The future of long-term contracts

The long-term contract for the sale and purchase of commodities has been at the foundation of doing business in some industries for many years. The Australian energy and resources industry and major development projects are two example of where long-term contracts have an important role to play. While the use of long-term contracts will always continue to play a role, in service industries where technology advancements are moving at a rapid pace long-term contracts are becoming redundant.

The primary risk of signing a long-term contract for services is that the price payable and or the services under the long term contract will become out of step with current market offers.

While this issue can be addressed by terms and provisions which enable the price to be adjusted during the course of the contract, typically the supplier does not include these flexibilities for obvious reason.

Within the registries industry we have recently seen a drive towards long-term contracts in return for an agreement not to increase prices further over the course of the 3-5 year contract period. What is the motivation here? Is it in the best interest of the provider or the client? I think the answer is obvious. Consider this, new entrants are coming into the Australian registries market with innovative technology and as a result can deliver better service and better pricing. There are recent examples where customers have changed registry or re-negotiated with their existing registry and have saved in-excess of 40% off their original pricing.

The future of long term contracts given in service industries, particularly in the registries industry will quickly become a thing of the past. There are providers in this market now prepared to offer Service Agreements with a 30-day notice-period to terminate. Surely this is a better option as we witness see companies bringing technology advancements enabling efficiencies and price benefits that can be passed on to the client.

Paul

Paul Williams, Director of Automic