A New Approach to Purchased Service Contracts

Robert T. Yokl, President, SVAH Solutions

Customarily, agreeing upon and memorializing a formal contract on a purchased service agreement has generally been a tug-of-war between the parties. This is because both parties feel unsure of the cost, quality, and outcomes of the contract they are about to sign, so they try to protect themselves from every eventuality with clauses like a “30-day cancellation for any reason.” This, in practice, means that your vendor only has a 30-day contract. So why should your vendors invest time, effort, and expense to exceed your expectations when their contracts could be cancelled tomorrow for any reason? This has actually happened to our firm, so we know how it stings!

A Much Better Way: Formal Relational Contract

There is a new contract construct that is getting a lot of buzz in other industries and has even been employed in the Canadian healthcare system. This is called Vested® Outsourcing and is designed to foster trust and collaboration between the parties yet is legally enforceable and is especially useful for highly complex relationships when it isn’t possible to predict every eventuality that could happen during the term of the purchased service contract. Instead of both parties negotiating from the standpoint of, “What’s in it for us?” the goal with this new Vested® relationship is more like an equal partnership where both parties work to make their purchased service contract affiliation more efficient, effective, and at a lower cost than new or renewal contracts for the same purchased service.

Vested® Case Study: Dell/FedEx Contract

Dell has contracted with FedEx since 2005 to handle all aspects of its computers’ return-and-repair protocol. However, even though FedEx met all of Dell’s contractional obligations, Dell still wasn’t happy with FedEx’s performance, for example, not being proactive in continuous improvement and improving their relationships. To our thinking, this purchased service contract was a transactional relationship. FedEx did what the contract required, and Dell paid FedEx per transaction, which wasn’t really a relationship at all, just a work-for-hire contract. After eight years, the parties were not happy with each other, but they also needed each other. So, they decided to try the Vested® formal relationship  contract approach to become equal partners in their outsourcing venture. This defined their relationship, set parameters for trust, visibility, reciprocity, etc., and established a governance body after the contract was signed to manage the contract. The results of this new Vested® approach was an equal partnership which resulted in a cost decrease of 42%, reduction in scrap by 67%, and record low defective parts per million over a two-year period. Now, isn’t this the Vested® Outsourcing relationship you, too, want to create, mature, and maintain with your own purchased service contractors?

Source: A New Approach to Contracts by David Frydlinger, Oliver Hart and Kate Vitasek published in the Harvard Business Review September/October 2019.