By Proxima

05 Dec 2019

What is outcome based contracting, and how does it represent an area for potential in the public sector? Proxima dives in 


It seems like we’ve been talking about outcome based contracting for a number of years, but we have yet to see it reach mainstream adoption. However, as IT becomes more closely linked to core business processes and delivery of customer experience, are we seeing a turning point?

Whilst uptime and availability remain key, are business outcomes such as speed, efficiency and flexibility now taking a starring role as buyers seek to measure a real return on investment?

Depending on a business’s maturity and size, IT service delivery has evolved from simple payment for people model to a delivery model whereby KPIs (key performance indicators) and service management methodology are used to measure and improve levels of services delivered to business functions. Understanding this change is critical for effective contract management – something public sector continues to invest in.

In more mature organisations, targets and metrics are jointly set by the IT department (or digital, modernisation or technical infrastructure by other names) and their customers, reflecting desired service levels (SLAs). Thereafter, the IT department manages the service using service management (ITSM) techniques to drive service improvement, most commonly focusing on quality and customer experience.

Traditionally, there has been a strong focus on uptime and availability, but more recently technological advances have enabled a shift to more value added tasks. For example, in the Data Centre, technological leaps in server tech, virtualisation, containerisation and dev ops automation has enabled vendors to move upstream from completing manual tasks such as patching, to reviewing eco system data to improve overall eco system performance.

With more focus on value, vendors have been able to switch the emphasis on metrics and commercial models, which is perhaps the best way of describing the difference between contracting a traditional managed service, and contracting for outcomes.

KPIs and SLAs have long since been SMART (Specific, measurable, achievable, realistic and time bound) and aligned to the user strategy. Traditional key system and service measures are uptime and availability as this is what mattered most to the user of the system or service to perform their role. Coincidentally (or not), these measures also seem to be the easiest for vendors to report on.

In the new world, mature buyers and contract managers are making a shift to agreeing metrics that matter to the business, rather than a set of users or department. The process of setting these KPIs under a Business Outcomes model is no different, other than moving from pure IT metrics into defining business outcomes rather such as speed, revenue or profit.

There is a further shift in the way costs are constructed, and their transparency to the buyer. Historically, contracting for IT services has been either on a basis of either staff augmentation (input model) or a managed service (output model). In either model the cost of service is predominantly driven by resources and tools required. When vendors contract for outputs, they often also take a larger risk/reward share.

Business outcomes go a step further. This is partly because they seek to measure the value impact of the supplier, and further because it often takes time for benefits to materialise in full. For this reason there are common relationship characteristics;

· -- The supplier tends to be a strategic partner, reflecting the need for collaboration and trust, as well as the importance of the services and business impact (this could be broader than just within the function or Department – and in fact be cross-government),

· -- There is typically a long term relationship between buyer and supplier, that enables both to invest in achieving success, and allows time for success to materialise,

· -- There is a clear understanding of the impact of the IT solution or service on the nominated business outcome and overall value to the business,

· -- A larger part of the supplier’s revenue (than a managed service contract) is tied to the delivery of the required outcomes in a heavily weighted risk reward mechanism.

· -- Dependent upon the chosen partner, there tends to be less commercial transparency of cost components.

Not all business or suppliers are ready for business outcome contracting.

The reality is that this is a maturity journey, and not everyone is ready, operationally, culturally or commercially – especially where contract management capability is lacking in some Departments. There needs to be close alignment (nee collaboration) between supplier, the IT department, the commercial function and the business area receiving the service, and critically a clear understanding of the linkage between service provided and required outcomes to meet the business’ goals. SMART metrics help here.

'Perhaps most importantly, both parties need to trust each other commercially - and this characteristic is traditionally patchy within the public sector' 

However perhaps most importantly, both parties need to trust each other commercially – and this characteristic is traditionally patchy within the public sector. When outcomes are met and payments, or indeed bonuses are triggered, the numbers can be large. It is important that buyers and contract managers understand why this is so, and the context against the achievement of the business objective. Put simply, they must understand why achievements represent value for money and for this reason, when embarking on contracting for outcomes for the first time, it’s good to have a clear understanding of current cost of service, and likely value that can be achieved.

When is business outcomes contracting a good fit?

Regardless of whether a managed service or business outcome model is chosen businesses should spend time, prior to engaging suppliers;

· -- Understanding current processes (what works well and current challenges)

· -- Documenting current services provided (do these need to be changed?)

· -- Linking business strategy to business metrics and IT service metrics

The reality is that Managed Services continue to be a good delivery model (with a risk reward mechanism) and for many organisations there is still a lot to achieve here before thinking about business outcome models. Only the most mature should be thinking about business outcomes, and if that departmental alignment doesn’t exist, or if the metrics are a bit vague, there is a very real risk of cost leakage, value shortfall and buyer/ supplier dissatisfaction.

Reality also dictates that understanding the drivers of service against function and overall Department goals is not always an exact science. It is not always possible to choose metrics where only the outsourced service affects the overall company goal. If the metrics are not aligned at all three levels, the service will be provided, potentially paid for, but outcomes may fall short or be unproven.

There is work to be done upfront, ensuring readiness and evaluating whether the services under review are a good candidate for a business outcomes contracting;

· -- Can the service provided be measured either in terms of availability, completion time or quality?

· -- What business metrics are the service metrics going to be aligned against?

· -- What is the causal link and measurable effect of the service metric on the business metric?

· -- Is this the only factor which effects the business metric?

· -- If not can all factors be measured to ensure the service metrics are evaluated effectively?

Finally as any service is outsourced, risks are quantified and a value and likelihood of occurrence is factored in to the overall contract price. Businesses should ensure they have a clear understanding of the cost drivers of the service when going to market and expect partners/suppliers will to some extent build in cost for failure.

If you are ready, then be brave and contract for outcomes.

Click here to read Proxima's report - The Capability Conundrum: Resourcing Challenges in Government Commercial. 

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