Menu-based Contracts

An insurer regulated by the FSA, the former regulator of financial services, had an existing business process outsourcing contract for document scanning, archiving and retrieval which was based on the supplier recovering its costs plus a profit margin.

There were a number of issues with the contract: (1) there was no incentive for the supplier to minimise the costs and make the services more efficient, (2) the insurer’s business was facing complex and unpredictable changes as a result of potential reorganisations, disposals, acquisitions and mergers, and the existing contract made it difficult to allocate the supplier’s charges to different business units or to model the effect of changes to its business, (3) FSA rules required the insurer to demonstrate greater transparency and control over outsourcing contracts. Like many outsourcing contracts, the service descriptions, service levels, charges, baseline volumes and management processes were scattered across many schedules. Changing these schedules was a nightmare if there was a change to the insurer’s business.

Using workshops, flip charts and slide sets, the answer we suggested was to create a new menu-based contract, so that each business unit could see what it was buying in one document. We created a menu for each service, containing:

  • the description of that particular service (e.g. scanning)
  • the service charge, baseline volumes and impact on price for increase or reduction in volumes
  • the key supplier processes which could not be changed without the insurer’s permission
  • the service levels and reporting obligations
  • the service credits commitments.

As a result, the insurer was able to add new business units or dispose of them, flex the demand for the services up or down, model the effect of changes to its business, and have greater transparency and control over the contract. The contract was also much easier for the procurement professionals to manage.