The Commercial Model

In our industry, many outsourcing relationships are complex and integrated, delivering multiple services across the client portfolio. Corporate Real Estate (CRE) services, in particular facilities management (FM), vary substantially based on uncontrollable issues such as changing business needs, corporate growth strategies, or even weather. Often, the commercial strategy, or lack of one, does not enable the flexibility required to deliver within this face-paced, environment.  

The commercial model drives behaviors of the service provider and impacts trust within the relationship. All too often, clients enter negotiations with a lowest-price-possible mindset and seek to negotiate pricing lower and lower without considering what the impact is to the ability of the service provider to deliver quality services. The result is short-term price concessions at the detriment of long term success. There is no value in a strategy that includes the, when I am winning you are losing, mentality. Shifting the mindset from cost to value enables the business to think strategically about what outcomes are important and build a model that aligns. 

Additionally, most companies are still operating in a conventional transaction-based commercial model, rather than one that is outcome-based. This structure cannot support the dynamic nature of the business environment, but rather drives bad behavior, perverse incentives and missed opportunities. What do I mean by this? When you pay for services in a transactional model, revenue is directly tied to the number of times a task is performed rather than the desired outcome. The more times a task is completed, the more revenue is generated for the service provider. This does not encourage behaviors that will drive efficiency because the very nature of the model means that efficiency results in a reduction in revenue. 

Another example of this is in commercial models where profit is tied to labor. The more resources on the account the more profit the service provider will make. Again, this can lead to mistrust. Are resourcing decisions being made based upon operational needs? Where is the incentive to be more efficient if efficiency means fewer resources and fewer resources mean less profit? As you can see, every decision relating to how services are paid for impacts how services are delivered. 

A well thought-out commercial pricing model strategy is aligned to the desired outcomes of the deal and is equitable and mutually beneficial to the parties. Linking service provider compensation to pre-negotiated goals and outcomes drives the behaviors within the relationship that align with achieving those goals and objectives. If the commercial model is structured in a way that as goals are met the service provider loses profitability there will be misalignment in the relationship. SIREAS works with our clients to understand their goals and objectives and develop a commercial model that aligns and minimizes the opportunity for perverse incentives and bad behavior to occur.