IACCM Contract Management Forum

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2016-12-20 10:01:27

Supplier Outcome Based IT Support Contracts

Over many years, as a Major IT Outsourcer in the Aviation and Travel Industry, we have been engaging with suppliers for 3rd Party Support of IT Systems based on value of assets and adherence to SLA's based around delivery of the ITIL v3 Framework. Failure of 3rd Parties to meet SLA's have resulted in Service Credits and sometimes finger pointing and scrutinizing contract terms and clauses. I believe this creates negativity and drives a higher cost of contract based on inflated risks. What I would like to achieve is a positive approach to supplier agreements, drive down base supplier costs and reward achievement of greater than expected service. I can draw a parallel with Employment of Staff where you base remuneration on an "expected" delivery of a job function but then pay bonuses based on better than expected performance. This drives innovation, motivation and a desire to earn more through exceeding Managers expectations!
Has anyone had the same experience or desire or have implemented this approach with Suppliers and have case studies where this has been achieved? Any sample agreements/contracts I can review would be most welcome as well as any documentation on the cost savings achieved.
 •  IACCM  •   2016-12-20 14:36:07
Hi Stuart,

As Tim Cummins states, it is not uncommon for outsourcing agreements to incorporate provisions that reward continuous improvement or innovation. These are in general some form of 'gainshare' provision. There are also examples of 'shared savings' contracts, especially in the energy and health sectors (I suggest a Google search - it will deliver a wide variety of articles and examples).

There are several difficulties with such clauses and contract models:
- they depend on an ability to accurately measure the improvements achieved
- those improvements need to be of real value to the client and capable of being tied to specific cost reductions or revenue increase
- the improvements need to be 'beyond the normal course of business' e.g. not something that simply happened across the industry in general
- there has to be a mutually beneficial approach to the allocation of the savings (experience shows that many times, customers are not inclined to pass on them on and this can then lead to dispute)

Many times, these factors prove difficult to establish so such an approach may be abandoned. Often it is best to establish an agreed forum where improvement opportunities will be discussed and rewards established. This is typically not within the standard performance reviews where, as you say, it is more typical to discuss things like service credits and to allocate fault. The people you need to be involved in improvement initiatives are often very different from those who monitor performance.

This article from FM World is helpful - www.fm-world.co.uk/good-practice-legal/explainer/contractual-gain-share/

Kindest regards

Pablo Cilotta
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