New Kind Of Vendor Lock-In And Purchasing Concerns

Increasingly, there has been a push by firms purchasing services to move towards consumption-based pricing. Accompanying this move is an additional desire to reduce the length of contracts. Ideally, you should only pay for what you use; and when you stop using it, you stop paying for it. Although this is what traditional contracts purport to offer, the reality is far from this seemingly natural and beneficial state. Most traditional contracts create buyer lock-in and require some form of take or pay.

Furthermore, traditional contracts often seek to restrict the buyer’s flexibility in a variety of additional ways such as limiting access to data, requiring changes be made through the incumbent vendor often at above-market prices and maintaining the architecture planning in the vendor’s control or influence. Over time, this structure proved frustrating, locking in technical debt and resisting innovation.

Although it would seem long-term contracts are designed to favor service providers, long-term contracts historically proved to be two-edged swords that, over time, negatively affected the service providers as well. By creating contractual lock-in and the negative dynamics that accompany it, the two parties’ interests became unaligned very quickly. Both parties refer to the contract as the source of truth. But the contract doesn’t change when a client’s needs change, which forces a contractual discussion that often results in negative behavior by one or both sides. Understandably, contractual friction occurs. There is opportunity at least for the vendor to extract a price for changing. That, in turn, results in clients writing future contracts with leverage to force the provider to change when necessary.

Read more in my Forbes blog.