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Improvements and Gain Sharing Presented By: Lisa Abe OBA Technology in Bloom March 8, 2010
Improvements and Gain Sharing
Presented By: Lisa Abe
OBA Technology in Bloom
March 8, 2010
Improvements and Gain Sharing
• Encouraging quality improvements and cost saving in IT• Approaches to gain sharing• Calculations, measurement methodologies• Review, reporting and payments
• Dealing with project services• Sample draft clauses
Encouraging quality improvements and cost saving in IT
• New technologies, R&D• Better quality• Lower costs, economic benefits, economies of scale• Functional benefits, improvements in operations• New processes, methodologies, tools, practices
• New releases, updates, upgrades• Consolidation, new locations• Contract and subcontractor management• Need service provider commitment
Encouraging quality improvements and cost saving in IT• Service provider arguments (cont.):
• Why should it share improvements in margins and profits?• Part of normal business operations• Customer direction not in line with service provider’s• Don’t want customers running our business• Too many customers, each with own interests
• Need ability to share with other customers
• Customer not investing in risk of development
• Don’t want to disclose confidential info and trade secrets
Approaches to Gain Sharing
• Calculations, measurement methodologies• Review, reporting and payments• Dealing with project services
Calculations, measurement methodologies
• Adjusting charges for the services• Adjusting service levels• Allocating gains, based on margins• What is a margin?
• The percentage margin is the percentage of the final selling price that is profit
Calculations, measurement methodologies
• Defining a baseline:• Service provider’s net income (revenues less expenses) for
specific customer• Pre-tax• Expenses: direct cost of sales, allocation of indirect costs,
e.g. overhead, admin, royalties, interest• Profit margin (expressed as a percentage) = (revenues -
expenses)/revenue
• Time period, e.g. calendar vs fiscal year, quarter
• Contract years less than 12 months (stub year) use average
Review, Reporting and Payments
• Governance process, working groups, meetings, planning and forecasting, information exchange
• Time periods• Content and details• Audit rights
• External auditors
• Timing
• Effort, assistance, cost• Verification
• Confidentiality and security
Review, Reporting and Payments
• Payment calculation• May vary depending upon extent of customer’s
involvement in creating the improvement or gain share
• When due• Cash, credits or fee adjustments
• Stub years• Dispute resolution
Dealing with Project Services
• Improvements, cost savings and gain sharing to be implemented as a project
• May require a change to the way services being implemented or costs calculated, therefore need to follow Change order process
• Change request to address measurement methodology• Project governance for planning, forecasting, reviewing
and development of improvements
Sample Draft Gain Sharing Clauses
• Customer may, and Provider shall use commercially reasonable efforts to, identify potential savings opportunities with respect to the Services and/or potential opportunities for improving the quality of the Services (each, an “Opportunity”).
Sample Draft Gain Sharing Clauses
• If either Party identifies an Opportunity, the Parties shall discuss such Opportunity [NTD: Reference governance process and meetings], including the likelihood that such Opportunity will result in savings to Customer and/or improved quality as to the Services and, if approved by Customer, Provider shall further research the Opportunity and present a written proposal to Customer within a mutually agreed time frame. [NTD: May want either party to have the ability to submit a Change Request. Align with Change Order Process.]
Sample Draft Gain Sharing Clauses
• Provider’s Change Order Response Proposal shall include, as applicable, the estimated current costs, the recommended changes, the anticipated savings and/or improvements in the Services that will be achieved by Customer and a proposed project plan, developed in consultation with Customer, setting forth each Party’s responsibilities if the Opportunity is to be realized.
Sample Draft Gain Sharing Clauses
• In the case of improved quality of Services, a mutually agreed value shall be ascribed to such improved Services and used as the basis for any gain sharing as hereinafter described. If Customer agrees with Provider’s proposal, the Parties shall execute and implement the Change Order Proposal to exploit the Opportunity.
Sample Draft Gain Sharing Clauses
• The Parties shall specify in the Change Order Proposal the gain sharing formula (if any) that will be applicable in order to compensate Provider with respect to the Opportunity; however, the Parties anticipate that such gain sharing formula shall be consistent with the following:
Sample Draft Gain Sharing Clauses
• (a) for any Opportunity initiated by Provider resulting in savings or improvements to the Services benefiting Customer, Provider shall be entitled to forty percent (40%) of the savings or value in improved Services for a period of twelve (12) months, after which all further savings or enhanced value shall be realized solely by Customer; or
Sample Draft Gain Sharing Clauses
• (b) for any Opportunity initiated by Customer but as to which Provider provided substantial assistance in terms of developing such Opportunity, at Customer’s sole option, either: (i) Customer shall retain one hundred percent (100%) of the savings or enhanced value and Provider will be compensated directly through Fees for its implementation Services; or (ii) Provider shall retain twenty-five percent (25%) of the savings or enhanced value for a period of twelve (12) months, after which all further savings or enhanced value shall be realized solely by Customer.
Sample Draft Gain Sharing Clauses
• If: (a) Provider proposes to Customer any innovative and creative improvement activities which are anticipated to result in overall savings to Customer which could not be implemented without the assistance of Provider; (b) Customer approves the implementation of such cost savings methods; and (c) such cost savings methods result in demonstrable savings to Customer, Customer will pay to Provider an amount equal to 50% of such net savings in the first two years following the implementation of such cost saving methods.
Sample Draft Gain Sharing Clauses
• For greater certainty, the Parties agree that the foregoing will not apply to real estate matters (which may be discussed between the Parties) and will not require Provider to share with Customer any cost savings achieved by Provider as a result of achieving normal operational efficiencies in the performance of the Services.
Conclusion – Checklist
• Identify potential IT services for improvements, savings and gain sharing – process for identifying
• Create a forum for discussion, planning and creating
• Develop formulas for calculations
• Create a baseline to measure against
• Ensure appropriate measurement tools are in place
• Set up proper reporting and audit processes
• Ensure alignment with governance process, internal corporate policies and change order process
• Provide for payment, credit or fee adjustment mechanisms
Lisa K. Abe416-868-3358
• This presentation contains statements of generalprinciples and not legal opinions and should notbe acted upon without first consulting a lawyerwho will provide analysis and advice on a specificmatter. Fasken Martineau DuMoulin LLP is a limitedliability partnership under the laws of Ontario and includes law corporations.
