Performance-based contracts work better

0

Author: Tim Cummins

I have written several blogs recently on the topic of performance or outcome-based contracts. This reflects growing pressure on suppliers to take responsibility for results and the momentum is especially strong in the public sector.

As with all contract models, the key question is whether their use drives greater levels of success. IACCM research (a recent report is available from the IACCM website) suggests that performance-based contracts have a substantial positive impact – reducing the percentage of ‘failed’ agreements by almost half. But this depends on a shift in the behaviors and management systems of the contracting parties. If they do not invest time in clarifying requirements or fail to establish the right governance mechanisms and incentives, most or all of the benefits will be lost.

Yesterday I presented to an audience of project managers from the Canadian Department of Defence. Canada is just one of the countries moving steadily towards increased use of performance-based agreements. I also sat in on a presentation by Deloitte, which revealed the results of their audit of US performance-based logistics contracts. The US DoD started switching to this model about 15 years ago, but (as with many organizations) kept no data to show whether there was overall benefit. About 5 years ago, Deloitte developed a methodology and ran a pilot review of 11 contracts. Subsequently, they added a further 11 to the list. Based on their analysis, 21 of the projects reviewed were generating improved availability and responsiveness at significantly lower cost. These findings have helped support the steady expansion in use of performance-based agreements.

Among the many interesting insights that Deloitte shared was the fact (and their surprise) on how little performance data is generated in respect of contracts. They had great difficulty in extracting demand data, cost data, consolidated availability or supply data from either the customer or supplier. In other words, no one know whether a different form of contracting was generating any real improvement in results, at either a transactional or portfolio level.

To me, this was once again the critical point. IACCM research regularly points to the substantial effect that improved contracting can have on business results. Our frustration is the absence of solid data. Our only method to establish impacts is through ‘crowd sourced’ input. When member organizations go away and test this data by undertaking their own in-depth audits, they actually find the results are quite accurate. But sadly, they remain the exception and many contracts groups prefer to dispute the results than to undertake the research. Hence, the move towards performance and outcome-based agreements will doubtless remain slow – and in many cases will be driven by other parts of the business.

This article was originally published on the IACCM website.

Many of these issues will be discussed at “Contracting for Services in the Public Sector”, a two-day conference scheduled for 11th & 12th August in Canberra. The programme is developing very well and will be published in the next week or two. Further information can be found here:http://contratractinginpublicsector.com/ 

 

Tim Cummins
In his role as CEO of IACCM, Tim works with leading corporations, public and academic bodies, supporting executive awareness and understanding of the role that procurement, contracting and relationship management increasingly play in 21st century business performance and public policy.

Prior to IACCM, Tim’s business career included executive roles at IBM and a period on the Chairman’s staff, leading studies on the impacts of globalization and the re-engineering of IBM’s global contracting processes. His earlier career involved the banking, automotive and aerospace industries, initially in Corporate Finance and later in commercial and business development. He led negotiations up to $1.5 billion in value and his work has taken him to over 40 countries.

Tim’s writing is extensively published and he has acted in an advisory capacity to government bodies in countries that include the US, UK, Australia, Canada and Japan, as well as regular briefings to senior managers at many of the world’s largest companies.

About Author

Procurement and Supply Australasia (PASA) is the leading provider of information and education to procurement and supply professionals throughout Australia and New Zealand. PASA supports the largest community of engaged procurement stakeholders in the region, through its renowned series of events, publications, awards, plus various community and network building activities. PASA is a trading name of BTTB Marketing, for many years recognised as the leading producer of conferences and events for the procurement profession in Australia and New Zealand. Whether producing under the BTTB, CIPSA Conferences or now PASA brands over the last ten years, our events have consistently led the market in terms of both educational and networking opportunities.

Leave A Reply