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

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.