I firmly believe the future of consulting is all about outcomes based work. In principle, this is easy to understand and there are several examples of projects where this has been successful. A welcome change in these contracts is that the actual paperwork is significantly lighter than the paper monsters we have all dealt with in the past.
In its most “unsexy” extreme – think of a maintenance contract. Customer wants a certain number of trouble tickets every year for a certain amount of money from an outsourcer. Whether the vendor solves it by automation, by offshoring or by whatever means should not matter to the customer as long as the SLA is met . Simple as it gets on paper – but it is not simple in practice.
The CIO who signed the contract gets it. But the order entry clerk whose printer stops working can no longer walk over to end of the hall and find Joe, the printer guy, to fix it. He needs to raise a ticket and wait for 4 hours to get it fixed. Result “our vendor sucks”, low NPS scores , CIO getting all kinds of hate mail and so on. Experts on twitter will say “Big Outsourcer screws over customer with poor service”.
Lets also look at the “sexy” extreme – think of a business KPI like inventory turns as the metric that defines the outcome. A baseline is made today and vendor pays a penalty when turns decrease, and vendor gets a share of the gain when turns increase. Sounds like a fair deal on paper. What can go wrong when both parties share risk and return ?
End of the year customer and vendor are sitting together to compute turns and voila – turns increased by 20% and according to contract the customer needs to pay a lot of money now to the vendor.
Scenario 1 – was all 20% of the goodness due to the Vendor’s work ? What was the contribution of the new store manager Jane who introduced more discipline in the warehouse? .
Scenario 2 – ok ok, so it was all due to the vendor’s good work. But there were so many returns . So the customer did not really get the business benefits. What now ?
Lets also flip this situation and say turns decreased by 30%. Customer wants a big fat check as penalty.
Scenario 1 – well you fired all the experienced managers and hired cheaper inexperienced folks. What did you expect? But for the vendor, turns would have been 70% lower instead of 30%.
Scenario 2 – This would have worked like a charm, except for the flood in India causing disruption. You never signed up for the extra location we begged you to sign for just a little more money.
You get the drift – this gets complex in a hurry on both extremes, and results in all kinds of unpleasantness. What was done to move away from rewarding effort and complexity to rewarding outcomes and simplicity just did not pan out.
Is there a way out ? Of course there is a way out. That needs each side to have some trust in each other to begin with . It also needs these contracts to be in place for a long period of time to make sure that both sides get a fair shake. Contracts need to stop being about “average price per hour” to benchmarks that measure outcomes across the industry. And this needs a lot of “change management” initiative to set and reinforce the right expectations. The order entry clerk needs to know that his performance metrics should be adjusted to reflect the fact that a broken printer takes four hours to fix now – he should not be punished for a decision he did not take.
I can say first hand that this works quite well when you find the right sponsors on both sides of the table. But it is anything but the “walk in the park” that it looks like from the outside.