Post-Contract Supplier Innovation and Efficiency – The Difference Between Success and Failure (Article 3)

Spend Matters welcomes this guest post from POD Procurement, a business consultancy that created the POD model.

Introduction

In the last of our three articles we explore how to obtain supplier innovation to mutual benefit:

  1. Centralised Procurement (Article 1). Aggregate the organization wide demand for common goods and services through a centrally let contract to deliver maximum savings, without using a framework.
  2. Improve Contractual Flexibility (Article 2). Reduce business requirements post-contract award without contract re‑negotiation, without pre-agreed pricing models and without using a framework.
  3. Encourage and Reward Post-contract Supplier Innovation/Efficiency Gains, (Article 3) enabling the supplier to add value post-contract award, whilst reducing the ongoing business costs without using a gain-share model.

On the CIPS Knowledge Site there is a new model called POD, which is an easier way of achieving all three business objectives.

Reward Post-contract Supplier Innovation

Once a contract is awarded, the requirements agreed and the contract award value has been stated, the supplier’s focus is on delivering as per the contract to achieve the full contract award value.

Gain-share is a model to encourage post-contract supplier innovation. Some of the challenges with gain-shares include creating additional obligations on the supplier leading to perceived risk and increased supplier pricing, the business objective can be difficult to define and may be difficult to successfully measure, the risk vs. reward can lead to the supplier getting “excessive” payments that do not sit well with the buyer and the buyer pays the supplier more than the initial contract award figure.

Rewarding Post-Contract Supplier Innovation using POD

Here are the steps to use POD within your organization in order to reward suppliers for introducing post-contract innovation to reduce the buyers’ ongoing costs and deliver under budget, without using a gain-share model.

  1. Negotiate the contract as normal, based on the business requirements and a price to achieve it.
  2. Once contract has been awarded, collaborate with the supplier to see if the contractual deliverables can be achieved for less than the contract award figure. This could be achieved through supplier innovation and efficiency gains and working collaboratively.
  3. If this is possible, the buyer returns unused budget back to the business and the supplier receives improved profits, without risk or additional obligations.

Outcome

If it was not possible to achieve the contractual requirements for less than the contract award figure, there was no impact to either party. If the contractual requirements were met, and through innovation/efficiency gains, the supplier invoiced for less than the contract award figure, the buyer returns unused budget to the business and the supplier sees increased profits.

Summary

Post-contract innovation has been achieved, but this time it didn’t use a gain-share so there were no additional obligations placed on the supplier and no additional risks, the contract has been delivered for less than the contract award figure, customer (buyer) satisfaction is high, chance of the supplier achieving contract renewal/repeat business is high and supplier profits from the contract are up. POD has provided a mechanism to reward the supplier for introducing post-contract innovation to bring down the buyers costs whilst increasing their profits, mutual benefit for both buyer and supplier.

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