SOURCING BUSINESS OUTCOMES REQUIRES A SEA-CHANGE IN THE WAY SOURCING BUYS AND SELLERS SELL

Over 40% of senior business executives are looking to suppliers and external parties to co-develop and deliver measureable business outcomes. Telling suppliers to forget their old pricing metrics and focus instead in delivering value while also sharing risks and rewards requires a new set of skills on both sides of the negotiating table. This is a real challenge for both suppliers and buyers, and it takes both parties out of their comfort zones into new territory for risk management, project control and revenue sharing.

Forrester’s Forrsights data reveals business executives want to see more value delivered from IT projects and more outcome-based contracts. This is a priority for them in the next few years and sourcing professionals must develop and enhance their skills in this key area or risk getting left behind.  

Whether it’s increasing revenues, driving more client subscriptions, cutting costs, facilitating more paperwork processing in less time or driving up customer satisfaction and retention, some IT companies are now offering outcome based contracts and are happy to be paid purely on the results.

Unfortunately for some of today’s technology giants, clients don’t want to pay anymore for software licenses, hardware products or time & materials staffing. They want the suppliers to have ‘skin in the game’ and want to pay based only on the value delivered and the outcome achieved.   

To help their organizations navigate through the emerging world of business outcome based contracts, we have identified three key principals of change that both suppliers and buyers will need to address:

1.    Sourcing needs to change the way it buys. Procurement will have to become less adversarial and less focused on squeezing supplier’s margins. Buying will become a collaborative process where the role of sourcing is one where its prime objective is to work closely with suppliers to help their organization not only save money but to also make money too.

2.    Suppliers need to change the way they sell. Suppliers will have to forget their traditional price book and come to client meetings with value propositions that live or die based on delivering real, measureable business outcomes. Suppliers will share the risks and the rewards of the project and will need to align themselves with the clients longer term goals and aspirations; not their own short term profit realization.  

3.    Both parties need to get a grip on new metrics. Sourcing activity needs to be measured and targeted in a different way; no longer will cost savings be the most important factor as delivering outcomes becomes the key driver. And suppliers will be paid based not on what products they sell but on what value they deliver to their client.

Thoughts? Experiences? We would love to hear from you.

I’ll be speaking about this topic at our upcoming Forrester Forums on May 6-7 in Washington, DC and on June 10-11 in London, UK.  

Comments

There are two aspects that

There are two aspects that you have mentioned. Price for the service delivered and Value from the service. The first aspect price for the service delivered is evolving from time and material based to an output based where output is defined technically in terms of milestone mirroring a stage in technical service progression which essentially is nothing but moving up the value chain kind of in the area of pricing.
The second aspect value derived from the services is more tricky and difficult to quantify and hence measure because there are multiple factors that will govern the value. It is in this aspect that a great deal of effort will be required from both buyer and supplier side to arrive at consensus about the value expected from the services and right metrics to mesure the same.

Easier said than done

TRUST - is the central theme to make this happen. Most suppliers and buyers will agree this as the way ahead.

In any sourcing contract, while both parties usually want to squeeze the other and get the best deal, I wonder how to make outcome based contracts happen? Risk management, project control may lead to several caveats,rules of engagement which may only complicate things, than make the contract simple. But probably that's the only option.

Value is still subjective

Value is still subjective term, utlitmately it will translate into numbers even if it has to based on "value based" pricing. If it gets translated to numbers ($$) than all metrics vanish and real buyer and seller minds play the game. Afterall IT services is any kind of service - sold puerly based on service type, service need, service volume. However claim IT can make to simplify or automate business, eventually it will be measured from all aspects of cost, ofcourse it enables better experience and quick expansions but still at sizable costs - how do you balance this - is the value.