Contract Reviews: Critical to the success of your CRE outsourcing strategy

One of the most damaging mistakes an organization can make when embarking on any outsourcing initiative is not taking the time to assess what is happening today and think through what is working well and where the challenges lie. One important element of this assessment is understanding the existing contract and how it aligns with future state goals and objectives. A contract review delivers a detailed assessment of the current contract, related amendments, and relevant artifacts including the commercial model/pricing approach, and governance framework.

Many organizations don’t recognize that when it comes to outsourcing partnerships, the contractual framework is the foundation that drives behavior within the relationship. It determines how services are resourced, paid for, and delivered. It determines how strategy is developed and paid for, or not. If the goals and objectives of the relationship are not clearly defined within the contract, and if it is not clear how the parties will be held accountable for delivery against the desired outcomes, the result is often misalignment, miscommunication, lack of transparency and failed delivery. It is a situation that also occurs as the strategies, objectives, or assumptions on which the contract was originally based, change over time.

In one common example, I often see companies rely on a conventional transaction-based model rather than using a more appropriate outcome-based performance model that may be better aligned to business needs. The client wants the service provider to deliver strategic outcomes, however they are paying for services in a task-based structure.?Misalignment exists in the very foundation of the relationship.

A well-structured deal is the foundation of a healthy relationship, but shifting priorities, strategies and changing circumstances can strain strategic relationships when the original contractual framework is no longer appropriate.

Another common pitfall relates to the commercial model/pricing approach used (or more appropriately, a lack of a well thought-out and aligned approach). For example, companies that adopt a strategy solely focused on obtaining the lowest price possible, in which they aim to squeeze short-term price concessions from their service providers, often do so to the detriment of the relationship and service delivery over the long-term. It can be a costly mistake.

It is important to conduct the review and assess the contract relative to intent of the deal, current needs and desired outcomes, and market trends. You receive valuable insight and answers to important questions about the contract, such as:

• How competitive are the commercial model and the deal terms?
• Does it promote cooperation via alignment of both parties’ interests?
• Is it equitable and does it balance risk and reward allocation to ensures both parties take appropriate responsibility?
• Does it effectively tie performance to profitability? Are the right KPIs and operational indicators linked to business outcomes?
• Does the commercial model drive perverse incentives or bad behavior? How can that be solved for?
• Does the contract maximize transparency to build trust?
• Is it a flexible framework allowing for business changes?
• Is it an insight vs. oversight governance and management structure?

A well-structured deal is the foundation of a healthy relationship, but shifting priorities, strategies and changing circumstances can strain strategic relationships when the original contractual framework is no longer appropriate. Sometimes the framework wasn’t appropriate to begin with. A contract review will diagnose the problem and provide insight into the most appropriate contractual framework for the future.