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Input vs. Outcome-Based Contracting: The Basics

For quite some time, there was a traditional approach to contract management that primarily focused on delineating the specific way in which a relationship was supposed to work and the tasks and activities the other party was supposed to complete. Now, rather than outline every step of the process that will eventually lead to the desired result, companies are inclined to state what it is they hope to accomplish from any specific contract. This is known as outcome-based contracting. The benefits of this outcome-oriented, rather than input-based, approach include saving time, allowing leaders to exert their efforts elsewhere, cutting costs, and reducing the need for oversight, as explained below.

Companies that employ outcome-based contracts can save a lot of time during the negotiation process. Rather than spending time nitpicking over every task or activity of how the vendor (or other party) will fulfill its obligation, a company should be able to explain its expectations for the final product and leave the rest to the professional judgment of the other party. Of course, this requires contracting with reputable and trustworthy firms.

Ultimately, if the goal is to have something happen by a specific time, or achieve a specific milestone, making that expectation clear and allowing the other party to do its thing to fulfill it makes far more sense economically and time-wise. It does not make sense to spend hours going into excruciating detail as to how and when and where something must occur. Companies have to find contracting partners to whom they can delegate obligations and responsibilities, allowing leaders to spend time on other items that require their attention and expertise.

In addition to saving time, this approach reduces the amount of oversight required, as well as any associated costs. If the right vendor is hired, it shouldn't be necessary to have a company project manager babysit the entire process to ensure that each step is met. Instead, the contract should merely include key milestones, and the contract manager can periodically check on the progress of those items being met. In the end, it really doesn’t matter how contractual actions were accomplished, provided that they were accomplished in the manner desired by the deadline imposed, and this is precisely the focus of outcome-based contracting.

The idea of outcome-based contracts is still gaining traction, however, government agencies have already started to adopt this approach and have projected substantial savings in doing so. For example, a saving of a trillion dollars in the United States over the next decade has been forecast for the successful roll out of an outcome based payment model in government healthcare spending. With this type of projected results, it is only a matter of time until companies regularly employ outcome-based contracting in lieu of the more traditional input-based model, and to support that, CLM software will prove useful. 

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Tips and best practices for a successful contract management process.

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