10 Elements for Creating a Flexible Supplier Contract

By Kate Vitasek

With so much uncertainty in today’s business climate, here’s how buyers and suppliers can create flexible contracts designed to help them win together.

A key supplier’s costs spike overnight. A new tariff reroutes an entire supply chain. A regulation changes the rules mid-agreement. A major customer’s forecasted demand unexpectedly tanks, leaving you holding excess inventory.

However carefully a contract is written today, the ground it stands on is almost guaranteed to shift tomorrow.

But how do you write a contract that can stand the test of time when “business happens?”

From Fixed to Flexible Contracts

Researchers at the University of Tennessee have spent the past two decades exploring how to write more flexible contracts.

The good news is that their efforts paid off; they found a framework for building contracts flexible enough to bend without breaking. Researchers nicknamed the model “Vested” because its partners leverage a win-win (and lose-lose) outcome-based business model where they have a vested interest in each other’s success. With this, rather than fighting each other when business happens, partners turn to collaboration to make something of the lemons life has handed them. They find the best way to overcome obstacles, minimize losses and maximize gains through a transparent economic model.

The model was named the “Breakthrough Idea” of 2025 by the management and business organization Thinkers50. This model is not just a nice academic theory; it’s been put into practice with leading companies such as Intel, BP, IBM, Jones Lang LaSalle(JLL), EY, and ISS, resulting in a great deal of success.

But what exactly does a Vested flexible contracting framework look like?

Here is where UT’s applied research provides guidance by providing five “rules” and 10 contractual “elements” organizations can use to make the shift from rigid transactional contacts to flexible relational contracts purpose built to keep business partners aligned.

The rules and elements are each highlighted below.

Rule 1: Focus on Outcomes, Not Transactions

Conventional buyer-supplier agreements are traditionally built around a transaction-based model. The supplier is paid for performing the transactional services (per hour, per unit, per mile, per shipment, per call, etc.).

Rule 1 is designed to help parties align on the underlying nature of their strategic relationship. As part of Rule 1, the parties agree on their strategic direction and the Desired Outcomes they want to achieve by working together. We define a Desired Outcome as:

• Desire: Something the organization wants and does not have
• Outcome: A boundary-spanning business objective – not a transactional service-level agreement with activity-focused metrics

In essence, the parties contract for the future (to achieve the Desired Outcomes) instead of anchoring the contract around simply performing transactions. Rule 1 includes two Elements: aligning on the business model and a formal statement of intent.

Element 1: Business Model Map

This first step is for the contracting parties to understand and align on which sourcing business model they will use.

One common mistake trading partners make is failing to align on the underlying business model that will guide the trading partner relationship. For example, suppose the buyer is seeking business outcomes and feels an outcome-based sourcing business model is the best fit, but the supplier is risk-averse and wants to avoid investing in what it takes to achieve those outcomes. In this case, there will be a misalignment of interests.

Identifying misalignments in advance can save both parties frustration, and possibly the need to switch suppliers later.

This first step is for the contracting parties to understand and align on which sourcing business model they will use. Doing so helps the parties pinpoint the value they are seeking to achieve from the strategic nature of the partnership. This is important because contracting parties often skip this discussion and later find out they are not aligned on the core underlying nature of their relationship.

Element 2: Shared Vision and Statement of Intent

Once the parties have aligned on the sourcing business model, the next step is to create a formal Statement of Intent. A Statement of Intent includes the parties’ Shared Vision and high-level Desired Outcomes, Guiding Principles, and Intended Behaviors. The Shared Vision and high-level Desired Outcomes align the parties on what they want to achieve through the partnership. The Guiding Principles and Intended Behaviors enable the parties to co-create the social norms and culture they want to create as they enter the partnership.

Combined, the Statement of Intent creates the foundation for a relational contract that commits the parties to collaborating on their mutually agreed vision for the future.

Rule 2: Focus on the What, Not the How

A common mistake that companies make is trying to define how the work should be done too tightly through a detailed statement of work (SOW). On the surface, it makes sense to control the work a supplier is doing.

However, such an approach can create perverse incentives by locking service providers into doing the work the way it has always been done—and inhibiting the service provider’s ability to innovate and limiting flexibility when “business happens.”

And business is bound to happen, constantly and unpredictably.

Adopting a Vested business model does not change the nature of the work to be performed. At the operational level, there is still a need for materials to be stored, orders to be managed and fulfilled, calls to be answered, and goods to be delivered. What does change is how the organization purchases goods and services. Rule 2 includes one contractual Element.

Element 3: Statement of Objectives/Workload Allocation

This Element lays the foundation for the parties in the Vested partnership to do what they do best.

Rather than develop a conventional Statement of Work or specifications document, the buyer and supplier jointly develop a Statement of Objectives (SOO), which includes an end-to-end taxonomy (e.g., inventory) of all of the work to be done regardless of company and a workload allocation defining who does what work.

This differs significantly from a standard Statement of Work (SOW) in two ways.

First, a SOO describes intended results, not tasks. Based on the SOO, a supplier will draft a performance work statement that defines in more detail the work to be performed and the results expected from that work. So when business happens, the supplier can more rapidly make changes without having to do a formal contract change as long as the parties are aligned on the change.

For example, at the onset of the COVID-19 pandemic, a pharmaceutical company and their workplace services supplier were able to quickly adjust from providing meals in the company cafeterias to providing a variety of support services, such as converting office spaces to rest areas for essential workers and making take-home meal kits for the workers to take home.

Rule 3: Create Clearly Defined and Measurable Outcomes

As mentioned in Rule 1, the parties align on high-level Desired Outcomes. In Rule 3, the parties define how to measure and manage their mutually defined outcomes. Rule 3 includes two contractual Elements that help the contracting parties align on how to measure and manage the partnership.

Element 4: Top-Level Desired Outcomes

It is important to understand that the Desired Outcomes are not typical service-level agreements or task-focused measures. During Rule 3, the partners spend the time – collaboratively – establishing exact definitions for how each Desired Outcome will be measured. This is done using a Requirements Roadmap tool that links metrics to each Desired Outcome. Typically, a Vested agreement has 12 to 15 objectives and associated metrics to measure how the parties perform against their Desired Outcomes. When parties develop their contractual metrics, the University of Tennessee recommends organizations adopt a three-dimensional or “3D” perspective when developing the metrics for their relationship, with metrics falling into three categories:

• Operational Metrics (measuring success for today)
• Transformational Metrics (measuring success for tomorrow)
• Relational Metrics (measuring the health of the relationship)

Element 5: Performance Management

It is one thing to define how you will measure success. It is another thing to determine how you will manage performance. Element 5 is where the parties collaboratively determine how they will manage performance based on the measures they have chosen in Element 4. This includes agreeing on performance reporting and the management dashboards the parties will use to monitor progress towards the Desired Outcomes.

When combined, Element 4 and Element 5 ensure companies are not just using performance metrics for the sake of measuring, but to ensure contracting parties are getting value from their relationship.

Rule 4: Use a Pricing Model with Incentives That Optimize Cost/Service Trade-offs

The approach of many procurement professionals is all too often centered on one thing: getting the lowest possible price. Vested Rule 4 reframes the economics to helping the parties think about value and flexibility, creating a pricing model with incentives that reward the supplier to go beyond simply performing work and focus on optimizing the business. Rule 4 includes only one Element, which is the pricing model itself.

Element 6: Pricing Model and Incentives

A key goal of the pricing model is to incentivize the supplier to drive continuous improvement and invest in innovation and flexibility linked to the parties’ Desired Outcomes.

A Vested pricing model uses a transparent win-win (and lose-lose) economic model aligned to the total cost of ownership (vs a transactional price). This enables the parties to align on the underlying cost drivers associated with work. 

Inherent in this model is a reward for the supplier to invest in continuous improvement, innovation and flexibility that will create value for the buying organization. When done properly, buyers and suppliers quit bickering over who is responsible for the loses when a tariff occurs or inflation kicks in. Rather, the supplier is incentivized to collaborate with the buyer on how to best deal with the situation.

For example, a component supplier is rewarded with incentives when they bring solutions on how to best design and assemble products to mitigate tariffs. Or a supplier of labor-intensive work is rewarded when continuous improvement and automation outpace inflation rates.

Rule 5: Use Insight versus Oversight Governance Structure

Rule 5 centers on embedding formal governance mechanisms into the relationship. Governance is the glue that holds any Vested agreement together because governance mechanisms outline how the parties jointly manage the relationship.

Governance is the glue that holds any Vested agreement together because governance mechanisms outline how the parties jointly manage the relationship.

The Vested model shifts from a culture of oversight to one of insight, consciously laying the foundation of trust and mutual accountability for achieving the Desired Outcomes. Simply put, the buying organization turns its focus to managing the business with the supplier, not just managing the supplier. Why? If you’ve done a good job of selecting the right partner and aligning their interests by using Rules 1-4, then the supplier will truly have a vested interest in performing because their success depends on achieving success for the buying organization.

As the parties work through Rule 5, they design a fit-for-purpose governance structure around four contractual Elements.

Element 7: Relationship Management

A relationship management structure creates joint relationship mechanisms that emphasize the importance of building collaborative working relationships, attitudes, and behaviors. There are nine relational governance design principles that, when developed and institutionalized, help the parties effectively shift from simply managing the supplier to managing the strategic nature of the relationship:

1. Tiered Management Structure
2. Separate Management Roles
3. Peer-to-Peer Communications
4. Communications Cadence
5. Relationship Management
6. Relationship Health Monitoring
7. Issue Resolution Management
8. Continuity of Resources
9. Onboarding Key Personnel

Once the parties have designed their governance structure, they will implement it to help them actively manage the relationship through the life of the agreement.

Element 8: Transformation Management

Recall that a Vested agreement is designed to contract for the future – Desired Outcomes. In addition, business is dynamic, and contracting parties need to navigate changes and evolving risks. This is why a Vested agreement includes governance mechanisms to manage the various types of changes that may occur. A well-structured Vested agreement includes how to handle any initial transitional work, managing transformation initiatives needed to achieve the Desired Outcomes, and managing contractual changes.

Element 9: Exit Management

Sometimes, the best plan simply does not work out or is trumped by unexpected events. Business happens, and companies should have a plan for when assumptions change. An exit management strategy provides a template to navigate future unknowns. The goal of this Element is to establish a fair plan and to keep the parties whole in the event of a separation when the separation is not a result of poor performance.

Element 10: Special Concerns and External Regulations

Governance frameworks are not one-size-fits-all, especially in more technical or complex relationships. This final Element recognizes that all agreements differ and that many companies and suppliers must understand and adhere to special requirements and regulatory protocols. For example, the governance framework should include additional provisions that address specific market, local, regional, and national requirements. In addition, the agreement should outline any special requirements. For example, does the buying organization have any supply chain, finance, transportation management, or privacy requirements that may require inclusion under the governance framework?

When Business Happens, Will You Be Ready?

In a world where strategic contracts are the lifeblood of modern business, the University of Tennessee’s checklist of Five Rules and 10 Contractual Elements stands as a ready resource steering organizations to draft successful buyer-supplier contracts. The challenge lies in organizations making the shift to create contracts that help collaborators win together and release the full potential of partnerships.

About the Author

Kate Vitasek is an international authority for her award-winning research and Vested® business model for highly collaborative relationships. Vitasek, a Faculty member at the University of Tennessee, received the Thinkers50 Breakthrough Idea Award in 2025 and was lauded by World Trade Magazine as one of the “Fabulous 50+1” most influential people impacting global commerce. She has written nine books.