Commercial

Benefits of Open Book Pricing & Contracting

Athena Commercial
October 6, 2020
“Re-establish good faith, give the estimation of the work and not refuse a reasonable payment to a contractor who will fulfil his obligations. That will always be the best transaction you will be able to find.”

Marshal Vauban (1633 – 1707), Chief of Fortifications for Louis XIV, writing in 1683

Open Book Contracting is a commercialand procurement model which advocates transparency between clients and contractors.It is driven by the open and timely sharing of information to ensure thatoperational, commercial and programme decisions are taken in the best interestsof both parties to enable delivery of both parties’ obligations to meet thedesired outcomes of the contract. It enables the appropriate transfer of riskand can be used to financially (or otherwise) incentivise suppliers around keybusiness drivers and TCO reduction targets.

In order for an Open Book Contract to truly work, all engaged parties (including, where necessary supply chain partners) must be commercially mature enough to see past the initial perceived risks associated with sharing pricing information, and efforts should be undertaken to ensure all parties understand the strategic objectives and commercial process associated with developing the price, solution and delivery programme. The core principle of Open Book Pricing is transparency, and many companies have reservations about adopting a transparent philosophy in the way that they develop pricing for their clients. Our opinion is that Open Book pricing is one of the few ways in which all parties can truly understand each other’s obligations, and one of the key benefits of Open Book Pricing is that it drives a philosophy and thought process which enables “bottom up” thinking and the sharing of key information between parties. This enables the resulting Open Book Contract to be structured in a flexible and agile manner to accommodate any anticipated risks or changes.

General Benefits of Open Book

  1. Partnered contracting models allow for “bottom up” thinking, which allow all parties to understand each other’s constraints, obligations and considerations in order to make effective commercial and operational decisions on behalf of the partnership.
  2. Open Book Pricing allows for the true understanding of the costs of the products or services and enables effective decisions to be made regarding the true Total Cost of Ownership (TCO).
  3. Open Book Pricing and contracting allows for the partnership to truly understand each other’s commercial and operational performance drivers, allowing for an effective contract to be structured to facilitate the desired outcomes.

Benefits of Open Book Pricing / Contracting for Suppliers

  1. Open Book Pricing encourages a granular and bottom up estimating methodology, which affords suppliers the opportunity to fully cost both their obligations and solution.
  2. Open Book Pricing enable transparent information sharing between parties, which allows for price variances to be modelled upon the provision of updated or revised information.
  3. Open Book allows Suppliers to discover the client’s true business drivers, increasing customer engagement and enabling the development of a true value proposition back to the customer
  4. Open Book Pricing opens the door for incentive based contracting mechanisms, including Maximum Pricing and Target Cost Incentive Fee (TCIF) commercial models.
  5. Allows for risk sharing protocols to be determined, enabling the commercial model to be structured to anticipate, mitigate and treat commercial, programmatic and operational risk and ensure that risk is attributed where it is best managed.
  6. Open Book principles build trust with customers and suppliers, especially when the processes and principles are structured cognisant of the interests of both parties.
  7. Supports the development of effective change management governance and functions, and the associated financial baseline to adjust charges where appropriate.
  8. Open Book contracts can sometimes be more profitable than traditional “fixed price” engagements, especially where profit is linked to stretch performance targets (i.e. gain share on reduction in TCO spend).
  9. Open Book contracts drive internal operational and commercial discipline, and “gear up” organisational behaviour and contract management to truly meet customer requirements.
  10. Conducting Open Book Procurements (both pricing and contracting) builds a supplier’s internal commercial capability and drives commercial contract management and financial management principles.

Benefits of Open Book Pricing / Contracting for Customers

  1. Open Book Pricing allows for greater cost and price transparency, which underpins Value for Money assurance and provides the necessary detail to conduct commercial due diligence.
  2. Open Book Contracting is capable of delivering value for money initially at Contract Award and through collaborative working and levers for innovation it can deliver TCO reduction.
  3. Allows for relationship development with the Supplier (and partners) which is beneficial for ensuring a stable baseline in developed which enables effective commercial contract management.
  4. Open Book Contracting allows for payment and commercial incentives to be linked to Key Performance Indicators (KPI) which can be directly linked to internal business requirements.

Further Considerations

  1. Open Book Pricing requires a partnered behavioural approach from both parties. If Open Book is used as a “weapon” by Customers’ then there is a risk that the process may break down or that customers may not extract the potential benefits this commercial model can facilitate.
  2. Open Book must be used to drive benefits, and therefore the customer must be mature in understanding its own requirements and success criteria.
  3. Open Book Contracting requires highly trained commercial contracts staff on all sides, who must have the necessary skillset and behaviours to operate in a transparent and structured manner.
  4. Suppliers must have accounting systems that are capable of accurately recording contract costs, and these should preferably be integrated with contract management and financial management systems / processes.
  5. Open Book Pricing can remove the advantages of Market Based Pricing methodologies deployed by Suppliers, although these can be mitigated by making exceptions through the procurement process (i.e. transparency can be applied against specific quants only such as labour days only, not rate).
  6. Open Book may be difficult for suppliers to sell internally, especially without the necessary expertise to communicate the potential benefits, including increased profitability and customer retention.

Conclusion

This blog post is a top-level summary of some of the benefits (and risks) that Open Book Pricing and Contracting can offer if deployed correctly. This should not be taken as an complete guide to the subject and should you or your organisation require specialist assistance, we would advise deployment of a specialist commercial contract manager to ensure success. Should you wish to engage with Athena Commercial regarding a future or current Open Book engagement, we would be more than happy to discuss particulars with you in more detail.

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