Is the Outsourcing industry ready to adopt Smart Contracts?
For the past decade or so, I have been advising clients on outsourcing by putting in place a well-defined contract (read: smart contract) and eventually helping clients in the transition and management of contracts/vendors.
Believe it or not, most of the problems that arise are common – even “dumb”, if I may say so. They argue over trivial things like the interpretation of outsourcing contracts, timelines of deliverables, expectations mismatch, etc. What contributes to the problem are a variety of things but a major cause is teams acting in silos. Service Provider sales/presales teams are also generally different to delivery teams – and all act in silos.
Generally, during the bid process, service provider bid teams decide on the solution, scoping, pricing, service levels, commitment and risks. They will decide, first, what terms will apply, second, what the premium should be, and third, what service levels can be committed. The delivery team is generally not involved or is a mute spectator at best. This process creates silos.
In reality, when there is an issue between client and provider, the client is unlikely to deal with the sales/bid team. Instead, they communicate with delivery team, which is another silo. So, what matters is the interpretation of the provider’s delivery team of the signed contract.
How do we avoid or reduce such instances? Is Smart Contracts a solution? Perhaps it is, at least partially.
Smart contracts are computer programs that can automate the clause and ramifications part of the outsourcing contracts. In smart contracts, the nitty gritties aren’t ambiguous; hence, smart contracts run by computers allow for a greater level of trustworthiness compared to humans.
A survey by Deloitte reveals that while most organizations focus on vendor management, only 28% have mature vendor management functions in place. As the outsourcing industry evolves and the actual management of vendors/contracts matures further, contracts will become more results and outcomes oriented.
This is where blockchain based, smart contract solutions can be applied in outsourcing contracts.
A few areas where I think smart contracts can be applied are:
- 1. Milestone-based payments – Projects or services that achieve certain milestones as defined in the contracts can initiate payments once triggered
- 2. Service Levels-based rules – Rules can be defined that trigger invoice generation, based on monthly service levels being met or not met. For example, if a proof is submitted that Service Levels are met, then smart contracts will automatically trigger invoicing and payments.
- 3. Critical deliverables – Similar rules to define specific actions will trigger as and when critical deliverables are met.
Using blockchain/distributed ledger technology could help fix some really basic problems in outsourcing vendor management, including getting everyone on the same page. It obviously will take more time before the industry explores a deeper penetration of smart contracts in outsourcing, but a small start will pave the way.
I believe this will also mark the foundation of building trust, as client and service provider go beyond the basic issues of contract interpretation. This can also be a step towards increasing the automation of contract and vendor management – something which I will discuss in my next column.