Automating Outcome-Based Contracts - Anna Fink-Carratt & Phil Dungey

Made with speech-to-text software, so a few words may be off.

0:00You're listening to the Contract Heroes podcast, your one-stop shop for all things contract management. And now, here are your hosts, Marc and Pepe. Hello, everyone, and welcome to another episode of Contract Heroes. Today on the podcast, we have Anna Fink joining us from Sirion Labs. She's the senior director of GSI Alliances. We also have Phil Dungey. He's a contract transformation specialist with Deloitte Legal. Now, let's get into the episode. So Anna, Phil, thanks so much for joining us today. And before I flip things over to Pepe to talk about some of the topics we're gonna be reviewing, you know, we'd love to just get a, uh, some more information on your background and how you ended up in the, the CLM sphere. Uh, so Phil, maybe you could kick us off. Yeah, sure. Thank you. Uh, really great to be here. Um, so how did I get into CLM?

0:54Well, obviously, when I was about seven years old, I told my mom this is what I really wanted to do. And, you know, I've worked hard all my life to get here. Um, so actually, like most people, I kind of fell into it. So by background, I'm a strategic change consultant, and over the last few years, I've been specializing in sort of the commercial management and the contract management. Um, and it's, I've sort of progressed slowly into, into the sphere, so through from running large scale BPO bids, um, and looking at, uh, responding to them, um, and, and moving more into that looking at service delivery and where value is gained and lost in, in these large scale contracts. And, um, so making sure that we could get optimal trading relationships, and that's kind of where I, um, got into CLM through, through that bit.

1:47So I am not a, a lawyer, as you can probably tell, because I didn't start with, with the front end and the contract. I actually started at the back end with the trading relationship and the performance of it. And then, you know, over time I've, I've progressed into looking at contracts and the simplification, the standardization, the optimization for, for, for digital enablement, all that sort of stuff. But yeah, in, at the end of the day, I'm, I'm more interested in the back end of these contracts and, and the value they deliver. That's great. I appreciate, appreciate, uh, the, the introduction. Um, great to, to always understand where, where folks are coming from. I know that a lot of folks we speak with are lawyers, but, but every once in a while, you know, you, I get somebody on the show that's like me and, and is definitely not. So it's, uh, it's, it's nice to- I wear my non-lawyer badge with pride. Me too. Me too. And, and Anna, how about yourself? Well, actually that, I don't know if I should say this, but I do come from a legal background.

2:40Um, but I actually decided, um, to go into more of the technology space and started my career down the path of intelligent automation and really looking at ways to start deploying AI, um, in, you know, real-life situations and where we could practically start to get AI out working, in particular in financial services and, you know, with major corporate clients. So I got interested in CLM through the natural language processing side of things. Um, so really thinking about how can we structure unstructured data within contracts and start to use then that structured data in more effective ways. And through that, have moved into the vendor space now. So I, I work with Sirion Labs and manage our vendor... Uh, sorry. I work with Sirion Labs, and I manage our SI alliance partnerships and working with people like Phil on ways that we can continue to use CLM in interesting and innovative ways. This is great. And thanks you, thanks to both of you guys for being, uh, on the podcast. This is going to be a, a fun episode.

3:42Uh, we're going to be talking about the topic that we've never talked before, and it's all about outcome-based contracting, uh, what industries are using this, uh, kind of contracting, and how CLM and technology can help companies to become more efficient. So, uh, to kick off this chat, uh, could, uh, Phil or Anna, uh, tell us a little bit about what is outcome-based contracting? Yeah, sure. Um, so outcome-based con- contracting, it's not actually new, but there is a resurgence of interest in it. It's been going around, um, for, since about the late 1980s with certain, um, s- certain aviation companies, uh, which we'll come on and talk, talk about. But the actual concept, um, is all about paying for a ser- for the successful aspect of a service that you require. So many contracts are sort of input based. Some are even output based.

4:40So input based, so time and materials or you're paying for, for aspects that you're going to consume. And an output is you actually get something. And with outcome-based, you're actually paying by results, paying for results, looking at the success aspect of it. So, um, it's not, it isn't new, but there is a resurgence in it and there's, there's great interest as some of the services and some of the products become more expensive. People wanted to know and pay for the efficacy of those services. Right. Then I think, like, there's a lot of post signature management there, like, in, in order to keep a track on all the outputs. And, uh, Phil or Anna, can, can you give us, uh, also, uh, some examples on which kind of industries are using these type of contracts? I think first to comment on the end-to-end nature of the performance management or performance outcome, you know, from a CLM perspective, you're definitely right. There's a huge focus on the post-execution phase.

5:37So what are the obligations in that contract? But actually, it even goes further upstream because if you start to think about when you're drafting those agreements, you are introducing, you know, some clauses into that co- into those contracts that you're going to want to be tracking very closely. So even in that negotiation stage when you're in, doing your contract authoring, there's a whole new set of risks and also a new set of stakeholders you might be engaging. So it really thinks about, you know, the end-to-end management of that contract. So I just think it's important to, to keep that in mind- Yeah... where And, and interest- And this is, this is where the, the strategy consultant in me comes in because you actually, that is the end point from a, for a, a previous piece of work, which is all around the alignment of strategy, alignment of objectives, and an alignment of ways of working between the, um, the buyer and the, uh, supplier. So it, there's, there's some, um, pre-considered aspects that need to be put in place before you can actually even get into putting a, uh, putting a contract in place So if you don't have alignment of the strategy, the objectives, and the ways of working, you won't be able to contract for success through an outcome-based contract.

6:45So as Ana says, end to end, but there's also a, a hefty piece of work at the front end as well on, on alignment. Yeah. And, and Phil, I think it's interesting, you know, that, that you bring that up because, uh, you know, obviously we're, we're talking about CLM today, but as you said, you know, this, this type of contracting has been around for a number of years, and CLM is a fairly new, new piece of technology. So, you know, currently, if, if folks aren't leveraging a CLM tool to, to help with this, um, how are they going about completing this and, and, and tracking the data, uh, in, in the negotiation processes? What does that look like? Uh, manual feeds, Excels being completed, um, tally sheets, all sorts of stuff , you know. It's very, very manual, um, with not only the data collection aspects being manual, um, but the collation and the, um, scoring, the assessment of performance is very intensive, which is why, although it's been around a long time, it's only now becoming sort of practical really to, to, to run major scale contracts on it. And I think to give an example of that, um, you know, one of our customers who's a global oil and gas company, that's exactly where, you know, they wanted to move to this outcome-based contracting model, but they were finding that, you know, they were very limited in the scale that they could get because of that labor-intensive process of tracking, you know, the obligation.

8:13So it wasn't just, you know, a case of, great, now we've actually moved to this, we've agreed with the suppliers certain performance outcomes. They were using spreadsheets, as you mentioned, but also then trying, you know, various different tools to do those performance calculations on things like, you know, service level and invoices and, like, invoice management. Um, and that's where CLM is now... And it's not all CLM providers, I have to say. So Sirion Labs has really taken this, you know, on board in terms of thinking about how to add value to customers, and can do that management of the end-to-end calculation of whether certain outcomes have been achieved, and bring that all into a centralized, um, solution to say, "Okay, well, where are all these, these different data sources?" You know, instead of using a spreadsheet, let's generate actually, you know, let's pull in that source data, and then we can have a nice transparent report. And so when we did that with this customer, it was around a sixty percent reduction in the number of hours spent tracking that process, um, but then also increased capacity significantly. Yeah.

9:15That's one of the main benefits of having a CLM, like, like in the, in the Sirion Labs, like the scalability, especially for the size of the company and the size of those contracts, right? And can you give us any other example on real case scenario? How was the before, right? On, like, which kind of performance? Like, I, I just want to imagine how those spreadsheets looks like. Like, on the rows you have, like, the performance, and the columns you have, like, dates or, or outcomes. So it, it depends on... It, it really depends on the style of service or, or the product that you're looking to achieve through the outcome-based contracting. It's generally a service base. Um, and if we just go back, there was a question that you did ask that we, we, we skipped across, and that's not because we didn't wanna answer it, it's just 'cause we've got... A- Ana and I work together regularly, and we just get quite enthused by this 'cause we are both sad individuals that are interested in contracting.

10:09But, so some of the, um, some of those industries are, it's really big in, in public sector. So looking for a social i- impact and getting suppliers to help government achieve a social impact, you could pay by the input, people doing things, or you could, you could look to reward and incentivize for things to have happened, and those things to have happened are greater than the outputs of, of what, what's going on. So w- you... There are many different ways of, of looking at it. But... And that's why there's a lot of work up front to determine what success looks like, and then being able to critically decompose that success. Because often you'll have things that will be successful without any input, and that's sort of dead weight in there. You don't wanna be paying for that. You want to be paying for things that have happened because the supplier has, has input and done something, and then there is an outcome. So, so that has to be put into the, um, performance management as well.

11:15So stripping out, uh, events that would happen anyway. So i- in, in the UK, um, moving people into work and then, um, the, the w- unemployed people into work, there will be an element of the population that will get into work no matter what happens. There'll be then o- others that are more difficult to place into, into roles. Um, but they, you know, what you need to do is define a success criteria that mu- that, that enables organizations to, um, to invest in, in things that don't look like they're going to have an outcome because over ti- 'cause that's really where you want it to go. So it's, it... That's why I say up front there's a lot of strategy and a lot of alignment is needed to prevent people getting paid for stuff that, that, that will happen anyway. And also to prevent pe- uh, suppliers sort of creaming and parking, as it's called, uh, where they cream off the ones that they think they can do something with and park the others because, uh...

12:17So, so that's not what's required either. So removing the cherry-picking and removing the dead weight. So there's, there... It, it is really a series of complex critical success factors that are ne- needs to be built up. Um, on the flip side, in, in aviation, uh, one of the very first, um, outcome-based contract style that, that actually gained momentum was Rolls-Royce and its power by the hour And, uh, for that, what you, you, you, airlines pay for the usage of the engines. And what was found when the studies on that, there was between a 25 and 40%, depending on the different style of engine, um, increase in product reliability. As the shift in contracting and the shift in the actual activities, because they were being paid for success, um, different ways of engineering, different ways of design, and different ways of servicing were all built into it.

13:18Because at the end of the day, it was Rolls-Royce's responsibility for, for, for power to be available to the airlines. So the flip side of that was during COVID, nobody was flying, so they didn't get paid. But the, the positive side of it is, though they increased reliability and the increased availability. So aviation uses it, defense, um, defense platforms. Um, it's more about the Ministry of Defense paying for the availability of certain, um, tactical solutions and, and also then in healthcare as well. So we... Especially as some of the treatments are, are becoming much more expensive, a, a different way of, uh, paying by success is there. It's all about the efficacy of the treatment. So it gives you sort of a, um... There's a, there's a wide range, and they all do need serious consideration as to how... What, what triggers a payment? How do we incentivize the supplier to, um, to operate in a way that maximizes the benefit of me as the customer? Right.

14:25And it sounds like, you know, with, with this model, you know, you're, you're not basing this off of time and material, so, uh, people can get things done faster. And, and hopefully they, they wanna get things done at a, at a more rapid rate so that the customer is, is happier sooner with, with what the outcome is going to be. Um, i- is that, you know, is that something that, that you, you all are seeing as well? Mm-hmm. Um, a- and, and what about for organizations that might be looking to, to migrate to this model? What, what are a first couple maybe good steps that you can take to, to kind of evaluate some of your processes and discuss internally with, you know, how, how to set these, these types of, um, agreements up? So I think to comment on both of those points briefly, to the first, you know, it's als- it's the end customer, of course, you know, impacted in certain types of business, but really also thinking about the relationship between suppliers and vendors. So, you know, what we've seen where customers or our customers do take this centralized approach, they're just able to get a lot more transparency into the way those outcomes have been calculated, which of course means when they go on to communicate to their supplier, you know, whether they have or haven't met certain outcomes, they can see right there all of the data, centralized report, so that decreases the number of disputes.

15:40So it also improves the relationships between suppliers and vendors in addition to, you know, outcomes for an end customer potentially. Remind me what your second point was. I was gonna comment on it. So how, how can organizations, you know, that might be- Get started... curious about- Yes, okay... about this model? Yeah, yeah. Mm. So in terms of where to get started, um, there's of course, there's various points that you might... There's, there's a big transformation that would need to happen, right, to move to something like an outcome-based contracting model. You know, really starting to think about level of risk and also the balance between the supplier versus vendor relationship. 'Cause of course, if you're a big player in the field and you decide, "Actually, I want everything to move to this outcome-based pricing model," you know, that might be a very different conversation versus the supplier and vendor who are, you know, potentially more peers. So there's a, there's a big conversation that has to happen upfront, you know, in, in terms of how you get to that point.

16:31But let's say you're an existing, you know, customer who has elements of outcome-based contracting already enshrined in some of your contracts, but you wanna get started to begin to digitize this and move away from spreadsheets. So in that, I think a key starting point is thinking about how you actually start to track, um, your obligations. So of course, it's great to have that all written into your contract, but if you aren't able to quickly pull up what those obligations are and to also have an automated way to keep track of, of different commitments that have been made, you'll still end up finding you're pulling up the contract and searching through it manually to figure out, well, what is it that we agreed? So getting your contracts into a centralized repository, tagging those obligations, but also then having automation that actually reminds you what you need to be tracking, and, and that might be things like SLAs. Um, and then also starting to think about the really critical integrations.

17:28So of course, there's so much different data that might come in to, uh, the evaluation of a certain outcome, but really a high priority one might be, say, starting with something like your billing or invoice management system to start pulling that in. So at the very least, you know, you can start to automate the high priority, you know, um, calculations that you might need to make to determine whether performance has been achieved. Mm-hmm. Just, um, to build on that, I think the first things you actually need is, is a good relationship with sp- um, detailed or, or, or really good governance, and I, I keep using the word good, so, so apologies for that. But the governance and the relationship between the two trading partners has to enable outcome-based contracting, 'cause we need the systems to generate the information that the decisions then are bas- based on as a joint, um, partnership. So the governance, the understanding of what success looks like. If you cannot communicate what success looks like to your suppliers, you cannot then just hand them across to deliver some outcomes.

18:39You've got to understand what you are looking for. So there's, there's quite a lot of work up front around on that. And really importantly, there needs to be that alignment of interests. So you can't make people want to do that. You've got to... It's, there has to be a, a meeting of minds along there. Then defining the objectives and the performance indicators, and as Anna was saying, all the data. You need clarity of data, clarity of data feeds, 'cause you do not want to be discussing the veracity of, of it. That you want, you want it to be there, you want it to be trusted, and you make the decisions based on the data feeds that are coming through. And then finally, what are the consequences? So what does it mean to have actually succeeded on that, on that contract? What does it mean to have actually failed in delivering that outcome? So they need to be pretty clear as well, because the consequence of failure has to be greater than the cost of actually complying and delivering.

19:41'Cause some- some- sometimes, it, it sounds obvious, but sometimes it's cheaper to, to miss some of the targets because it's more expensive to put the process or the people or the tech in place in order to meet it. So all of those things need to be thought about if you are going to embark on it. And then along with, how do we actually, um, automate this so that it's manageable so I don't need 200 people with spreadsheets? 'Cause some of the contracts that I've seen have actually had two to 300 people measuring, managing, uh, feeding in, drawing up PowerPoints, putting lots of reds and greens on, on stuff. That, that really does need to be automated. Right. That was exactly what I was going to ask, Phil, because from what, uh, you've all been talking about, I can't imagine that outcome-based contracts can be, like, very difficult... I mean, not, not difficult, but specific for each of their contracts, right? Right. Yeah. So I'm just thinking about, like, if you're thinking about an implementation, right?

20:40And this is something that might be very specific with one supplier than with, with another one. And how is, uh, in, in this case, uh, Deloitte or Sirion Labs helping your, your, your customers to automate that so the configurations and, and getting that into the system is, is not that hard or expensive? Mm-hmm. That's, that's a, that's a good question, and that, that comes down to the fact of doing the pre-work and being able to decompose what success looks like into something that's meaningful and tangible to measure, and that the data's available from a, from a source that, uh, that will not be disputed by either side. So that is the pre-work that, that is required. We, um, Deloitte and Sirion Labs built a, um, outcome-based, um, contracting platform in, for healthcare around the efficacy of some, uh, of some treatments. Um, and the complexity absolutely lies in the fact that the outcome is at an individual level, and the contract's at potentially multi-organizational levels.

21:51So it may well be with a government or a health agency with various hospitals or regions and then hospitals, but the actual, "Has the treatment worked?" is at an individual level. So having the ability to roll over all of those up, it... The a- the, the logic wasn't that difficult, but it is difficult to track it unless you can automate it, and you can track it in a, in like the Sirion Labs consumption module. You've got a- you've, you've got the starting point of a system to build it in. You, you... And so, um, that, that one was reasonably straightforward. Some of the others are, are more complex, but it is about that breaking down and then figuring out how and what, uh, the, the trigger point is for a payment and being able to codify that trigger point for a payment. I think it also, you know, it touches on the fact that this is, it is complex, as you said, and it might vary by client, and that's where something where you're just tagging manually, say, obligations, you know, that's never gonna scale when you go onto your next contract.

22:58And that's where, you know, the fact that Sirion Labs does have this artificial intelligence, AE module, is really important because it can recognize similar types of obligations, you know, based off of models that you've trained. So even if you have something new that you might want to start tracking, you know, as, as a specific agreement with a specific supplier, you're not actually going to have to manually look through that agreement. Um, you know, the concept is understood by the CLM, so you can be quite flexible when you start to scale out to different types of, you know, performance outcomes you might be trying to measure. And, you know, let's say that somebody, um, does decide to, to move forward with Sirion and, and they're, they're trying to move towards this model or maybe they're already using it. They're doing it manually, but they wanna move, move it to more of an automated process to leverage AI and, and, you know, Sirion to, to help with this. W- what's the, what's the time to ROI wh- when you're looking at something like this?

23:53How, how soon can people start to see a difference in, you know, how they were doing things manually versus, uh, automating some of this? So we tend to say that you could see ROI within around three months, and again, that will depend on the complexity of the use case, et cetera. Um, and that's where we'd be working together with, you know, Deloitte to do the consulting piece of work around actually setting up for success and making sure that we get those requirements right from the beginning. Um, but realistically, a lot of the integrations or the data feeds that we might be pulling into Sirion to do those calculations are ones we will have seen before. Um, there does tend to be some consistency between, you know, different companies that we work with in terms of the type of data that they need to pull in. So that isn't the all bells and whistles, everything nice and fully integrated, all the data coming in at once within three months. But that's certainly for a targeted use case, um, where you can start to already unlock value.

24:45And in terms of what that value might look like- You know, some of the estimates out in the market is that you can unlock an additional 10 to 20% of value from contracts by shifting to a performance-based model, and that's not just to think about the cost-saving components. That's really thinking about additional value that you're unlocking in that contract. So when we work with our clients around that business case, it does tend to come together, you know, even if we're starting to look at, you know, a very targeted process, and then we expand that with them into other areas. Mm-hmm. Th- th- this, th- there are the two elements. Uh, there's the, there are, um, the pro- payment by results, performance-based, et cetera, it, it is intensive, but it doesn't need to be now. But also, you, you gain greater control. So there's two aspects here is, um, by automating it using a Sirion Labs platform, you have greater transparency.

25:40There's a greater consistency about how each of the contracts are, are being managed, and, um, that also drives greater performance. One of the, one of the big things to remember here is many of these organizations won't just have one con- uh, payment by results one, and they'll have multiple suppliers on similar contracts. Now, if suppliers in a particular... It's, it's like everywhere. Everyone knows one another in a particular industry, and if they can tell that an organization's not delivering the outcomes that it should be, uh, and you as an organization are, y- what do you do? You, you instinctively, you start going, "Well, it's costing us to deliver all this. There's no consequence for them for put- you know, if, if we don't," and performance decreases across the whole portfolio. So this is a way of ensuring that there's a continual review and consistency of performance across, um, a contract portfolio that will have many suppliers as well.

26:44Yeah, I think that, uh, some great tactics there, you know, to, to implement these, these types of strategies, and I, I think some of our listeners, you know, might be interested or, or might be actually doing these things and, and wondering, you know, how can a CLM tool, you know, like Sirion help, help to, um, get them to move past that manual phase. So Anna and Phil, I mean, this has been a, a fantastic conversation. If folks wanna learn more, uh, about this outcome-based model, uh, or they wanna connect, learn more about, about Sirion and what else it has, you know, capable, um, where, where's the best place to do that? Um, well, of course, we'd be very happy to have specific conversations and to explore this topic further. Um, I'm very happy for anyone to reach out to me on LinkedIn, um, or to reach out to Phil as well, and, you know, to, to engage in the next stage of conversation that way. We do also have a lot of interesting information, including case studies on our website, so if you type in Sirion Labs, you'll, you'll see a lot of information.

27:38Um, and of course, you know, one of the things that we focused on as Sirion is this, um, you know, focus on obligations and actually performance management in contracts. So you'll see that flows through a number of our case studies that we have in the market. Awesome. Fantastic. Well, Phil, Anna, this has been a wonderful conversation. Thanks so much for joining us, and to all those listening out there, thanks for checking back in for another episode of Contract Heroes.