of Trust Focus on Evolutionary Contract Phase Focus on Getting to “Perfect” Base Contract Process is Formal – Trust is Thin Approach is Closed Book Seller is Restricted in Solution Buyer is Prescriptive Slow/Expensive Innovation Seller Solution Buyer Solution Mutual Consent Commerce
  • 10Copyright © 2012 Information Services Group, Inc. All Rights Reserved What needs to Change? The focus of commerce needs to shift from the “deal” or event of signing, to the framework and evolution of the deal as we move through a dynamic market. ► Base Contract 2.0  Looks more like 100 pages than 1000 pages  Ease of expansion AND exit for both parties  Focus on bi-lateral transparency  Rely on trust not legal terms ► Evolutionary Contracting  Mindset that the contract is an understanding not a document  Focus on change and evolving structure  Input  Transaction  Outcome  Mutual Consent Commerce  Both parties need to ensure that the other party is succeeding. Base Contract Base Contract 2.0 Contract Term Evolutionary Contracting Typical Base Contract & Governance Framework New Framework that recognizes that the world is changing faster than we are
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