Drive Your Suppliers to Advance Your Objectives ...

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2014

Contractual Terms to Incentivize

Exceptional Performance

Drive Your Suppliers to

Advance Your Objectives:

PepsiCo, Inc.

Russ DamronSr. Director, Global Procurement

Mayer Brown

Linda Rhodes, Partner

Brad Peterson, Partner

www.sig.org/eval

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2014

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Drive Your Suppliers to Advance Your Objectives:

Contractual Terms to Incentivize Exceptional Performance

Brad PetersonPartner

Mayer Brown LLP

+1 312 701 8568

[email protected]

Russ DamronSr. Director, Global Procurement

PepsiCo, Inc.

[email protected]

Linda RhodesPartner

Mayer Brown LLP

+1 202 263 3382

[email protected]

Business & Technology Sourcing Practice

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• More than 50 lawyers around the world focused on helping clients improve their business operations by sourcing services and technology

• Advised on more than 300 significant outsourcing transactions valued at an aggregate of more than $100 billion

RECOGNIZED MARKET LEADER

“Band 1” ranking in IT/Outsourcing forten consecutive years (Chambers 2004-2014)

Named “MTT Outsourcing Teamof the Year” in 2014 and ranked in the top tier from 2010 thru 2014

Ranked as one of the top law firms in 2009 thru 2014 on The World’s Best Outsourcing Advisors list for The Global Outsourcing 100™

"An excellent team of people for outsourcing agreements globally -pragmatic in their approach, with a wealth of experts they can call on.“~ Chambers Global 2014

“Mayer Brown is universally regarded as a leading player in the technology and outsourcing arena, with market commentators commending the ease with whichits lawyers integrate with clients, delivering business-focused advice and guidance.” ~ Chambers Global 2013

“Their knowledge in this area is tremendous. They know us so well they blend into our deal teams and become a natural extension to our in-house team.”~ Chambers USA 2014

Mayer Brown is universally regarded as a leading player in the technology and outsourcing arena, with market commentators commending the ease with which its lawyers integrate with clients, delivering business-focused advice and guidance.”~ Chambers USA 2013

Speakers

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Linda Rhodes, a partner in Mayer Brown’s Washington, DC office, focuses her practice on complex commercial transactions, with a primary focus on a broad range of information technology, business process sourcing, cloud and other digital transactions. Her representative outsourcing transactions include large, complex and unique matters, such as leading the outsourcing by our client of its customer-facing managed communications services and leading the negotiation of an inter-related set of research, development and subcontract arrangements for the development of non-invasive, in-vehicle technologies to prevent alcohol-impaired driving. Her representative sourcing transactions also include the outsourcing of equipment maintenance and refresh services, SAAS, IAAS, finance and accounting services, procurement, human resource services and other business processes and functions.

Russ Damron has been with PepsiCo for 15 years and held various jobs within IT. In late 2002, Russ joined Global IT Procurement and was responsible for managing the hardware and software categories. Russ is currently the Sr. Director, overseeing the purchasing of IT services globally for PepsiCo, including ITO and BPO. Russ is also actively involved in minority owed business initiatives. He is a board member of the USPAACC Southwest and chairs an IT Forum designed to educate Asian small business owners on how to develop and grow their business with large corporations. He is also responsible for helping to achieve IT Procurement’s M/WBE spend goal, which is about 25% of the total spend.

Brad Peterson is a partner in the Business & Technology Sourcing Practice in our Chicago office. He has represented clients in dozens of large outsourcing transactions and hundreds of software license and services agreements. In the past year, he has represented leading companies in entering into mission-critical agreements for information technology, finance & accounting and human resources services and in replacing critical information technology. With both an MBA from the University of Chicago and a JD from Harvard Law School, he provides practical, business-focused advice and completes transactions efficiently and effectively.

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• PepsiCo Information:

– $67B in revenue

– 274,000 employees

– $142B market cap

– Major divisions of PepsiCo:

• Pepsi

• Frito-Lay

• Tropicana

• Quaker

• Gatorade

• Naked Juice

• Our 22 iconic, billion-dollar brands are the flagship food and beverages that make us uniquely PepsiCo.

– You can find more information on our website at http://www.pepsico.com/Brands

http://www.pepsico.com/Brands

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1use general terms to align

incentives for success;

2set and enforce service

levels to drive exceptional performance;

3implement key incentives

for projects; and

4leverage termination

rights to drive behavior.

You will learn to:

Polling Question

On a scale of 1 – 5, would you say “suppliers do their best to serve customers even if that reduces their profits” (1) to “suppliers follow their incentives first.” (5)

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Use General Terms As Incentives to Perform

Learning Objective 1

Participants will learn how to use general terms to align incentives for success

• “Suppliers must keep their promises” is rhetoric not reality.

• In reality, supplier contracts are incentive arrangements.

• Question 1: What outcomes drive value in your contract?

• Question 2: How can you get the supplier to focus on delivering those outcomes?

– Be likely to act

– Be able to act with enough impact

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Use General Terms As Incentives to PerformIncreasing Likelihood

• Clear obligations

• Rights to withhold/collect

• Reporting requirements

• Audit rights

• Adequate governance resources

• Willingness to hold suppliers accountable

– History of sending firm correspondence

– History of requiring correction

– History of withholding/collecting

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Use General Terms As Incentives to PerformIncreasing Impact

• Represent and warrant, so it is a material breach

• Obtain right to require correction of failures

• Obtain right to reimbursement of specified costs, including audit costs

• Indemnify, so legal costs are included

• Exclude from limitation of liability, so the supplier bears more of the costs of its breach

• Include on executive meeting agenda in governance

• Authorize telling truth as reference

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Use General Terms As Incentives to PerformChallenges

Problem Solution

General terms provide incentives to comply, not to excel

• Service levels requiring less than 100% compliance

Cost and delay in determining damages • Expedited arbitration• Pre-determined Service Level Credits and Transition Milestone Credits

Poor understanding of contract and contract law limits value of incentive

• Training• “Please be reminded” messages

General incentives not linked to your outcome

• Identify key risks and objectives• Modify general terms to match objectives

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Participants Will Learn How to Set and Enforce Service Levels to Drive Exceptional Performance

• Set Service levels based upon the types of the services performed and their criticality to the customer’s business

• Use multiple incentives, including both risks and benefits

• Develop service levels that are easy to measure, track and report against

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Set and Enforce Service Levels to Drive Exceptional Performance

• Set Service levels based upon the types of the services performed and their criticality to the customer’s business

• Focus credits on critical behaviors

• Maintain flexibility to promote, add and remove service levels

• Maintain the ability to reallocate credits across service levels to focus supplier’s attention

• Use continuous improvement

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• Understand the service level needs of your various business units

• Recognize that the level of supplier performance may come at a price

• Consider enhanced levels of quality for designed parts of the organization

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Polling Question

1. Have you been involved in an outsourcing transaction where the supplier breached the same service level more than once? (Y/N)

2. If yes, did you have contractual terms beyond just service level credits available to incentivize the supplier to improve performance? (Y/N)

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•Use multiple incentives, including both risks and benefits

– Risks include:

• service level credits

• variable credits

• increased credits for multiple failures

• termination rights (described further below)

– Benefits include:

• earnback for exceptional yearly performance

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•Develop service levels that are easy to measure, track and report against

– Drive toward immediate consequences

– Require prompt analysis and action

– Require monthly reporting

– Use governance to

reinforce lessons learned

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Key Incentives for Transition, Transformation and Other Project Services


Participants Will Learn Key Incentives for Projects

• Key project incentives include:

– Holding back payment until milestones are met

– Credits for delayed or incomplete milestones

– Reduced rates for delayed, over-budget or low quality work

– Pain sharing

– Early payment for meeting milestones ahead of schedule

– Bonuses for early completion or more-than-promised success

– Increased rates for early, under-budget or high-quality work

– Gain sharing

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Project IncentivesKeys to Success• Analyze the spectrum of outcomes and estimate the value

• Define the supplier’s required performance and flexibility

• Define the incentive structure (with clarity and precision)

• Stress test the incentive structure

– Do incentives continue despite early successes or failures?

– Is the result clear if your failures or outside events intervene?

– Can limit the role of luck?

– Is the incentive strong enough?

• Follow through

• Follow through

• Follow through

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Leverage termination rights to drive behavior


Participants will learn how to leverage termination rights to drive behavior

• Use general termination rights for leverage to correct performance issues or ultimately exit the relationship.

• Include specific termination rights to create bright lines for unacceptable behavior

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Final Thoughts

1) Set up the economics of the transaction to drive the supplier to make decisions in the customer’s interest

2) Call out activities to highlight them to the supplier

3) Provide benefits to supplier for achieving customer’s objectives and risks to Supplier as an incentive for the Supplier not to breach

4) Use the broad array of contractual incentives available

5) No single contractual remedy should be sole and exclusive

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Questions?

Russ DamronSr. Director, Global ProcurementPepsiCo, Inc.

[email protected]

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Linda RhodesPartner Mayer Brown LLP+1 202 263 [email protected]

Brad PetersonPartner Mayer Brown LLP+1 312 701 [email protected]

DE

NV

ER FALL

SU MMIT

2014

Session #7

Drive Your Suppliers to Advance Your Objectives:

Contractual Terms to Incentivize Exceptional Performance

Russ DamronSr. Director, Global ProcurementPepsiCo, Inc.

[email protected]

Linda RhodesPartner Mayer Brown LLP+1 202 263 [email protected]

Brad PetersonPartner Mayer Brown LLP+1 312 701 [email protected]

Drive Your Suppliers to Advance Your Objectives ...

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