MULTISOURCING AND INCENTIVISATION Technology and Sourcing Webinar Series

MULTI-SOURCING AND INCENTIVISATION Technology and Sourcing Webinar Series Thursday 4 August 2016 www. dlapiper. com Thursday 4 August 2016

Speakers www. dlapiper. com Amanda Pilkington Gavan Mac. Kenzie Legal Director United Kingdom Special Counsel Australia T: +44 (0) 114 283 3071 amanda. pilkington@dlapiper. com T: +1 (0) 6126 2018741 gavan. mackenzie@dlapiper. com 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 www. dlapiper. com Thursday 4 August 2016 2

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. www. dlapiper. com Thursday 4 August 2016 4

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. www. dlapiper. com Thursday 4 August 2016 5

Contractualising collaboration Multi-party collaboration agreement www. dlapiper. com Replicating bi-lateral customer – supplier provisions Thursday 4 August 2016 6

Multi-sourcing - key consideration overview www. dlapiper. com Thursday 4 August 2016 7

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). www. dlapiper. com Thursday 4 August 2016 9

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 service level description applying to a single Supplier with the sanction applying solely to that Supplier. www. dlapiper. com 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 • • Thursday 4 August 2016 10

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. www. dlapiper. com Thursday 4 August 2016 11

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 www. dlapiper. com 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 Thursday 4 August 2016 13

Soft levers - examples Reference site Secondment opportun ities Human Factors Co-author case studies/ white papers 360 feedback Customer guest speakers www. dlapiper. com Employee reward schemes Thursday 4 August 2016 14

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 www. dlapiper. com 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. Thursday 4 August 2016 16

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 www. dlapiper. com Thursday 4 August 2016 17

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. www. dlapiper. com Thursday 4 August 2016 18

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. www. dlapiper. com Thursday 4 August 2016 19

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! www. dlapiper. com Thursday 4 August 2016 21

Please feel free to get in touch with the speakers www. dlapiper. com Amanda Pilkington Gavan Mac. Kenzie Legal Director United Kingdom Special Counsel Australia T: +44 (0) 114 283 3071 amanda. pilkington@dlapiper. com T: +1 (0) 6126 2018741 gavan. mackenzie@dlapiper. com Thursday 4 August 2016 22