Introduction

The ability to embrace and leverage the new commercial models associated with As-A-Service will be a critical factor in driving future competitiveness.

These new commercial models are based around the following building blocks:

Outcome-based services

As-A-Service solutions are focused around business outcomes, rather than vendor specifications. This is leading to a more simplified approach to contracting – which is much less prescriptive in relation to vendor technologies and processes. 

The risks around staying up-to-date with new technologies are transferred to the service provider – and contracts are instead focused on achieving required business outcomes and maintaining competitiveness.

Consumption-based pricing 

As-A-Service solutions are becoming available “on demand”, with payment on a consumption basis – or to put it more colloquially, “pay by the drink”. Pricing is linked to actual usage - without minimum volume commitments.

This aligns business operating costs with actual levels of business activity. It removes the risks associated with actual demand falling below forecasts – and the associated fixed costs and minimum volume commitments that business customers have had to manage in the past.

Performance metrics align with business outcomes 

New approaches to performance metrics are required – closely linked to the required business outcomes. This is leading to fewer performance metrics – and an overall simplification of performance management. 

New contract frameworks

As-A-Service requires new outcome-based contract frameworks to deliver the required agility and flexibility. It requires new approaches to termination rights. It also requires new approaches to change management that are more sophisticated and multi-layered than we have seen in the past, with close integration between governance and contract frameworks.

Change is no longer “by exception”. The contract need to be a living document – a tool for driving ongoing changes that are focused around value, innovation, ongoing competitiveness and achieving business outcomes.

New governance models 

New governance models are emerging to support new ways of working together. Governance is no longer just about managing to prescriptive contract requirements – it is built around collaboration and strategic partnerships to achieve the required business outcomes, and deliver ongoing innovation and competitiveness. 

Short-term commitments 

As-A-Service arrangements generally don’t require business customers to make long-term commitments to particular solutions. Instead, the onus is on service providers to earn customer loyalty by delivering ongoing service improvement.

This removes the risks around the rigid “lock-in” arrangements that customers have had to agree to in the past, in order to obtain best pricing – often accompanied by punishing break fees for early termination.

Future-proofing

In the past, business customers have often found themselves “out of the money” if market pricing fell faster and lower than expected. Or they have found themselves locked into old technology, while the market moved on in terms of innovation. 

The days of long-term lock-in are disappearing. New “future-proofing” mechanisms are emerging to ensure to ensure that supplier offerings stay competitive throughout the term:

  • focused on dynamic developments in the market – rather than retrospective benchmarking approaches; and
  • focused on the ongoing competitiveness of pricing, products, services and innovation. 

WHAT ARE THE LEGAL CHALLENGES?

Customers and their lawyers can’t afford to dismiss digital transformation as just being about new technologies and increased automation. The impact is far broader, driving major changes in day-to-day business operations and leading to new commercial models. Customers and their lawyers need to adopt a fresh approach to contracting if they are to stay relevant in this fast-moving environment.

If they stick with traditional approaches to contracting, then they run the risk of locking out the required flexibility and agility. This calls for a new kind of contractual certainty – moving away from prescriptive requirements, and focusing instead on the targets required to achieve business outcomes and maintain ongoing competitiveness.

IF CORPORATIONS ARE TO REALISE THE BENEFITS OF THE AS-A-SERVICE ECONOMY, WE NEED TO TAKE AN ENTIRELY FRESH APPROACH TO COMMERCIAL AND CONTRACTING MODELS.

Phil Fersht, CEO of HfS Research(*) in the United States, has been promoting the importance of creative thinking in this space over the past year. In Phil’s words: 

“Many lawyers will inevitably impede the growth of the As-A-Service economy if they blindly apply traditional approaches to contracting, without an understanding of the new commercial models. Today’s service relationships must be based on greater collaboration, forward planning and co-innovation between buyer and provider, and lawyers need to help foster this collaboration, not hold it back with archaic approaches focused on obsolete metrics and restrictive practices. Lawyers need a change in mindset – and to develop a broader mix of capabilities to architect new solutions, reimagine and re-shape their approach to contracting.”

The first challenge for customers and their lawyers is to understand the new commercial models emerging, the new approaches to risk allocation, and the new kinds of commercial relationships arising. This will enable them to play a critical role in “joining up the dots” – and creating new contract models that can deliver on the promises of digital transformation and As-A-Service.

Flexibility and agility are becoming the holy grail, as corporations can’t afford to be left behind. And it is just the same for lawyers. 

For more resources on the digital industry, including As-a-service, visit http://digital.gtlaw.com.au/tag/asaservice/