Aligned contracting – the right way to deal

August 25, 2009

I’ve been giving a lot of thought into why clients and outsourcing service providers fall out and I think that in most cases, it comes down to different expectations; i.e. each party provides misaligned inputs leading to misaligned outcomes.

I’ve talked before about how outsourcing is mostly about guessing. The service BPO/ITO provider guesses what the client wants and what the competitive organisations are going to charge. The client in turn guesses what services are going to be provided and how closely this matches their requirements.

I now believe that all service providers must sign up to agreements which reward them for the delivery of a desired outcome. Most current contracts are based on an input specification, i.e. build an integrated finance system to take us from a to b to x specification. The principle here is that this specification would be turned around. The proposed system must enable y millions of transactions to be covered per annum with no or minimal disruption.

This kind of approach would mean instead of letting a contract for the construction of the system,  a contract would be let for say 10 years for its design, build and operation. The client’s governance structure/team leaves it to the vendor to decide how best to achieve this based on strict total cost of ownership criteria, with heavy disincentives for failure and gain share for success, this drives the right behaviour, both with the principle contractor and its sub contractors, it focuses on the purpose of the system not its fabric.

Outcomes of aligned contracting against which key performance indicators would be matched could include: cost savings, better services, economic regeneration in areas of low employment – this is good not only for the client, but leads into the political and economic growth agendas of the current and future government leaderships.

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