T&M vs outcome-based contracts – what’s best for innovation?

How and why does innovation happen in procurement – how can it be encouraged?

Episode highlights

Exploring the pros and cons of time & materials contracting
Aligning motivational factors during the contracting process
Contract economics
Innovation and different contracting models
How does innovation happen between buyer and supplier?

Posted by: ZivioReading time: 98 minutes

With Tom Eveleigh, Strategic Category Manager, Mitie

00:00:00 - Innovation and different contracting models
00:14:20 - Definitions of services
00:22:00 - How does innovation happen between buyer and supplier?
00:28:15 - Exploring the pros and cons of time & materials contracting
00:37:30 - The halfway house been T&M and outcome-based
00:48:20 - Aligning motivational factors during the contracting process
00:51:00 - Contract economics
01:05:00 - Measuring inputs, outputs and outcomes
01:16:30 - Innovation lives in S.P.A.C.E


Jonny Dunning: 0:00       So, Tom, welcome back to the podcast! It’s great to have you here for the second time. And we did actually just get started a second ago, but we had to stop because a light was changing color behind you making it look a little bit like we are in some sort of disco.

Tom Eveleigh:   0:15       Yeah.

Jonny Dunning: 0:18       That 80s disco. We were also discussing before we started how just the difference of doing this in-person, you were saying it’s less nerve wracking doing it in-person? 

Tom Eveleigh:   0:29       Yeah, for some reason. It’s like, all the great things about Zoom and virtual meetings and all that kind of stuff is something about actually getting face-to-face with people that just, it feels a lot more natural. And you can just get on with it. It’s not something, they are not forced about.

Jonny Dunning: 0:52       Yeah, definitely, it’s what were designed for, isn’t it? You are getting all the cues from the other person, you are seeing their expressions, you are just having a conversation with another person. Whereas you are otherwise you feel like you are on video, like you are, I have to admit on video right now. So we had a conversation, I think it was about a year ago now, where we talked about some of the stuff that you were interested in and looking at around services and kind of buying value in services. And it was a really interesting conversation, I have kind of been following what you have been doing on LinkedIn, and places like that, where you are putting out some really interesting content. And I know when we spoke previously, you were talking about some of the ideas you had that might be working towards, putting some of that content into like a book. And you just released a white paper recently, which I found really, really interesting looking at innovation, basically, and contractor models, and specifically assessing time and materials approaches versus outcome or output based approaches. What was it? What’s the process that you go through at the moment, and what kind of led to that white paper?

Tom Eveleigh:   2:04       I had kind of grand ambitions all this thinking that I have been doing around, exactly what you are talking about, which is measuring value in service delivery, sort of the difference between how we buy goods and how we buy services, and I had a lot of content that was fleshed out and just in really raw, just not very well-formed form. And I kind of had the idea that, yeah, eventually, there’s probably 30,000, 40,000 words here, that I could put into a book. But to be honest, half of it was rubbish. So I was like, “Well strip that out. I will take out six or seven pages worth, put that online,” half of which I have actually done because I was doing a master’s degree anyway. And thought, “Well, I will just kind of use the wisdom of the crowds to put you in the right direction.” I have got a few different ones kind of in the works ones around. Yeah, exactly. How do you form contracts to incentivize innovation between buyers and service providers? And then there’s a few different topics I have got kind of lined up, all kind of around the same theme. But yeah, I mean, I kind of think a lot of the body of knowledge we have got in procurement is kind of coming out of 60 or 70 years of heavily kind of manufacturing, driven supply chain management theory. And I think, just given the purely the volume, and the weighting to services in most large global organizations, and in most developed economies, I think in terms of services, we are a step or two behind, we have got to figure out what are that best practice we can bring across to indirects, into services procurement, and whatever it needs to be kind of created de novo, we were talking about relational contracting, and kind of advanced outsourcing models, things like that. But yeah, I have got to be honest, it’s a complete work in progress. And it’s kind of thrown at the wall and see what sticks and kind of course, reference there.

Jonny Dunning: 4:06       Yeah, I mean, it’s great. I think the idea of going through a series of white papers, breaking the content down kind of, just your approach as you go. And as you say, take the feedback and build from that is a really good way to do it, because there’s a lot to it. But I always love your content. I love the kind of academic approach to it, and the very scientific approach to it. You bring in theories and concepts that certainly in some cases I hadn’t heard of before, and I find it really interesting and educational. And you are really delving into stuff, calling out really good questions and looking at a very strategic, sometimes theoretical level. But you also have the realism behind it. Obviously, you are a working practitioner, you are working at Mighty. And, so you will see what happens in the real world as well and applying it to it which I don’t quite know how you find the time to do it. But it’s obviously a passion.

Tom Eveleigh:   5:06       Yeah, exactly. So kind of, yeah, I don’t really find the time to, I just kind of put it together when and where I can. But yeah, as you said, I have kind of come out of over a decade of working specifically in outsourced services, procurement, both in house and in outsource service organizations, specifically in FM. And so I have kind of, yeah, day-to-day, I kind of see the reality of how a lot of these contracts work, service performance and the lack thereof as well. So we, we have got, like, I mean, procurement, FM procurement is full of brilliant people everywhere. And I think it’s about pulling together, some of those real world experiences, but also realizing that, we don’t know what it will in procurement, naturally, there’s bringing together a lot of these ideas from, not just business thinkers, but people in a variety of different fields, pulling them together. 

Jonny Dunning: 6:03       Academics. 

Tom Eveleigh:   6:04       Yeah, academics, but also, there’s tons of stuff in consulting. And, just, yeah, just in social media in general, you will always find, there’s gold that’s been mined, you just got to bring it together from different sources. 

Jonny Dunning: 6:23       Yeah, I like the way you bring in certain things that are in like, kind of marketing theory. And just broader business theory, there’s something I want to come on to in a bit, which is a completely different type of theory, which you talked about within this white paper, which I find fascinating and very interesting part of it. But let’s just go back to the kind of the reason why this is important. Okay, so why should organizations be concerned with services?

Tom Eveleigh:   6:51       Let me zoom way out, I will give you my 50,000 foot view, and then steer me in the right direction. Because I haven’t...

Jonny Dunning: 6:58       Okay. I love a tangent, love a tangent. 

Tom Eveleigh:   7:01       So I am gonna go way, way back here. If you according to, like the ancient historians, we basically spent 10,000 years up until the sort of medieval period, working the farms, everything’s revolves around farmland, etc, you get into the medieval period, and you start seeing, like the emergence of trays that support local food production. 

Jonny Dunning: 7:29       You have gone from subsistence to more broader society based agriculture that’s trades. 

Tom Eveleigh:   7:34       Yeah, but still, up until the start of the Industrial Revolution is still revolves around really a subsistence economy, a feudal economy, we have a small subsection of society, which controls most of the land, and then the majority of the people who either work in the land, or providing goods and services, which support the work on the land, until you get inventions like steam technologies, and that starts to obviously, take off and you start seeing, rather than small scale production, which, you are butchers, bakers, candlestick makers sort of thing where production is heavily localized and supports local production, you start seeing the centralization of a lot of production, because of the capital intensity required for that production. So you start seeing the emergence of factories, people start moving into the cities, you see this explosion in the size of cities, but also the population density of urban areas. And then you get the emergence of coal, and then later oil. And so what you see from a foot in terms of businesses, sort of mass centralization to the extent that, Ford, in the 1920s, was so vertically integrated, that he had his own coal mines, he has his own railroad, and he owned freighters that were literally bringing coal up Lake Erie, so I mean, just the most centralized possible here, and the entire supply chain.

Jonny Dunning: 8:59       Yeah, that’s crazy when you think that now, isn’t it? 

Tom Eveleigh:   9:00       Yeah. And then you see sort of as we get through the 20th century, and you kind of move from the industrial economy into a knowledge economy where computing power becomes more important, you start seeing that centralization sort of move away, and you get, especially in the 80s. So you start seeing the emergence of mass outsourcing, but also offshoring, technology enables that work to be done more and more outside the firm, the size of the firm shrinks. And so you get from someone, like, who’s a good example? General Motors, they had at one point, 300,000 employees, compare that to Tesla today has about 70,000. Facebook, I think it’s got, something like 40,000, 50,000, but double, triple the market cap. So really, what you are seeing is a sort of decentralization of the means of production going into not just smaller and smaller scale firms that can specialize in certain activity, but increasingly now even individuals, which is, so you can get one have done in a more fragmented way. And so what this means now is you get a move from the majority of GDP going from production of goods to now, in UK, in the US, we are about 80% now, going from services, but the challenge is, as I was saying earlier on, a lot of the best practices and a lot of the kind of value added methodologies, keiretsu, Lean, Six Sigma, coming out of Twitter and Motorola, they are heavily focused around manufacturer of goods, because that’s where most of the economic value is coming from. Whereas today, we are outsourcing more and more and more, four fifths of the economy in the UK at least come from services, we have got to realize that there is a value gap as a productivity gap in services that doesn’t necessarily exist with goods. And yet, we have got these organizations that are becoming more and more extended, and more and more work has been done outside the firm, that specialists that are outside of the walls of the firm, are not necessarily, it’s not just they are not employees, there could be third parties, subcontractors or third parties, etc. And so the supply chain is getting longer and longer and more and more complex, not just in terms of raw materials to finish products, but raw services, if you like to, to work being done, the firm cares about. There’s risk and complexity in that. And it’s tremendous amount of value in the table that at the moment, I don’t think you are taken advantage of. So McKinsey did a study in 2016-17, I think it was really estimated this, about a trillion dollars of value in the Fortune 500 left on the table because of poor contract performance management. And so when you look at... 

Jonny Dunning: 11:46     And that’s going to be a large portion that is going to be services. 

Tom Eveleigh:   11:50     Yeah, exactly the thing in their study that almost all of what they were talking about, there was outsourced services. So you have got just a tremendous amount of value, I think 8-9% of their total service spend, they believe is kind of left on the table, because you haven’t got the right kind of contract parameters within the agreement, you haven’t got the right KPIs in place, et cetera. And so this kind of leads on to where I was going with the white paper is, often we are outsourcing non-core functions within the firm, to specialists that know how to do it properly, you don’t have the right contract, not even the right contract, in terms of the right philosophy and governance around the contract that enables them to do that work, to produce the results, we are looking for the out comes as opposed to outputs, that they are enabled by letting organizations do the work the way they know how to do best. So in paper, the terminology is determining what, not how, if you like, so that’s kind of where I was going. It’s how do we incentivize innovation that bridges, that gap to that 9%.

Jonny Dunning: 12:57     So it’s absolutely fascinating. So when you are talking about the size of services, and the importance of services and the growth of services, in the white paper, you describe it as kind of like a larger slice of an ever increasing pie. But obviously, you mentioned like the US, UK, economy is like that are very heavily service based at the moment, but most economies are moving more towards services generally across the globe. That’s certainly a trend. And also, when you look at the way the work gets delivered, the way that work gets delivered from the kind of very top level right down to individual level, that is also having a transition towards more outcome-based scenarios, whether it’s the gig economy, or whether it’s outsourced consultancy, or whatever it might be. So services are really important. There are fundamental critical part of what organizations do and what their services are and what they procure. So they are massive, but I loved your, out of the fact you included in your white paper, the I-HIP definition. So do you want to just talk through that a little bit? Because it’s, I mean, working as a technology provider, specifically within the services side of procurement. It’s interesting, because sometimes people will ask me, “Well, how do you define services? Or what do you define as relevant to what problem your product is trying to solve?” And the I-HIP definition is quite a technical one. But there’s some really good points in that. So you have got the Intangible, Heterogeneous, love a biological scientific term, Inseparable and Perishable. So on the intangible side of it, that’s fairly clear. Most people appreciate that the services are fairly intangible, which is where you get one of the big problems with services, which is defining them and obviously defining the contract and what’s to be delivered. So services can be vague, or as you put it, nebulous.

Tom Eveleigh:   14:57     Yeah, if you think about it as a spectrum between if you think about a pure good on one side, which is, a widget that you might, go into screwfix and buy a hammer. That is a pure procurement of a goodness purest form right through to get a hacker. To me, that’s a pure service. There’s nothing tangible, but.

Jonny Dunning: 15:23     There’s nothing tangible for me about having it I can’t believe use that example. That’s so insensitive.

Tom Eveleigh:   15:33     But there’s a spectrum. So, in the sort of services marketing theory, you are talking about right in the purest form, those four factors, so the fact that it’s intangible, the fact that you can’t touch them, feel services really, or this gray area, but we will come on to that later. The fact that they heterogeneous, meaning that it’s very difficult to replicate services, you can think of 100 examples of this in like, personalized, it’s very difficult to replicate services reliably over time, because it’s just so many different factors involved in the delivering the service. There’s the inseparability, in like, services or co-created, so someone who’s coming into the performance service is usually in contact with the person who’s experiencing the delivery of the service, if you like.

Jonny Dunning: 16:25     So we use the example of a hotel, slightly, that’s a great example.

Tom Eveleigh:   16:29     Yeah, hotel, say music, like, usually or comedians, they are providing a service for the audiences inherently linked to the performance. 

Jonny Dunning: 16:39     It is all happening at the same time. The delivery of the service and the consumption of the service is happening simultaneously.

Tom Eveleigh:   16:45     Exactly. You can’t store inventory, put my kind of supply chain hat on, you can’t store inventory in a hotel quite as cleanly as you can, in accounting terms, as you can, if you making screws that go into this table, because you can batch them up and store them in a warehouse and use your mileage from whatever. 

Jonny Dunning: 17:07     So that’s the perishable element of it. 

Tom Eveleigh:   17:08     That’s the final part of that, which is the perishable, they can’t be stored up. You can’t, if you own...

Jonny Dunning: 17:16     Go to the hairdresser store.

Tom Eveleigh:   17:20     Well, I can’t store up 10 haircuts today, use it tomorrow, they have to be happening at the same time. 

Jonny Dunning: 17:29     Yes, and that’s where the difference between procurement of goods and materials versus the procurement services. You were talking about how certain kind of like procurement, organizational design and processes and procedures have been, the whole buying architecture had been mainly set up around supply chain for goods and materials, like you say, from the kind of 80s onwards, when procurement really started to come to the fore, those kind of manufacturing principles and making everything organized. At the same time, the same thing happened within procurement technology, in the sense that when the ERP systems started to move towards becoming the kind of source to pay platforms, the same thing was the most important and that was the procurement of goods and materials. So I would echo what you were saying about there being a gap around the management of services or the understanding of services within organizations. The same is true within technology. And the reasons are exactly those are I-HIP reasons. They are intangible, they are hard to define at the outset. The heterogeneous, you can’t just template, everything, every project is going to be different to a certain extent, which the fact that they are intangible, and the fact that they are heterogeneous, also has an impact on measuring them. Because, it’s how can you, are you comparing apples with apples, when you are actually trying to assess performance of suppliers, even if they are working in a particular category, because every project they work on is different. So you can’t just say, “This project costs X, and that project costs Y,” and make an assessment on it. The fact that they are inseparable and perishable, I feel is more downstream around kind of the concepts of delivery and how you are managing those services. But from a technology point of view, the fact that they are intangible and heterogeneous creates significant problems. Whereas goods aren’t. 

Tom Eveleigh:   19:24     Yeah, you kind of got to think about the business case as well. So when ERP, MRP, the XRP, let’s say a suite of technologies was first kind of formulated, we are talking about 50 years ago, or something like that. But again, it comes out of complex manufacturing environments where you need technology to manage production processes from procurement of raw materials or work in progress through to a finished product, you are gonna end up selling to market, the business case for that is it was, A, lot simpler to make because it’s much good to have much more. 

Jonny Dunning: 20:02     Well, it’s relatively more binary. 

Tom Eveleigh:   20:04     Yeah, it’s easier to define, you can get metrics around it, there are a lot cleaner. But also, then you are talking about a period where, again, production of goods and manufacturing was still kind of a core of the, you can kind of think back to like, this sort of Detroit’s, same in this country in the northeast and Wales with like, mining industry, etc. But even in the American context, like the kind of the heyday of automobile production in Detroit, and all that kind of stuff. That business case is easier to make. And also what you are saying is, it’s difficult to capture the value add on getting the right specifications in place for service agreements, and measuring performance, et cetera, et cetera, et cetera. And so you can kind of get away with that until now. Because I think now the value gap has sort of caught up to us, and we have got the data to prove it, the McKinsey study, and [Unclear]. So I think it’s almost like, and the technology is almost catching up to the point where we kind of understand the problem. And I think, we are seeing technologies come to the fore that can help us solve that problem. It just the right time.

Jonny Dunning: 21:29     Yeah, at the right time, where the evolution of the market means that organizations are starting to appreciate the problems in this area, and they are starting to look to try and address them. Whereas before, they wouldn’t necessarily have been recognized, or they have just been seen as too complicated to try and solve. So yeah, I think you are absolutely right. So the other side of this, so we are looking at contracting mechanisms, but we are looking at them in the context of how do they foster and encourage innovation? So my first question for you is, how and why do you think that innovation happens within this kind of supplier-buyer relationship?

Tom Eveleigh:   22:13     Well, I think it’s so there’s.... I kind of look at it from two points of view is, A, there’s innovation that’s created within the contract itself and within the supplier relationship itself. So, that’s unique to that contract. And that comes as a result of the collaboration between the buyer and the supplier. But also, as I was kind of saying earlier on is, where we typically outsource things that we either don’t have the capacity or don’t have the knowledge or the desire as in the operating margin to produce in house. And so we outsource that to experts. It’s those experts typically that have the know-how, and the domain specific expertise and technology, the marketplace, whatever to understand how to best deliver outcomes for clients. And it’s more often than not, I think its buyers trying to define too tightly, how services have to be delivered, as opposed to what the outcome they are looking to achieve is, which limits the innovation that you can get from a lot of those relationships. But the second part as well, as is go sit again, the relational contracting thing is, if we are looking at creating value, there’s kind of two different of each value and innovation was interchangeably because we are looking at the end of the day, that innovation has to have an endpoint and that endpoint has to be better service delivery, customer satisfaction, reduce cost, whatever it is. So if we are looking at value creation, there’s almost two ways you can go, at least, two ways you can go about it. So either you are looking at extracting value, which is probably the stereotype, I think, an undeserved stereotype these days what procurement actually does, which is, launch an RFQ, tender out, provision of goods and services, and then hammer down price until there’s nothing left on the table. And it’s, a very much a transactional win-loss engagement between the buyer and the supplier. The flip side of that is you say, now we are going to look at this from a partnership or small P, partnership, perspective and say, “Rather than what’s in it,” I am gonna steal another key points asset quo, but “Rather than what’s in it for me, is what’s in it for we,” and this is the example, I think I listed in the white paper, if I didn’t say in the Harvard Business Review article, that’s linked there is Dell and FedEx literally went through this evolution. So they had an outsourcing agreement, where Dell was increasingly frustrated and seeing cost spiraling out of control. They weren’t able to perform to the wrestlers, etcetera, etcetera, and they moved to a model where they were saying, “Well, let’s structure the agreement to allow FedEx to perform according to our SLAs. But in a way that allows them to take on risk in proportion with the way that the contract is structured.” So the simple example is termination for convenience, they have got a termination for convenience clause in their FedEx know that they can lose the business in six months. So they are not incentivized to index in the contract. And, in the way this in the long term aims, both parties, so that’s rather than what’s in it for me, what’s in it for we. But we are kind of getting into that, that’s moving away from a single contract to a kind of philosophy around contract governance, it’s much broader than...

Jonny Dunning: 25:45     That’s getting into like a really developed relationship. And yeah, that more kind of advanced setup, but ultimately, you have kind of covered one of the points I was going to ask it, which is why organizations want innovation, they don’t want it for the sake of it. Some organizations are focused internally on innovation to come up with new products, for example, but in terms of having a service delivered, the purpose of innovation, is to create more value as exactly as you said, there’s no point in doing something wacky and wild and creative, just for the sake of it. Ultimately, you are trying to deliver a better outcome when that innovation, so the idea of an outcome harnessing innovation, I can definitely see the rationale around that. So one of the things you mentioned was about contract design. But ultimately, that comes back to what’s incentivizing who, so when you talk about a kind of very restricted or prescriptive approach, that is basically just telling a supplier to do very tightly controlled, “Do A, B, C, and D.” Rather than saying to the supplier, “I want you to achieve this outcome, how you do it is up to you.” It’s a different mindset completely. And I think the interesting thing about this is, it’s quite scientific, some of the stuff that you are writing about in this white paper, it’s very scientific, and there’s a lot of theory behind it. But there’s a decent amount of psychology and human behavior in there as well, which I think is, I find quite interesting. So, organizations want innovation, lots of organizations talk about innovation. But it’s got to be fostered, it can’t really be forced, which always makes me laugh when you think about this kind of like, quarterly business review, where the supplier is getting hammered for 55 minutes, and then the last five minutes, what innovation have you got for me? That’s not really the fertile breeding ground for new ideas if they are being kind of put in the corner. And so when you are looking at this in the white paper, you are looking at in the context of that contractual design, and you are really addressing time and materials or something that would take time and expenses, and looking at the impact that has on the motivations and the drivers of behavior within that contract delivery mechanism. So, can you just outline firstly, why is time and materials so common? And also, what are the good sides and what are the bad sides as you see it?

Tom Eveleigh:   28:16     So, I will say you write in that, a lot of this paper is kind of theoretical kind of trying to put a kind of logical scientific framework in place. But as see examples of this across now, three different countries, four different industries I have worked in. So there’s examples of this every single day. 

Jonny Dunning: 28:43     It’s real, basically.

Tom Eveleigh:   28:44     Yeah, if you think about how this sort of outsourcing evolution took place, we are taking things that were originally been done in-house and shifting them to a third party. So the units of measure for work being done in-house is usually an employment contract. If you are talking about services being performed by an individual or group of individuals, you have got a certain amount you pay them, you have got certain number of hours they work, and that’s a very simple methodology for calculating your cost inputs. You can, also obviously, you have got to have different employee incentives, you can have different ways of targeting them, etc, etc, etc. I am not an HR expert, but you can kind of imagine a lot of that stuff can be well-controlled in-house. When you take that and outsource it, you are taking something that was easily measurable, because the only way to measure it really is on a time and materials basis in-house. And then putting that on to a third party. So it’s easy is the first answers that, you can measure it in an ERP system in the exact same way you would in a procurement of widgets, because you have got very concrete way of measuring number of minutes or hours. In my case, maintenance is my area. So it’s hours or minutes on site. It’s a cost per unit of time, it’s to some extent, as simple as that. So that’s the first part. The second thing is it kind of makes sense not to invest heavily in complex relational contracting, in the kinds of things that will have a major payoff in large scale complex outsourcing agreements, if what’s being produced is relatively trivial. You can kind of imagine relatively simple, low spend, low risk categories, in procurement, everything’s always cost and risk, if you can kind of think about it in that kind of bottom left quadrant, if you like, doesn’t really make sense to invest heavily in reducing transaction costs. And making sure you are driving innovation, etc, etc, with someone’s standing up for 15 minutes a month, and it’s costing you 7000 pounds, you probably don’t, it’s not going to move the needle. So that’s the two kind of big ones. It’s simple. It’s easy. And if something’s relatively low risk, well, there’s what’s the point the ROI isn’t there? I completely forgotten your question.

Jonny Dunning: 31:31     No. So, the question was really around why is T&M so common. And I think it’s interesting, because I was looking at the different, I always think of it as like work delivery channels, you have got your permanent workforce, you have got the ability to bring in contractors and temp labor, which typically is, your time and materials, time and expenses. And then you have got the ability to do the variety of different outsourcing models, where you are buying a service, or an output, or an outcome from a company that is providing that service. And, T&M as a go to, as a get started dealing with a simple situation, is the simplest way to do it, you are just measuring time, but the other side of that is you don’t know how much time it’s gonna take. So, it comes down to, I always think it’s horses for courses, in the sense that in the right context of what it is you want to achieve. So like you were saying, if it’s something really simple, is it really an area where there’s a massive opportunity for innovation, is a very simple, straightforward task. I think as you said in the white paper, if I remember correctly, where the level of skill and knowledge within the buying organization is similar to what they are buying in from a service provider, then you are really just buying extra capacity. So it makes sense in the right circumstances. It’s not a question of, this contractor model is always better than that contracting model, is there’s a time and a place for the particular modes of contracting. But as a default, I do feel like it’s easy for companies to just adopt the time and materials mindset. Because they feel comfortable, “There’s work being done, there’s people doing it. And I know how much I am paying per hour, or per day, and I am comfortable with that.” Because they are not having to do the bigger thinking about how much is this going to cost in terms of total cost of ownership? What’s the lifetime of this going to be versus the what is it I want to achieve? And what’s the actual outcome or outputs I am after? Which is a much bigger thought exercise at the beginning of the process. So effectively, what you are saying makes sense in that, there’s no point in going through that big exercise and investing all of that if it’s something very straightforward, and the most effective way to do it is via time and materials. So there’s always going to be absolutely a place for in it. 

Tom Eveleigh:   33:52     Yeah, exactly. So that kind of that’s why the title of the paper was, “How time and materials contracts hamper innovation.” Because if you don’t need innovation in a given category, or given service line, time and materials is fine. It’s only in areas where you really need innovation. And that innovation you are getting from the supplier is going to move the needle, that it’s worth investing in complex relational outsourcing agreements. So one example let’s say right so, transport for London before the 2012 Olympics, they are gonna have visitors coming from all around the world, massive showcase of London’s presents as a global city. And they wanted to make sure that the transportation network, the underground, the over ground everything that comes under the TFL umbrella was working to was a symbol of London’s kind of efficiency and [Unclear] wherever you like. So, they brought in cubic transportation systems, which they manage, among other things, the turnstiles that you go through when you are on the underground. And they invested heavily in a true collaborative co-designed agreement, which had, I mean, I think that was listening to a podcast with this case the other day, there was 95, different SLAs that they had to comply with. And so you have got an agreement there, which is, it’s of such high value to TFLs client that to have uptime on as many different turnstiles and all the rest of the assets that are under management as possible during this time period, that it’s worth getting, its senior team of people together to collaborate and come up with a complex document, it’s going to be managed to a tee, you are going to have a governance structure that involves both parties, you can be overseeing that. And even to the extent that it was designed so that the team that cubic transportation systems would have to sort of prioritize which SLA is that we are going to meet at each time to give the greatest payoff to them and TFL, because it couldn’t be both of them at the same time. But that was down to them to prioritize that. 

Jonny Dunning: 36:11     Yeah, exactly. But that’s the contracts design. 

Tom Eveleigh:   36:15     Yeah, so that they have trust in the partner there to make the right decision at the right time. So that is, I think, a beautiful example of you have got high risk, really high amount of value in delivering that contract, it’s gonna have a massive pain of not just for TFL, but for the whole country, it’s a huge once in a lifetime event. And so that’s something which rewards investing in the contracts and driving innovation of the back of it. But that’s obviously on the far end of that spectrum. It could be 80% of the things we have come in contact with, the Pareto rule, 80% probably as a minority of what we are actually spending on a minority risk. And so in those cases, it’s much simpler to draw up a contract, which is based on inputs, rather than outputs or even outcomes. And so yeah, I mean, in, in many, many cases, the time and materials contracts perfectly sufficient for the needs that you have. 

Jonny Dunning: 37:14     Yeah. And I think you talked about this scale within the white paper, I think you come in with, you had a graph on this or not. But basically, there is this scale that goes, low complexity to high complexity of what it is you are doing, versus the value in investing at the contract design stage, and really understanding what it is you want to do before you get into it. I see that a lot. It’s interesting. You also mentioned this concept of kind of like a halfway house where people get a bit stuck, do you want to just kind of explain that in a little bit more detail?

Tom Eveleigh:   37:48     That’s what I think you will see in practice more often than not, is you have got a contract, which was initially designed for time and materials, you might have some SL A’s on back. And so you have got some performance criteria for the supplier. But ultimately, you still got the risk, the cost risk sitting with the buyer. So, if you have got a time and materials agreement, the supplier is to a certain extent incentivized to build you as much as they possibly can, in practice doesn’t happen. Usually you have got a little bit more faith and trust in that between the parties. But the incentive is there. 

Jonny Dunning: 38:29     I think a lot of people would argue it does.

Tom Eveleigh:   38:35     I am picking my [Unclear]. But you have got exactly the scenario you are talking about. Whereas we have got a time and materials agreement with the supplier that you may consider strategic, they might be performing a strategic service for you. And, on paper, you have got an agreement, which incentivizes them to overbill you and then every quarter, you sit down with them, and wonder why you are not able to drive service efficiencies, greater performance against pre-agreed KPIs, whatever it is, because you have got a tension between what you have got on paper, and what you are actually trying to achieve. 

Jonny Dunning: 39:13     So you have got a misalignment of expectations in the sense that the buyer is expecting an outcome. And the supplier is being basically leveraged on a time metric, which doesn’t incentivize them towards an outcome. 

Tom Eveleigh:   39:28     Exactly! And I think that comes down to that there’s not enough trust in the relationship, sort of investment in developing a trusting relationship between the buyer and the supplier. So the buyer can’t release the control. They have got over billing at an invoice level. They can’t relinquish that trust to perform to pre-agreed outcomes. So you see, I mean, even like a lot of PFI contracts, you see that, you might have that outsource wholesale to a third party. But all you have done then is shift all the risk onto the outsource. And that’s not necessarily what KPIs was talking about that which is a truly collaborative agreement, which is designed to meet the objectives of both parties, you can’t shift, you can’t outsource risk that, effectively you can do, but you have got to realize that all it does is shift the risk elsewhere in the supply chain, it still exists, you just push us out, we want to do as collaboratively work together to make sure you are meeting the outcomes you are looking for, from the end user standpoint, or from whoever controls that budget at the end of the day with an efficient use of resources, and that’s where the value for money, the cost saving element comes into it, it’s not by hammering down the cost per unit of time or the total amount of time involved in contract. That’s a win-lose scenario, that you were talking about.

Jonny Dunning: 41:01     Yeah, I think it kind of has parallels in an individual level of work. So if we look at the outsourced service provider, scale out right down to them being an individual, you bring in an individual to advise you on something, and then you just tell them what to do, “So, I am gonna pay you 100 pounds an hour, and I want you to do this, this, this and this.” Whereas if you said to them, “I will pay you 10k, and I want you to solve this problem,” then they then have the opportunity to use an innovative approach to make it as valuable for them as possible. But you are getting the value, because if they are delivering the outcome, that’s what you are after, and you have got a cost around it, which is where I always find it interesting when there’s a discussion around output or outcome-based contracting versus T&M. And people naturally make the assumption that an output or an outcome-based contract is going to be more expensive. Quite simply, they don’t know how much it’s going to cost them to time and materials basis, I always talk about being kind of like on the never-never. People feel comfortable in the back of their heads if they think there are people working on X. But they are not thinking about where are the outcomes, which is where I think, there’s a massive opportunity for organizations to improve their efficiency and get more value out of the services that they buy. But it needs to be linked to their strategy effectively, in the sense that they need to have a clear strategy, they need to communicate it effectively. So that it filters right the way through down through the organization. So an individual buyer knows what the organization is trying to achieve what they are doing aligns with that. And therefore what it is they need to achieve. And therefore it makes it easier for them to define an outcome. Obviously, as we said, earlier, the value in doing that is greater, the more complex the thing is you are trying to achieve. But it’s hard for people to do that, even if it’s a complex service that they are buying, that’s something that we see all the time is organizations or buyers will just be saying, “I don’t know where to start, or it’s hard to define this.” But there are ways to do that in terms of how they can collaborate with procurement, to building the structure and content and how they can collaborate with suppliers, who were the ultimate experts. But it ties back to this point you are making about working in partnership, and actually, you are aligning on a common goal, how do we solve this problem?

Tom Eveleigh:   43:15     Yeah, exactly. How do we solve this problem collaboratively? And that’s kind of the key. It’s not us versus the buyer, specifying how something has to be done as us specifying a problem, which is the outcome we are trying to achieve is the one and then collaborating together to understand how we get there using supplier expertise, which is where the innovation point comes in. But for me, it’s like, this is the theoretical bit but we have it’s almost like innovation, sustainability. These are like buzzwords that we throw around and there’s endless streams of content on social media and let’s be honest, in a lot of CSR publications as well. But for me, services, procurement as like an outsource role to play in this because not only can you drive huge innovations with the way that we contract, but I think we have talked about this before it’s like, well, I also see this model of what used to be a pure goods procurement as in perfect examples, probably Rolls Royce, I think we talked about it literally a year ago on the podcast is Rolls Royce used to sell turbine engines to the marine in the airline industry. But they decades ago, they moved to a model which was completely integrated. So instead of. 

Jonny Dunning: 44:40     Where all the service and maintenance, everything was built into it. 

Tom Eveleigh:   44:43     So it’s what they call power by the hour. They have got an uptime metric, effectively they are looking at uptime, because that is really that’s truly what the customer cares about is how many hours can we get. We are not sitting on the runway waiting for technicians to repair an engine or wait for replacement parts or whatever it is, and what’s the maximum amount of time we can spend in the air or transiting through a terminal. And Rolls Royce has set up a business model, it’s incentivized to, for them to make sure that they have got three engineers in place of got the right inventory around spare parts, their entire supply chain is geared to make sure that they can meet Boeing or Emirates or whoever the buyer is, and goals and even kind of in the B2C space. from a consumer standpoint, your son, Airbnb is effectively rather than just another hotel brand, it is hospitality as a service. Spotify is not, it’s difficult to compare Spotify to, or Netflix to Blockbuster, they are entertainment or music as a service, you are no longer paying for a physical CD, you are paying for a subscription to an outcome, which is access to. 

Jonny Dunning: 45:56     Entertain me. 

Tom Eveleigh:   45:58     Exactly. Yeah, it’s, I think, we almost take that for granted. The idea of going to a shop, I don’t even have a CD player anymore, I am ashamed to say, but the idea of going out and buying a CD now seems so alien. And yet there’s technologies, what 15-years-old, probably at most. And so I think we are going to start seeing more and more of that heat as a service, power as a service, efficiency as a service, whatever it ends up being, because those business outcomes, especially in an environment that we are in today, with energy costs, commercial energy costs, going through the roof, these things are gonna become so important that businesses are going to have to align service provision to meet their end-customer goals, rather than just providing utility.

Jonny Dunning: 46:44     So, just one thing to drill into a little deeper on that you mentioned sustainability. So how would you see sustainability being factored into that? Would you see that as a part of the objective?

Tom Eveleigh:   46:55     This is a problem with me going off on tangents. So the first thing is, if you look at asset utilization, at the moment, where we look at buying a good, we are not necessarily looking at using 100% of it’s capacity all the time, in a sharing economy is much less resource intensive to produce the same outcomes of the set, the heat light, or whatever it is that or the hospitality or the music or whatever, that the end user is looking for. So that’s kind of one, Zipcar, for example, they have got a fleet of cars, but they are shared between so many different people that, rather than sitting in someone’s garage, might be sitting on a car park for a 10th of the time. So actually, the resource efficiency is a lot higher. And then, that, therefore, you lose using a lot less resources for the same helpers, if you like. But it’s also circular economy principles as well, it’s server tising, things that would otherwise be a flow of goods through a supply chain. And another part of that as well as is minimizing waste. So minimizing the amount of stuff that goes to landfill, these are everything that’s required to take things that would otherwise go to landfill, and bring them back into the supply chain is service-based. So again, I go off on a tangent unless, you...

Jonny Dunning: 48:19     I think, it’s an interesting one. But ultimately, it comes back to aligning objectives between the buying organization and the suppliers. When it comes to things like sustainability, if you look at like, for example, scope three, these type of objectives are, that there’s a much greater pressure on an incentive for companies to actually, really do meaningful stuff around these objectives. They have to now and so they should, but that’s filtering down to the supply chain, where again, the importance of getting control over and leveraging your services blockchain is incredibly important, because it’s generally a bit more vague. And therefore, when the strict controls come into place, it’s harder for organizations to get on top of that. But ultimately, what we are saying here is, it’s all about how you are motivating what the motivational factors are within the contractual process. 

Tom Eveleigh:   49:15     I will give you one more example. I will give you one more example around, a very clear example of innovation and sustainability being linked from my own industry is, if you have got, let’s say three different ice stores on the road outside here, and you have got a time and materials agreement, which incentivizes three different call outs, you might, by chance, be able to line them up so that you have got less than three service engineers fulfilling the same work orders in the same period of time. But if you are not incentivized to do that, there’s no guarantee that you would, if you could build that into the contract, and you could use density management to make sure that you had the minimum amount of travel time involved in filling out the service requests, you could still make sure that from the service providers point of view, they spent less some of the road, they got less fuel, they got less time that the paying to technicians, engineers etc. But you can still make sure that they are incentivized to make margin on those job orders. But you have cut travel time down by a third and therefore emissions down by a third. But unless you build that into the agreement, there’s no guarantee that you are actually going to achieve that.

Jonny Dunning: 50:41     Someone just put the head round the door, never had that happen before. Come and join us. Yeah, and the thing is, with that is, it’s encouraging sustainability. But it’s also allowing the organization to be more profitable by being more efficient. So the thing I wanted to come on to next was around contract economics, which, as you describe in your white paper, it sounds very boring, a bit scary, and kind of not really, it doesn’t feel like there’s much psychology involved in it. But actually, when you drill into it, what it’s all about is incentives and tradeoffs. So how do you see those two factors kind of playing into this?

Tom Eveleigh:   51:25     So, the way the economics of the contract work, the first trade off you have got is, how do we trade cost off against value? And then the second part is, how the service provider looks at trading off performance against their input costs. 

Jonny Dunning: 51:59     So this is where you get either a linear relationship or you get a kind of geometric exponential.

Tom Eveleigh:   52:09     In very simple terms, in a time and materials agreement, you have got a one to one relationship between cost and performance, or a one to whatever, it’s a linear, as you say, it’s a linear relationship. What you are looking to do is bend that curve, basically. So that the more that’s invested in innovating the contract, the steeper that curve gets. So rather than the outset of the contract, it might require more cost, because you want high fixed costs, because you want higher investment in technology, people, processes, whatever it is, in the agreement to achieve certain service levels. But to achieve really high uptime levels, you might need personnel co-located with where the service has been delivered, for example, or you might need certain technologies, Internet of things, sensors, whatever that gives you real time information as to the condition specific assets, I am using examples from my own field. 

Jonny Dunning: 53:07     It applies to any service. 

Tom Eveleigh:   53:08     Revenue services, you can think of different parallels. But the point is, there’s a theoretical example, it’s a little bit kind of conceptual. But the point is, you can kind of see, to achieve really high service standards is going to require one of two things, it’s either going to require you to throw an awful lot of bodies and time and materials at the problem, which is going to be expensive, both parties and it’s going to cap margin at the service provider, because they are always going to be, there’s only so much you can charge a margin for a lot of these contracts. Or you can allow them to use technology. And in more innovative ways of delivering that service, etc, you might be able to leverage that across multiple different client groups, whatever it is, to get to that stage. So the density management example earlier on, it could be, as I say, it could be capturing different types of information, which allows them to be proactive about, again, it’s a specific example about how certain assets are maintained, rather than being reactive, waiting for to get feedback from a facilities manager or someone who’s on site. And you see this more and more now increasingly, smart buildings sort of area where you have got just massive amounts of data coming out of these buildings. To the extent that in many cases, the real estate manager on site or the real estate manager responsible for that site, the building is actually telling them what’s going on before they have the chance to be Without because there’s so much data involved in that, well, you are never gonna get there. If the only way that you can make a profit on the contract is by making sure that you have got bums on seats. 

Jonny Dunning: 55:13     And it’s taking as long as possible. And as you say, you are using kind of FM examples with some of this, but it applies to any service, ultimately, you are giving the supplier the opportunity to meet the outcome in the most efficient and effective way that they can, which is going to cause them to rather than just say, “It’s linear, I need as many people on the ground as possible for as long as possible for us to make the best markup on it.” Versus saying to them, “Here’s the objective, here’s the destination, you need to get to, how you get there is up to you, if you have got a really clever way of doing that. And that saves you loads of cost. Good for you. I am still getting what I need for the cost that I am accepting upfront. And that makes sense to me.” So it’s just, yeah, I mean, the word used, hamper. Rather than a nice picnic, the kind of thing that gets in the way and stops, organizations, suppliers from innovating. It’s absolutely true, because it’s just where’s the motivation to do that? I always find it frustrating organizations, because they would think I mentioned this earlier when you see bright people being hired, and then just told what to do. But what’s the point in hiring bright people and not letting them work stuff out for themselves?

Tom Eveleigh:   56:27     Yeah, that’s absolutely. And it’s your scale out across an entire organization, you can kind of see how that those type of materials contracts in the wrong context. There’s not a relationship between partners. That’s a relationship with subservience. So, I mean, also the fact that some of it’s just basic math. I mean, if you look at what’s happening with E-commerce reasonable, you are taking high street stores, where there used to be one in every market town, you might be centralizing them in major parts of the country, then you are increasingly reliant on warehouses, but even more so now, data centers, so you have got these large hyperscale, right down to co-located data centers, all over the place, crunching massive amounts of data. And the challenge is, if you get service outage in a high street store, and a couple of lights, because it’s a little bit too hot, whatever. It’s an issue, it’s not the end of the world, if you get similar issues around temperature, control, humidity, whatever it is in a datacenter. That’s a first season problem, because you are gonna have energy efficiency issues around operating. But also, if you have a power outage, people are going to be, if you are in a high street store, people probably, unless it’s something to disastrous, might have the opportunity for comedy, but it’s in a data center, you are talking about the average outage in data centers, that $750,000 cost. 

Jonny Dunning: 58:02     Wow!

Tom Eveleigh:   58:02     So you can kind of see how, it doesn’t really matter how much you are paying people to be physically present on site, if something like that occurs, and it just hasn’t, there’s an astronomical penalty to be paid for not managing performance.

Jonny Dunning: 58:16     So where are we getting to is that if used in the wrong context, time and materials might seem like a cheap and effective and easy way to do something, but it’s a false economy.

Tom Eveleigh:   58:28     Yeah, if we don’t understand total cost of ownership, it always come back to the whenever we vote, it’s a hammer, everything looks like a nail, you really need to understand what all the costs involved in that service delivery are, relative to the outcomes you are trying to achieve. Because you can kind of look at that example alone. If you have just one or two instances of that, over a five-year period, it’s probably wiped out all the potential costs you could have made from negotiating down rates for, you can get, it’s terrible example. No one actually does this, but you can kind of see why. 

Jonny Dunning: 59:06     Well, it’s the effort reward thing, isn’t it? Where level of complexity or level of importance, it makes sense to spend the time upfront. It becomes more strategic, and therefore it makes sense to take a strategic approach to it.

Tom Eveleigh:   59:21     Yeah. And I think I got waylaid a little bit talking about the economics of contracting earlier on but the other thing which is fascinating to me is and this is getting, I think more and more kind of, in the sort of academic space, is getting more and more attention from the procurement kind of knowledge base, whatever you like, is game theory, like, just amazing, fascinating area to study by itself. 

Jonny Dunning: 59:49     There’s two elements to that. 

Tom Eveleigh:   59:51     Yeah, broadly speaking, you can have a competitive game, which is like a game of chess, both got different objectives. When trying to use strategy to win the game, and my win is your loss and your win is my loss, or you have got co-operative games, which is like the classic example would be like the prisoner’s dilemma. So, two criminals are arrested for the same crime, but they don’t know what the other one is going to do. And so we have got to kind of figure out how the other one is going to behave. And based on that, minimize the sentence that they are gonna get, and the Nash equilibrium result is always, you have got to assume good faith in both the other party or the second best choice for the other party, basically. 

Jonny Dunning: 1:00:37  So effectively, that saying that collaboration, statistically leads to a greater outcome, better outcome. 

Tom Eveleigh:   1:00:44  But also the greater sharing of information, the better outcome for both parties as well. And that’s another problem, we can kind of see everywhere is, we were siloed enough within organizations, but let alone between buyers and service providers, so the sharing information is kind of key way to achieve the outcomes of both parties, shielding that information around intellectual property protection, etc. And figuring out ways to hold that information close to your chest is in theory and in practice, a way to kind of hamper innovation, reduce that, but also, with a competitive example, we set up agreements with the best of intentions, but as soon as you start getting a breakdown of in an relationship that’s not truly collaborative, it’s goes back to the chess example, if you make a move, and I am now we are going to be trying to figure out how to move based on what I think your strategy is, if I don’t do that in good faith, as if the game is competitive, but as a cooperative, then the relationship starts to break down, because I start realizing, “I have got to protect myself rather than work for the benefit relationship,” if you like. But anyway.

Jonny Dunning: 1:02:07  It’s really interesting that, I think that’s one of the things that I find really fascinating about the content you put out, it’s the introduction of the kind of theoretical, and the academic principles behind some of the stuff that’s going on. And it’s really valid, at first glance, you can look at and go game theory, what the hell’s that got to do with this, but it’s got everything to do with it, if a contractual relationship is a win-loss setup, then that’s probably not going to really build a brilliant relationship, and it’s probably not going to be a massive attempt to deliver value on the supplier side, because they are not incentivized to do that. They are just incentivized to achieve up do certain things, whether that’s bums on seats, or whatever it might be, where it can be a collaborative approach, that goes back to what we were talking about earlier about being aligned towards a common objective. Strategically, that’s where you get into this, you are getting much more into the situation where it is an extended capacity and extended part of your organization, which is, it’s where it’s going, as you say that the core organization is setting smaller and smaller and smaller, and more concentrated around things like, what is this organization? What is the brand? And what does that brand mean? What’s its purpose in the world? What’s it all about? And actually, then there’s a core function around that. But in terms of managing the rapid rate of change and uncertainty in this VUCA era, you need to have the flexibility to scale up, scale down, bringing new capabilities rapidly, doesn’t always mean you are going to need to you have to hire them, that’s not always necessarily the best way to do it. So by having a trusted services supply chain, and obviously a full supply chain, flexibility around that, visibility on it, you can you can manage things like, “How sustainable is my supply chain? How diverse is my supply chain? What innovation potential do I have in my supply chain? I have got smaller suppliers that can maybe think differently and do things differently.” If you can engage that your whole supply chain, or the parts of your supply chain where it’s relevant on a collaborative basis, then it is the that extended supply chain is acting as part of your organization, you are acting as one unit towards a common objective. So it’s just a different, more kind of developed principle. But there’s a massive amount of value to it. And I think the stuff you were talking about earlier, was the lady whose concept was the relational contracting? [Unclear]. So you mentioned the Dell and FedEx example. And I seem to remember in the white paper, the outcome of that was that, there was an overall 40 odd percent cost saving so Delwin but FedEx one as well. They got long term business. They were making great, great margins on what they were delivering, because they were bought into the overall objective solving the problem. And they were able to use innovation to make that a profitable enterprise for them as well.

Tom Eveleigh:   1:05:02  Yeah, exactly. The cost savings is the simplest example in the wilderness, that’s at face value. That’s what procurement is there to do. And you have got an example there of using a collaborative approach to drive savings that you would never in a million years thinking we are going to be able to get from a transactional kind of, short term negotiation.

Jonny Dunning: 1:05:24  So, I want to come on to space in a minute. But before we do that, so just looking at the performance side of things, that ties into that relational contracting, in a way, but there’s differences in the way that you can measure performance and different things that you might be measuring. It could be an input, it could be an output, or it could be an outcome. What’s your view on that from a kind of performance management angle?

Tom Eveleigh:   1:05:57  I think it’s almost like when you go, I kind of see them as, again, on the spectrum from inputs, probably been the easiest to manage. But, that’s the furthest distance, probably from what the actual objectives of the enterprise are, through to outcomes, probably being potentially being the most difficult to manage, depending on what the actual service has been provided. It also requires probably the strongest collaboration between the two parties, but it’s the most closely aligned to what the end users the enterprise, whoever’s actually experiencing that service is looking for is, then outputs to me, it just, that’s the flip side, the inputs, you might have someone turning up for a certain amount of time on site. But the response time to get, and whatever the different parameters are around the service delivering, that can be managed on an individual, transactional level. So that might be a single workload or a single job, or you might have an input and output from that instance, but the outcome is, whatever is the, it might be customer satisfaction, might be room utilization. 

Jonny Dunning: 1:07:18  Power by the hour. 

Tom Eveleigh:   1:07:20  So that’s on that spectrum, I think the challenge is, I think Andrew Coffey was talking about this on a podcast video ages ago, is across the kind of source to pay workflow, if you like, the source of the contract that needs to be set up so that you have got the right contract parameters, and like performance parameters are in there. But oftentimes, you can do that and not have the procure to pay contract to pay whatever you call at the end of that setup, and where that actually manages the parameters you have set out at the start that relationship. So it’s impractical to do that on every contract. So if you have got agreements where you are looking for specific outcomes, again, this strategic top right, that quadrant, that kind of makes sense. But it all comes back to what’s the strategy of the at an enterprise level, which contracts you are going to look at utilizing different contract models for and then building performance metrics off the back of that. But there’s concept in IT, I think, again, I have talked about this before about the watermelon effect. 

Jonny Dunning: 1:08:28  Yes.

Tom Eveleigh:   1:08:29  So if you are measuring on inputs and your end users looking at outcomes, for the distance, that is, the more chance you have got having everything look good when you are looking at the suppliers performance against a contract. But everything obviously, being perceived lot more negatively, if the actual result the end user looking for, isn’t there if you want. So, I mean, performance management is probably the trickiest of all this, because it’s all great in theory, when the rubber hits the road, you actually got to make sure that you have got governance around contract management, which, in many cases, even in quite complex agreements, isn’t in place. 

Jonny Dunning: 1:09:05  Yeah, it’s, in my opinion, the biggest gap in services versus the goods and materials. Are there clearly defined outputs that are defined within that contract? And is that contract stored digitally? Quite often not. So there might be some milestones or deliverables contained within that, let’s call it a statement of work. But if that’s just a scanned in PDF and contract repository somewhere, then that’s kind of lost, the process is fixed at that point. Clearly, most services they are going to change along the way, and one of the things I was going to bring up was that sometimes the first part of the service delivery might be to define what the actual outcome needs to be if you bring in consulting arrangement. For example, you don’t always know what you need to get to. Sometimes you need to do an initial piece of work to define what it is you need to do it. So, yeah, the measurement of an outcome or an output is only going to happen effectively, if there’s something there tangible to be measured, if there’s a way of administrating that, and a way of kind of capturing that digitally in an ideal world. And the other side of performance, which is really worth considering is, it’s got to have the qualitative considerations around it as well. As you said, if there are quantitative metrics are in place, if you capture that digitally, you can look at how a supplier is performing. Did they hit their milestones? Were they on time on budget? How much did the scope change? So that’s one side of it. But then, okay, they might have hit all of their milestones, but the level of satisfaction for the buyer might be very, very low, there were a nightmare to deal with that, communication was terrible. They didn’t bring in the level of diversity that we wanted involved in this project, they were using lower level consultants when we were promised high level, whatever it may be, if that’s not captured, as well not factored into it. And that’s where I think artificial intelligence, so I was talking to you earlier about how that can help with the performance management side of it when you are bringing all of these qualitative and quantitative metrics into play and weighting them and scoring suppliers. That’s when you can get into the real magic of being able to compare services suppliers on a like, for like basis? are they hitting the quantitative metrics that they should be for the desired outputs and outcomes of their what they are working on? And are they delivering satisfaction on whatever those qualitative metrics are, that are important to that particular organization, then you can compare suppliers doing totally different things as to, are they providing value as a supplier? And obviously, once you start to break that down per category, then you can build that into your kind of strategic planning as to what supplies you might use in particular areas in the future. So, there’s difference in measuring performance, whether you are measuring an input, and output or an outcome. Now, I have heard it said to me before, “But in certain areas, Johnny, it’s pretty much impossible to measure an outcome in that area, you could only measure an output, because in some areas.” Some people would argue that, it’s so hard to pin down what it is you are doing, or maybe the start of a process that you have to stick to your outputs. But in the ideal world, everything would be around an outcome. So outcomes and outputs. I feel that there’s still value in outputs driving innovation, maybe not to the maximum possible level on your scale of it being an overarching outcome, where there’s this massive amount of freedom for the supplier to say, “Well, let us go and think about that. And we will do it the way that we think is best.” There’s still this scale, where an input level, there’s no incentive for innovation. Not really any asking for innovation. At that point, you are saying, “Just do what I asked you for that rate.” When you get to outputs, I think there’s still a potential for innovation at that stage.

Tom Eveleigh:   1:13:03  Yeah, I mean, that’s a big question. And I suppose the challenge’s, when you are measuring performance based on outcomes, from the suppliers point of view, often those outcomes won’t be entirely within their control. So there’s more of a kind of outcome-based metric you are looking at, that can be asset, time, it could be...

Jonny Dunning: 1:13:30  What about in a consulting arrangement, though? So I think, when you are looking at like in the FM industry, in particular, that outcome is possibly easier to define. But if you take that on a broader services context, if you are looking at a consulting arrangement, the outcome might not be, it’s a difficult one to define, because you could look at and go, the outcomes, there should always be a clear outcome, because it should align with what you need to achieve strategically within your organization. But I think if you look at it in the context of a consulting arrangement, the outputs of that might be a report that feeds into more developed view of what the outcome needs to be, like, sprints in an Agile process.

Tom Eveleigh:   1:14:12  Right. I like that. So, I am kind of thinking about it like, well, as you are kind of developing scope from project, all of the deliverables and all the objectives you are putting in place for the project should have a tangible value based endpoints, increased profitability, enhanced employee retention, whatever, depending on what field is, there should be something tangible the buyer or the stakeholder is procuring their services is looking to get out. They can be personal metrics, or they could be organizational metrics, but it should be something tangible to that. But if not and you are looking at an early stage. It’s almost like discovery projects, try and feel out what that outcome is gonna look like? That maybe, like what you are saying we use kind of, an agile methodology says, we know that the finish line, you can sort of see the finish line, but it’s a little bit blurry. But we can see the first move to the 100 yard line, to use a sports analogy. So we can at least set that up. Maybe that’s outcome-based. And maybe it builds into a broader project. The honest answer is, I don’t know.

Jonny Dunning: 1:15:32  Ultimately you are driving towards the clearest definition possible at the end point. But at a minimum level, if you can define where you need to get to next, then that still, it’s an output, or it’s a mini-outcome. And ultimately, that’s still sharing the risk, and it’s sharing the responsibility with the supplier. If you take that approach through that type of contracting mechanism, that shared risk and shared responsibility is going to lead that supplier to be motivated to do it to use innovation. And get it done in the best way, use initiative to get it done in the most effective way, which will make it as profitable as possible for them, best possible outcome for you as the customer. And ideally the best relationship when you have got a trusted Problem Solver as part of your extended organization. And so, just to wrap things up, because we could probably go at this... Innovation, I made a note to myself that, innovation lives in space. So, within your white paper, and it’s a bit of a challenge here as to whether you can remember every part of that acronym. Talk to me a little bit about that in terms of fostering innovation.

Tom Eveleigh:   1:16:48  Right. So I think I mean, kind of it was a nice acronym. But basically what I was saying I think was at the outset, we have talked about many of these points already. But at the outset, you want to understand that the contract needs to match the level of risk and value to the organization. So that’s the segmentation piece, that’s reuse, like the crouch matrix and procurement all the time, understanding where strategic, leverage your bottleneck in your tactical transaction suppliers said, it doesn’t make sense out of misalignment between your segmentation and your contract type, because otherwise, you end up over investing in something that’s not going to produce the value of the innovation that you want. That’s the first piece. The second piece was... A, was agreement, can’t remember quite what it was talking about. 

Jonny Dunning: 1:17:39  Partnership. 

Tom Eveleigh:   1:17:40  Possibly, I think, broadly speaking, I am talking about, you got to understand from a category standpoint, or from a high level standpoint, where each of these service agreements, or each of these categories is going to fit within that kind of portfolio of categories you have got, that’s the first piece. The second bit was really around using the agreement, designing upfront, to meet the outcomes you are trying to achieve, but also not doing what we do 90% of the time, which is sign an agreement, throw it over the wall to the business, stick it in a filing cabinet, and then forget about it, it should be a template and a roadmap for driving the relationship. So in the case that TFL and cubic transportation that those SLAs in the contract. And the terms that were between FedEx and DHL, that’s a roadmap. That’s what they use to drive data that decision making as opposed to just having it there as a reference guide when you need it. No, that’s an actual route to achieving what you need to in the relationship. See, I think was really around collaboration, which is, I think, is another point I stole from Caitlin’s asset, which is the governance structure around the contract, once everything’s put in place, has to be there to make sure that it’s stayed on course, and doesn’t drift into the position when you get into competitive game theory, rather than cooperative, so you have got to have. 

Jonny Dunning: 1:19:10  Came into conflict at that point. 

Tom Eveleigh:   1:19:12  Yeah, so the right level of seniority involved, the right level of performance management, you got to have an understanding of how conflict gets resolved, because conflict is inevitable, regardless of which kind of relationship you are in. So you need to have a proactive approach to governing the actual contract and then making sure that it achieves the aims that you are trying to at the outset, and you are getting what you need to in terms of value and innovation from it. And then the final point, I think, it’s on how it’s executed and rolled out, but also just as importantly, how you can exit from it. So you need to have a plan from the outset of not an assumption that the relationship lasts forever. But at some point, one or both parties may realize that they want to change course, pathways whenever and you need a way to enable both parties to exit from the contract without one of them taking undue risk. So that’s not again, termination for convenience clause is, it’s a pretty...

Jonny Dunning: 1:20:07  You had the quote in there that was like, “There’s no way I am going to take on a 60 day termination for convenience clause if the contracts not gonna be profitable in two months. It’s just an unacceptable business risk.” 

Tom Eveleigh:   1:20:17  Yeah. So I can’t remember... 

Jonny Dunning: 1:20:18  Who’s the CFO.

Tom Eveleigh:   1:20:19  That’s, just straight from the horse’s mouth. That’s like, you can’t put capital into an agreement where you can have the rug pulled out from underneath you. 

Jonny Dunning: 1:20:33  There’s just too much risk. 

Tom Eveleigh:   1:20:34  Yeah. So, that’s kind of, I still forget to...

Jonny Dunning: 1:20:39  I would definitely recommend that people check out the full white paper. I found it really, really interesting and very thought provoking! It introduced some concepts to me that I either wasn’t aware of or I hadn’t really considered very much, and I can see your curiosity going into that. And I think the fact that it’s takes that kind of scientific and academic approach is really valuable. And I think it’s great content. I guess the question is, what’s next?

Tom Eveleigh:   1:21:13  I have no idea. I have got a couple of other things where I was, as I say, I was kind of partway through a master’s degree. And I have got a lot of content for that sort of thing. It would be good to try and make a much more relevant, bring in some real world examples and put out some short form content around that as well. So yeah, especially around the sustainability piece, and really trying to understand how the servitization and the circular economy, all kind of fits together, because I think, there’s sort of emergent business models that we are seeing, especially in B2C space, that in 10 years time are going to be even more commonplace in our industry. And I think more we can kind of understand exactly how they work and what our role is in? The more value we can get. 

Jonny Dunning: 1:21:40  And the faster we can bring them into play.        

Tom Eveleigh:   1:21:55  Yeah, exactly. And I mean, we have got a major challenge whether it’s emissions target, just the sustainability agenda, in general, yeah, big massive deployment.

Jonny Dunning: 1:22:18  Definitely. Excellent. Well, listen, thank you so much for coming in. Really appreciate it. Love that chat. I can feel a potential future chat coming up around this sustainability and the circular economy. I think some really interesting concepts that you touched on briefly around that. Yeah, just a pleasure to chat. And really nice be able to meet up in person. So thanks very much. 

Tom Eveleigh:   1:22:37  That’s been fun. Thank you. 

Jonny Dunning: 1:22:38  Excellent. 


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