Reinventing retail: three contractual levers to deliver technology-led transformation

Technology is transforming retail and it is increasingly important for retailers to have focused and structured investmentstrategies to maintain market share and avoid getting left behind. In a world where funding is scarce, it is increasinglychallenging for teams across the retail sector to find the right technology opportunities and partners to invest in to ensurereturn on investment.

This article explores three contractual levers to consider when investing in digital technologies.

1. Plan, plan, plan

In a sector where growth is linked to key trading periods,it is critical to hit timelines. Retailers should think aboutwhat they need their technology partners to deliver, andby when, to ensure that new technologies are tried andtested (and so more likely to withstand increased demand)before high-demand holiday and sale seasons, as the effectof downtime or poor functionality in these periods willhave a disproportionate effect on sales.

In complex digital programs, project delays are unlikelyto be clearly caused by the culpability of one party or theother. Projects often fail due to a lack of collaboration, soit is key to deal with project scheduling, management andcollaboration issues up front, making sure appropriate duediligence is undertaken so that suppliers understand inadvance the scale of the project and its deliverables.

As part of the contract, suppliers need to be up frontabout what they require from retailers in order to deliverthe project, so that retailers can factor the time and costs of their own activities into their roadmap and businesscase. Having clear expectations at the outset is critical –a jointly produced and adhered-to project plan, with cleartimelines, outcomes and processes for dealing with bumpsin the road will invariably increase the likelihood of success.During delivery, suppliers need to keep their customershonest too, and it is key to have a clear contractual processfor them to flag and communicate any delays which thatwill impact delivery.

2. Providing incentives through commercialmodels

There is still a place for traditional incentive levers,such as milestone-based payments and fee retentionstructures, which affect the timing and release ofpayments. However, these incentive levers are used mosteffectively in conjunction with disincentive levers, such asdelay payments or liquidated damages provisions inthe contract, whereby service fees are lowered to reflectthe reduced value of the services if timelines are not met.In addition, retailers should consider contract provisionsproviding for the accrual of service credits if services arenot meeting required performance levels.

In the context of collaboration, it is appropriate for thesupplier and retailer alike to share the commercial impactof missed deadlines. However, parties are increasinglydisplaying an appetite for shared upsides too, whetherthrough earnback provisions, if a delayed project is broughtback on time, or through identifying tangible outputs andbusiness benefits, which can be shared with an overperformingsupplier.

For example, in the context of e-commerce cartabandonment, if an AI-enabled re-marketing andpersonalization strategy increases the number ofcustomers who ultimately complete the transaction,there is a measureable upside for retailer and supplieralike, encouraging further investment from both in theunderlying technologies.

3. Long-term partnerships

Technology is constantly evolving, so retailers must evolveas well. Through sustainable, long-term relationships withdigital innovators, retailers can ensure that they remainahead of the curve.

Establishing joint innovation funds, where both partiesmake a recurring sum of cash available for innovation,is increasingly popular, because such funds help drivediscussion about how technologies can be improved.Similarly, working in partnership and identifying mutuallybeneficial strategies, such as joint marketing, can bepowerful for both parties; building these into the contractas definite obligations that are linked to successful deliveryis advantageous for retailers.

Balanced scorecard regimes are also increasingly used, inwhich retailers’ leadership can score technology partnersbased on a number of soft measures, both in terms ofoverall relationship governance, such as the number ofinnovation initiatives the parties have agreed to implement,as well as more day-to-day work processes, such as fixfirst, argue later approaches. These models are mostsuccessfully deployed in conjunction with commerciallevers, either by way of fees at risk for low scores or byway of upside; for example, where the retailer makes anadditional contribution to the innovation fund.

Where next?

Successful technology projects require bothupfront and ongoing collaboration, so getting thecollaborative relationship right from the start is key.Building this ethos into both contract negotiationsand the contract itself is a core part of any successfuldigital transformation initiative. For any deal team,considering how to build a successful, long-term andmutually beneficial partnership is the linchpin.