0. MULTI-SOURCING AND INCENTIVISATION
Technology and Sourcing Webinar Series

1. Speakers Amanda Pilkington Gavan MacKenzie Legal Director
United Kingdom
T: +44 (0)
Gavan MacKenzie
Special Counsel Australia
T: +1 (0)

2. Agenda 1. Multi-sourcing: an overview 2. Hard levers for collaboration
3. Soft levers for collaboration
4. Other considerations
5. Concluding thoughts

3. Multi-sourcing: an overview1
Multi-sourcing: an overview

4. 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.

5. 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 sub- contracts to various other suppliers for the delivery of the services. The Customer does not have a direct contractual relationship with the sub- contractors, 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.

6. Contractualising collaboration
Multi-party collaboration agreement
Replicating bi-lateral customer – supplier provisions

7. Multi-sourcing - key consideration overview

8. Hard levers for collaboration2
Hard levers for collaboration

9. 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).

10. 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
SIAM
Service Level Definition
End to End
Single definition applying to all Suppliers within the ecosystem. Operates on a one fail all fail basis.
SUPPLIER 1
SUPPLIER 2
SUPPLIER 3
SUPPLIER 4
SUPPLIER 5
Shared
Single definition applying to more than one Supplier with sanctions applying to all participating Suppliers.
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.

11. Incentive pots Incentive Pot Key considerations / risks:
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 top- slicing (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.

12. Soft levers for collaboration3
Soft levers for collaboration

13. Soft levers
Building a culture of co-operation and driving the right behaviours:
Openness
Self-accountability
Problem solving
Negotiation
Looking forward
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

14. Soft levers - examples Reference site Human Factors 360 feedback
Employee reward schemes
Customer guest speakers
Co-author case studies/ white papers
Secondment opportunities

15. 4
Other considerations

16. Liability - cross supplier
Key Features
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".
"Innocent" Supplier
"Guilty"
Supplier
Relief
Claim
Claim
Key Features
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.
"Innocent" Supplier
Customer
"Guilty"
Supplier
Compensation
Recovery

17. 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

18. 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.

19. 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.

20. 5
Concluding thoughts

21. 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!

22. Please feel free to get in touch with the speakers
Amanda Pilkington
Legal Director
United Kingdom
T: +44 (0)
Gavan MacKenzie
Special Counsel Australia
T: +1 (0)