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News » Outsourcing contracts should adapt to AI advancements, says legal expert

Outsourcing contracts should adapt to AI advancements, says legal expert

Outsourcing contracts AI
Photo from Urupong/ Getty Images

LONDON, UNITED KINGDOM—The integration of Artificial Intelligence (AI) into the outsourcing sector is prompting a significant shift in contract structure, according to Yvonne Dunne, a Partner at multinational law firm Pinsent Masons. 

As AI and other technological innovations drive down costs for service suppliers, Dunne emphasizes the importance for customers to ensure that contracts include mechanisms to share in these savings.

The rapid pace of technological change, particularly in AI, has brought into sharp focus the need for long-term strategic outsourcing contracts—often lasting a decade or more—to be flexible and adaptive. 

Dunne points out that while suppliers may feel entitled to the benefits of their investment in innovation, customers must be vigilant to avoid overpaying for services as technology reduces delivery costs over time.

Benchmarking clauses are increasingly being recognized as vital contractual tools. They allow customers to periodically assess their contracts against the market, ensuring that they are not paying more than necessary and that the supplier’s profits are not disproportionately high. 

However, Dunne notes that the traditional benchmarking approach, which typically leads to renegotiation rather than automatic adjustments, may need to be rethought to keep pace with the speed of tech advancements.

Dunne also highlights that while some customers may be skeptical about the practical use of benchmarking, it can serve as a catalyst for price discussions, potentially eliminating the need for formal benchmarking if a mutually agreeable adjustment is reached.

In addition to benchmarking, Dunne discusses the strategic use of non-exclusivity clauses and partial termination rights, which provide customers with the flexibility to seek better pricing or switch to different suppliers. However, this approach requires careful consideration of the potential complexities involved in coordinating multiple service providers.

Most favored customer (MFC) clauses and cost-plus models are also explored as methods to maintain competitive pricing. MFC clauses ensure that a supplier cannot offer lower prices to other customers, while cost-plus models tie the supplier’s profit to the actual costs of service delivery, allowing customers to benefit from reduced costs due to technological improvements.

Dunne advises that in the face of unpredictable tech changes, customers may be less inclined to commit to lengthy outsourcing contracts without protective measures such as break clauses, which permit renegotiation of terms at set intervals.

Dunne’s insights underscore the evolving nature of outsourcing contracts in the era of AI. She advocates for proactive contractual strategies that enable customers to capitalize on technological efficiencies while maintaining fair and competitive pricing throughout the duration of their outsourcing agreements.

“AI has been driving technology forward at a rapid pace, especially in the last couple of years. Customers should consider adding clauses to their long-term outsourcing contracts that ensure they also benefit from the supplier’s tech innovations,” she stated.

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