Part 2: Outcomes Are Most Important Metric For Performance-based Outsourcing Contracts
Outcomes Are Most Important Metric For Performance-based Outsourcing Contracts
By Vince Elliott - October 2012 - Facilities Management
In general, there are two types of value that improve the competitive position of the company that is buying outsourcing services: first, increased benefit to the company's ultimate customer, and second, reduced cost of delivery of the company's product or service. The performance-based contract should be clear about which benefit it values most. In emerging or expanding markets, the more benefits the company can offer its customer, the more likely its economic success and market growth. In this case, contracting to gain more, or better, benefits for the company's customer has great value to the company. In a saturated, or shrinking, market, the company's customer often sees the company as a commodity. In this case, the company can achieve a price competitive advantage by contracting to reduce its costs. Both strategies create value. Yet companies that pursue one value strategy with a disregard for the other are likely to suffer in the long run.
When it comes to outsourcing, facility managers should keep in mind that value is achieved by concrete outcomes, not by the activity the contractor provides in its service process. Processes can and should vary from case to case, but outcomes are the core of the facility manager's ability to translate results into value by helping to fulfill the company's mission to serve its customer. Buying a contractor's time, tasks, processes, labor hours, systems, etc., has little value if they do not produce an internal or external advantage for the facility manager's company.
The Performance-Based Relationship
A successful performance-based contract creates and sustains results through a relationship that is also performance-based. Such a relationship is founded on the principles of shared consequences and accountability, where measurement and improvement are contract commitments.
The most concrete evidence of a fair and open performance-based relationship is the idea of mutuality of consequences. Mutuality means that buyer success or failure is linked to contractor success or failure. In a sense, this is the heart of partnering in a performance-based relationship.
The definition of success, of course, depends on what each party wants to achieve. The facility manager wants a "quality" product or service, no customer complaints, responsiveness, a problem-prevention culture and below-market pricing as a strategy for maintaining or increasing the company's competitiveness. The contractor wants healthier profit margins, increased revenues and long-term relationships as a strategy for maintaining or increasing its market share. The idea of mutuality links the company's performance to contractor performance in achieving their respective economic and market goals.