The landscape of contracts displays increasing diversity. An increasingly common development is that more attention is paid to different forms of contracts. The most common types are the transaction-based and performance-based contracts. The newer types of contracts are much closer to real partnerships. They are more about the effect that the services generate or the influence they have on the organisation’s objectives. One way to set up these contracts is the Vested ™ method. How does this method relate to, for example, the CATS CM contract management method?
Different types of contracts
In a transaction-based contract, the supplier delivers a product or carries out an activity and receives a compensation for this, almost always in the form of euros. In a performance-based contract, the compensation is based on the service level achieved. An example of this is the supplier providing the service desk. The related activities are receiving phone calls and solving the problems reported by callers. The compensation is based on whether or not the call is answered within the agreed response time and solving the reported problems within the posed maximum time.
The newer types of contracts are about the effect of the services delivered on their influence on the organisation’s objectives. As such, this is the basis for determining the compensation. To return to the example of the service desk: the satisfaction of the caller or the contribution of the service desk to customer retention is the basis for the compensation.
‘The Vested Way’
A possible approach to achieve these types of contracts is the Vested methodology. This approach is gaining popularity. More and more organisations are deploying Vested to set up contracts. It is also common to see contracting processes in which a formal Vested approach was not applied, but which are still retroactively called Vested contracts by the developers of this methodology.
The popularity of Vested is easily explained. Binding a supplier in a real partnership (the most misused word in the purchasing industry) who helps realise your organisational objectives appeals to many people. Let’s by honest, who wouldn’t want that?
When to use which type of contract
So why don’t organisations transition to Vested contracts en masse? There are several reasons for this. First of all, not every contract is suitable for the Vested approach. Secondly, it is in practice not easy to find a supplier who supports the same approach. Finally, one’s own organisation must often be convinced of the approach. This is no easy task!
A number of books and many whitepapers have appeared about Vested. If I look at the most important topics treated in these reference materials, they mostly concern the substantiation of why the Vested approach delivers better results. This reasoning arises from scientific research, a field study of outsourcing contracts and a decision-making model to determine whether Vested is practicable or not. But these whitepapers also describe the guideline for realising a Vested contract and the topics that must be included in such a contract. The latter is of course interesting from a (post-award) contract management perspective, because this lays the foundation for the execution phase of the contract.
Framing the result
When we zoom in on the latter, we see that the approach proposes to record the following topics as result objectives:
- Shared vision and strategic objectives
- The principles of the partnership
- The scope of the work
- The agreements about allocating/sharing the value which is created in the partnership
- Other provisions and conditions for the partnership
- The structure and work method for controlling (governance of) the partnership
The following instructions are given for the execution of the partnership:
- Partners must remain focused on the relationship and take measures necessary to maintain a real partnership;
- It is absolutely necessary that the leaders in key positions continually display the WIIFWe (What Is In It For We) philosophy in their own behaviour;
- Execution of the partnership is only possible if both partners continually keep the shared vision and partnership principles in mind.
Two methods side by side: Vested versus CATS CM
How does this relate to the CATS CM method? The short answer is that Vested and CATS CM are a great match. Let’s clarify this.
The Vested approach relates to the part before signing the contract and the CATS CM method concerns the activities that follow. In that sense, the approaches complement each other.
The topics which have to be recorded from a Vested approach can largely be found in the CATS CM CM Essentials: objectives, the financial aspects and the controlling of the contract. CATS CM indicates what you have to work on as a contract manager and Vested structures the expected work method for these aspects. The additional instructions given by Vested can easily be picked up by a contract manager. And the other CM Essentials will also be put in practice in a Vested contract.
Conclusion: Vested and CATS CM complement each other nicely and can therefore be deployed together!
- Vested™: www.vestedway.com, Vested is a registered trademark of Vested Outsourcing, Inc.
- CATS CM®: www.cats-cm.com