Estimating the Value of Contract Terms in Sourcing Agreements

Originally published Winter 2012

Keywords: sourcing agreements, contract terms

Although estimates of economic value in sourcing agreements generally focus on the pricing schedule and the products or services to be delivered, sourcing agreements also provide value by securing commitments, obtaining options, aligning incentives and supporting a successful relationship. Those commitments, options, incentives and support for a successful relationship—referred to in this article as contract terms—clearly have economic value. However, customers generally do not make formal estimates of the economic value of contract terms. Instead, customers generally rely on impressions of the importance of "risks" or "key terms." In this article, I endeavor to describe the benefit of estimating the economic value of contract terms and approaches to doing so.