MULTI-SOURCING AND
INCENTIVISATION
Technology and Sourcing Webinar Series
Thursday 4 August 2016
www.dlapiper.com
Thursday 4 August 2016
0
Speakers
www.dlapiper.com
Amanda Pilkington
Gavan MacKenzie
Legal Director
United Kingdom
Special Counsel
Australia
T: +44 (0) 114 283 3071
[email protected]
T: +1 (0) 6126 2018741
[email protected]
Thursday 4 August 2016
1
Agenda
1. Multi-sourcing: an overview
2. Hard levers for collaboration
3. Soft levers for collaboration
4. Other considerations
5. Concluding thoughts
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Thursday 4 August 2016
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1
Multi-sourcing: an
overview
What is multi-sourcing?
 A definition (from Wikipedia!)
Multi-sourcing is the disciplined provisioning and blending of business
and IT services from the optimal set of internal and external providers
in the pursuit of business goals.
 Challenge:
Creating a collaborative landscape between competitor organisations
and incentivising end to end delivery of services.
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Multi-supplier Model vs Prime Contractor Model
 "Prime Contractor Model": The Customer contracts directly with a single
organisation or consortium (the "Prime Contractor"), which in turn subcontracts to various other suppliers for the delivery of the services. The
Customer does not have a direct contractual relationship with the subcontractors, and the Prime Contractor is responsible for holding each of the
sub-contractors to account (i.e. "one throat to choke").
 "Multi-supplier Model": The Customer enters into separate agreements with
different suppliers who will each provide a part of the overall service being
outsourced. A multi-sourcing structure can maintain competitive tension and
produce dynamic, direct relationships with suppliers who are leaders in their
fields ("best of breed"). However, there is a lack of end-to-end responsibility;
the Customer loses the central point of contact or "one throat to choke" the
prime contractor model provides, and will be responsible for any gaps which
may arise.
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Contractualising collaboration
Multi-party
collaboration
agreement
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Replicating bi-lateral
customer – supplier
provisions
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Multi-sourcing - key consideration overview
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2
Hard levers for
collaboration
Shared "end to end" service levels
 Establish "shared" end to end service levels, which apply to multiple suppliers and
measure performance across ecosystem. May have service credits attached.
 Failure to achieve end to end service levels constitutes a failure of all applicable
suppliers, regardless of individual fault? To provide some comfort, could grant relief
to "innocent suppliers" where consecutive failures are caused by a single supplier.
 Key considerations / risks:
– May be unattractive to the market, as Suppliers are required to take on risk for
things outside their control.
– Suppliers may price in such risk, making the overall solution more expensive for
the Customer.
– May lead to "finger pointing" (in particular where there is a relief mechanism).
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Shared service levels – an example
Principles:
Purpose: introducing end to end measures in a disaggregated model
"One fails all fail", aligned to the principles of collaboration
Limited relief granted where a single Supplier persistently fails to meet a shared service level
SIAM Supplier must measure performance and manage poor performance
Service Level Definition
Common
Single definition applying to all Suppliers in the
ecosystem but no cross default (i.e. not a one fail all fail
basis).
Unique
Unique service level description applying to a single
Supplier with the sanction applying solely to that
Supplier.
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SUPPLIER 5
Single definition applying to more than one Supplier with
sanctions applying to all participating Suppliers.
SUPPLIER 4
Shared
SUPPLIER 2
Single definition applying to all Suppliers within the
ecosystem. Operates on a one fail all fail basis.
SUPPLIER 1
End to End
SIAM
SUPPLIER 3
•
•
•
•
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Incentive pots
Incentive Pot
 Establish an "incentive pot" to distribute "bonuses" to suppliers for achieving business
outcomes / end to end services / innovation / savings.
 Scheme could be self-funding (i.e. savings pay for bonuses) or could be funded by topslicing (matched by the Customer).
 Common or segregated pots?
 Key considerations / risks:
– Are any constraints preventing the Customer from implementing a co-funded
investment pot (in particular for public sector clients). Approval for public funding
may be difficult to secure.
– How to deal with scenarios where the Customer is at fault (and the perverse
incentives that apply)?
– Suppliers may increase their charges to match top-slicing.
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3
Soft levers for
collaboration
Soft levers
Building a culture of co-operation
and driving the right behaviours:
• Openness
• Self-accountability
• Problem solving
• Negotiation
• Looking forward
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Embedding that culture in the project:
• Drafting it into the governance
framework
• Evaluating it during the
procurement phase (e.g. scenario
days)
• Monitoring it throughout the
contract term
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Soft levers - examples
Reference site
Secondment
opportunities
Human
Factors
Co-author
case studies/
white papers
360 feedback
Customer
guest
speakers
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Employee
reward
schemes
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4
Other considerations
Liability - cross supplier
Key Features
"Innocent"
Supplier
•
•
"Guilty"
Supplier
•
Relief
Claim
Direct Supplier to Supplier liability.
Customer is removed from the claim but this
can have disadvantages in terms of
ecosystem harmony.
Often requires complex drafting in the
collaboration "agreement".
Key Features
Claim
•
"Innocent"
Supplier
Customer
"Guilty"
•
Supplier
•
Compensation
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Recovery
•
Flow through liability model,
no direct supplier to supplier
remedy.
Innocent Supplier obtains
relief against any
consequential failure and in
some instances
compensation.
Innocent Supplier right of
recovery from the Customer.
Must limit Customer's
exposure re cost recovery.
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Liability
 Supplier to Customer liability
 “Normal” liability flows as between Customer and Supplier
 Consider flow through of liabilities from defaulting Supplier
‒ Different mechanism for minor claims?
‒ Separate Customer cap?
 Supplier to Supplier liability
 Unpopular with suppliers
 Potentially destabilising/loss of control for Customer
 Joint and several liability?
 Issue of supply contracts of different sizes, value and complexity and
level of risk and liability to which "smaller" suppliers will be exposed
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Governance and dispute resolution models
 Creating cross supplier forums.
 Identifying which issues need to be dealt with cross supplier and those which
should be reserved for bilateral (customer – supplier) discussion.
 Dovetailing governance regime with cross supplier liability provisions and
dispute resolution.
 'Safe-container' provisions.
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Additional contract considerations
In addition to standard contract protections, it is useful to consider additional
protections including:
 Ensuring suppliers retain responsibility for inputs they recommend but do not
supply (including representations they make about those inputs and the
volume or scale of those inputs required).
 Inter-supplier disclosure and information requirements and permissions.
 Inter-supplier IP considerations.
 Technical interdependencies.
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5
Concluding thoughts
Conclusion
 Take time to design a collaboration regime that works in the context of your
ecosystem.
 Engage with the commercial, legal and operational teams to design a workable
model.
 There is no right answer!
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Please feel free to get in touch with the speakers
www.dlapiper.com
Amanda Pilkington
Gavan MacKenzie
Legal Director
United Kingdom
Special Counsel
Australia
T: +44 (0) 114 283 3071
[email protected]
T: +1 (0) 6126 2018741
[email protected]
Thursday 4 August 2016
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