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Is becoming outcome-based the answer for outsourcing? January 10, 2011

Posted by Mark Hillary in Government, IT Services, Outsourcing.
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1 comment so far

One of the key trends in outsourcing that has been led by the public sector – rather than the super-fast and advanced private sector – is the move towards outcome-based-agreements. But as contracts are increasingly written with payment tied to outcomes, the suppliers need to be more open about their real abilities from the start, not once the contract has been won.

The latest research from analyst firm Gartner on sales in the outsourcing sector did show that sales to the big suppliers are actually down. After the last couple of lean years, no matter how much outsourcing firms do to cut costs, they can’t avoid their own sales being down when compared to the boom years. Therefore, many of the big mega-contracts for outsourcing suppliers have remained on hold until very recently.

But suppliers offering their services based on payment for outcomes have noticed that business is better than average.
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.

Whether this will become common practice in the private sector is anyone’s guess. What will be really interesting though will be to see how much the contracts rely on trust between parties and how much can actually be documented about expected future outcomes.

 

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Can a supplier contract exist without putting it in writing? August 23, 2010

Posted by Mark Hillary in IT Services, Outsourcing.
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Let’s shake on it. It’s a common enough agreement and it seems offensive to shake a on deal and then to refuse to take any further role in the business agreement until a contract is in place, but is the contract essential? Does the handshake really mean anything in law?

I have found myself in a situation several times where a company suggests that I work on a project, I do some work immediately because there is a sense of urgency or a deadline, and when we start talking commercials the agreement falls down. That can be annoying for me, as well as disappointing for the company I am working for, but does it always need to be like this?

It’s also common in outsourcing to find that these agreements are put in place and never documented. Either it’s because the supplier begins work urgently, before the formal agreement is signed, or there is some informal service agreement that is not in the contract. It can also be that two firms with an agreement carry on working after their official contract expires.
So if the contract doesn’t contain a specification of what is required or the contract has expired then is there really any contract at all?

Implied contracts do exist when parties have agreed orally or carried on working past the life of a contract, but it’s important to remember, the same terms don’t apply. Just because a condition was in the original contract, does not mean it can be applied when there is a dispute over the ongoing service.

So the handshake does have some value, even in law, but cannot replace a formal service contract.