In today’s rapidly evolving marketplace, innovation is not just a competitive edge but rather an expectation. Customers increasingly rely on their vendors to provide cutting-edge technology and stay ahead of industry trends. As such, a critical question arises: Should customers require service providers to agree to a contractual obligation to continually evolve and innovate their service offerings?
A contractual obligation to innovate can be a powerful tool for ensuring that the services provided remain relevant and competitive. By requiring service providers to actively seek and implement improvements, customers can mitigate the risk of receiving outdated solutions. These obligations can be framed to encourage the service provider to maintain its status as a leading provider within its market segment. For instance, service agreements might stipulate that the provider must:
- Identify and implement service improvements to align with the latest technological advancements.
- Adopt industry best practices to maintain performance standards. (For further insights on drafting service standards, see our previous blog post on considerations for industry standards in service agreements.)
- Commit to periodic updates or upgrades to reflect current market demands (with or without extra fees from the customers).
These obligations ensure that the service provider doesn’t just meet current needs but continues to anticipate and adapt to future challenges.
When incorporating a contractual obligation to innovate, clearly defining the scope of this obligation is essential to ensure both parties understand their responsibilities and benefits. To encourage continuous improvement, consider requesting that the service provider:
- Provide Notice of Improvements: The provider should inform the customer of any new technology, processes, methods, or procedures that could enhance the quality, effectiveness, or efficiency of the services. The notification process could be incorporated into the existing contract management arrangement between the parties.
- Identify Cost-Reduction Opportunities: The customer may request the service provider to communicate developments that could lower the cost of delivering or utilizing the services.
- Enhance Customer Business Operations: Notice of improvements should extend to changes that can directly enhance the customer’s own business processes and outcomes.
Once an improvement is identified, the agreement can stipulate that, upon mutual agreement (including any related fees or costs), the services will be amended to incorporate these enhancements. This structure maintains flexibility while fostering innovation.
Other Items to Consider
- Should there be parameters around how “innovation” is defined? “Innovation” can be interpreted quite broadly depending on the context, so we encourage delineating the scope appropriate for the applicable agreement.
- Should there be milestones regarding specific development and innovation objectives? What are realistic and achievable goals? If the parties have a specific development in mind, milestones can be useful to measure and realize development progress. The milestones should be tailored to the specific service offerings of the service provider to allow for realistic goals.
- Should there be consequences if no innovation is made? Perhaps the customer can terminate the agreement immediately, or after the service provider has had X amount of opportunities without success.
- Should the obligation be for the entire course of the agreement or only a certain time period? The customer would likely want the service provider to have an obligation to continue innovation for the entire contract period, but perhaps as a negotiation tactic the applicable time period is shorter.
- Should there be any obligation on the customer to collaborate? If the customer has a contractual obligation to provide feedback to the service provider regarding the provider’s service offerings, the customer should be careful that it is not assigning ownership of (or a very broad license to) an innovative idea or concept to the service provider that is useful to the customer’s business.
By incorporating a well-defined innovation obligation, customers can ensure their service providers stay at the forefront of technological advancements and industry best practices. This not only helps maintain service quality and efficiency but also positions the customer to benefit from continuous improvements and competitive advantages.