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Alliance Contracts
"In negotiating an alliance contract, the first step is that cost savings of at least 10% are required over a schedule of rates contract otherwise the efforts involved in using an outside party are not seen to be worthwhile."
Benefits sought and delivered from alliance contracts
Research studies carried out during the comparison of various outsourcing contract types prove that alliance contract partners experience a high degree of satisfaction with the benefits achieved. The top three benefits sought during the research were identified and analysed:
Cost savings - best practice organisations managed a ten element total cost model to assess outsourcing contracts - an alliance type contract performed best.
Service elements - enhanced reliability is a correlative outcome of the mix of planned, routine and emergency maintenance along with reduced liability costs and reduced overall maintenance costs.
Quality - quality is an issue that is closely related to reliability and best practice. All competencies, except core and essential, should be outsourced to maintain the competitive edge.
What do alliance contracts deliver and when should they be used?
Alliance / Performance based contracts are growing as a percentage of total outsourcing contracts. The link between contract duration and degree of management tasks outsourced is significant. As the relationship moves up the scale from in-house to joint venture / alliance, the duration of contracts tends to lengthen from 3 to 5 years. Outsourcing contracts of any type are not often longer than 5 years. Keeping the contract short and renewable is one method of keeping the relationship "fresh" and maintaining "constructive tension" in the relationship.
First generation contracts
Schedule of rates contracts are being used typically for the first generation outsourcing contract. Responsibility for management rests primarily with the organisation, with the outsourcing contractor providing better management skills to reduce costs within agreed service levels. Variation of volumes is often dealt with using a schedule of rates approach.
Alliance Contracts
Partnership, or more precisely - alliance contracts, have a common currency in the industry as well as a common set of characteristics. They are often structured on a cost plus performance based fee model. Trust and flexibility are essential elements and the provider is expected to provide access to best practice and innovation.
Why move to an alliance contract?
Trust and flexibility are the foundation requirements of moving to a higher value, closer relationship and many organisations moving up that chain would deliver significant benefits. The qualitative reasons given for taking this path are to facilitate innovation, better collaboration on strategic planning and optimising skill sharing, resulting in better value for money.
Alliance contracts for either services or skills were defined in a quantitative study as being “open book”, with profit based on performance and profit at risk.
Requirements of a strategic alliance
A strategic alliance board is made up of operations engineers, design engineers and the outsourcing contractor.
In negotiating an alliance contract, the first step is that cost savings of at least 10% are required over a schedule of rates contract otherwise the efforts involved in using an outside party are not seen to be worthwhile. Once this 'level one' requirement has been met, the second level - performance criteria, needs to be addressed before implementing a cost plus performance based fee model. Until this need has been met to the satisfaction of both partners it is difficult to meet 'level three' requirements of setting progress measurement and payment criteria. Once level three (measurement and payment) is achieved, joint development of process management and best in class visions can be achieved. The ompanies that moved successfully to strategic alliances made sure they had satisfied the three level requirements before sharing strategic management decisions.
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