How outsourcing changes with IoT and Artificial Intelligence

Outsourcing agreements might considerably change with the usage of IoT and artificial intelligence technologies.

The battle on liability clauses of outsourcing agreements

A few years ago I published a blog post on liability clauses in outsourcing agreements, defining their negotiation as the “battle“. And indeed, according to my experience, negotiations on such clauses as well as on service levels and the liquidates damages/penaltiestriggered by their breach take almost half of the time of a whole contractual negotiation.

The position of the parties is that

  • the supplier cannot accept a liability cap that is excessively high since otherwise the agreement would represent a disproportionate risk for its business, if compared to the price received for the services, while
  • the entity receiving the services does not want contractual limitations in case of suffered damages and wants to be able to quickly recover the suffered damages.

The matter is somehow “facilitated” in countries like Italy where limitations of liability for cases of gross negligence and wilful misconduct are null and void. This means that there is not even scope for negotiations on these scenarios since any restriction to claim damages under such circumstances would not be valid.

How the battle changes with the IoT and artificial intelligence

The IoT and artificial intelligence are able by definition to predict any malfunctioning and either avoid their occurrence or limit the negative consequences on the business of their occurrence.

Sensors embedded in industrial plants can provide a clear picture at any time of status of the machines and in some cases of the whole line of production, ensuring that necessary maintenance activities are performed before a negative event takes place. At the same time, artificial intelligence systems, but also machine learning technologies, are able to have a much better understanding of potential forthcoming downtimes and of the measures to be adopted to prevent them from happening.

But, if despite of the above technologies a malfunctioning takes place, there is a risk that very large damages occur since it means that a massive incident happened.

The above means that

  • service levels might become considerably higher than those currently agreed because the likelihood of occurrence of a downtime will be much lower and in case of occurrence of a downtime the artificial intelligence system will be able to immediately identify the most appropriate remedy; while
  • liability caps might also become higher since if a malfunctioning takes place, much larger damages are expected to be generated.

It is likely that the scenario above will happen in a medium/long term since it requires that Internet of Things and artificial intelligence technologies become the backbone of provided technologies. At the same time, there might be a “transitional” phase when still suppliers will not be able to justify to their insurers and shareholders the reason why high liability caps can be accepted because of the employed technologies.

What is your view on the above? I would be happy to discuss, and if you found this article interesting please share it on your favourite social media.

@GiulioCoraggio

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