One of the key trends in outsourcing that has generally been led by the public sector – rather than private – is the move towards outcome-based-agreements. But as contracts are increasingly written with payment tied to outcomes, the supplier community needs to be more open about their real abilities from the start, not once the contract has been won.
As we all passed through the difficult recent years of the global economic slowdown there has been some interesting analysis performed on how companies are reacting to different business trends. Gartner has observed that many suppliers offering their services based on payment for outcomes have noticed that business is better than average – even when they have been generally facing a slowdown.
Both suppliers and buyers have a lot to gain from more outcome-based agreements and the reasons are obvious in the current climate – you can share the gain when times are good and share the pain when times are hard.
But outcomes and causation can be hard to agree on. There have been examples of companies using share price performance as a desired outcome. It sounds logical, if the share price is performing well then the supplier must be doing a good job for the client, but in many cases the supplier might have no influence over their client’s share price at all – a company running your IT helpdesk for example. Why would they be rewarded or penalised based on your share price if their actions don’t directly influence that measure?
Outcome based agreements work well where the supplier can take over an entire process and then price that process, rather than the component parts – the headcount and infrastructure required to deliver the service.
It does make contract negotiation a lot harder, as a period of parallel running may be required to calibrate the supplier prices, and it does need a greater sense of respect and trust between the client and supplier.
Respect and trust are two attributes we are lucky to enjoy with many of our clients and new channels to customer support – such as social media – are changing the way it is measured. I expect to see many more companies exploring how to buy or sell their services based solely on outcomes in future.
Photo by PST licensed under Creative Commons