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Service Quality & Performance

October 12, 2010

An IACCM member from Finland recently asked for my thoughts on service quality and performance. I thought the question might be of wider interest – and by writing my thoughts, I hope others will be encouraged to offer their comments as well.

First, I am assuming the initiator of the question is asking about the interconnection between service quality and performance as they relate to inter-company contracts (since the question could equally apply to the role of performance measures in driving internal service quality). Focussing on the former, there are various aspects of this on which we have been collecting data or commenting in recent times.

  1. Research by Wharton Business School, looking at the Rolls-Royce performance based offerings (and comparing them with traditional cost plus or hourly rate offerings) found a significant advantage was obtained over time in terms of lower costs and greater innovation.
  2. Other research – I believe in the construction industry in particular – suggests there is no advantage in performance based contracting. However, I suspect the life-span of the respective arrangements might account for this, together with the frequency of change and aggressive focus on cost that are typical of the construction industry.
  3.  The Gulf incident brings a further perspective. It has been suggested that performance management was not to blame, but post-event analysis suggests there may have been a failure to  recognize the behaviors that specific performance measures induce. For example, a measure to continually reduce cost may lead to cutbacks that damage quality or safety (for example, fewer or less qualified resources, cut backs on maintenance etc); similarly, strong pressure on availability levels may cause personnel to err on the side of risk rather than caution (for example, if  alerting the customer to a safety issue might result in unscheduled maintenance). 

We are seeing a growing recognition that performance measures must always be designed to support the full set of value criteria that are important to an organization and then tested against each other to see whether they represent balance. It may also be significant to think about the nature and duration of the relationship being formed and whether it is sufficient for performance based measures to work. In particular, can the holistic performance criteria be used to affect payment schedules, so that issues such as quality become part of the reward structure?

This same point applies to the supplier selection process. If the quality of performance over time is important, then the weighting or evaluation criteria must reflect this. Often, we encounter weightings that are far too limited (eg simply based on price and availability), or where the final criteria are ‘adjusted’ to fit the supplier that internal pressures say must win, rather than the one that should win. If the selection process lacks quality, it should be no surprise if supplier performance shows similar failings.

Finally, the relevant organizations need to be honest in their appraisal of their own and each other’s cooperative instincts and to structure their approaches to performance and quality accordingly. I believe that performance based  and quality success come from situations where there is a well-established and fully supported commitment to communication and governance. It is the procedure and adherence to it that will support quality. However, a good supplier will find ways to ensure they have the feedback needed to ensure on-going high quality and user satisfaction, because they want to retain their customer and gain future business. They will do this in spite of a poor procurement process, but enthusiasm will be undermined if the customer continuously engages in behaviors that ultimately make their business unprofitable or simply unpleasant as an organization to do business with. Suppliers do ‘fire’ customers, or simply let the business whither away. (Indeed, having the courage to fire a customer is sometimes the surest way to rebuild the relationship).

 There are various articles related to these topics in past editions of IACCM’s Contracting Excellence magazine (available on the web site). There are also several blogs that I have written in recent months that expand on some of the points above.

 Another aspect on which I write regularly is the internal connection between performance measures and service quality. I believe strongly that companies should look at how they allocate internal accountability for the quality of their internal policies, practices and procedures. It is the failure to have clear points of ownership that frequently leads to the failure of service quality. Again, my blogs often return to this topic (see for example https://tcummins.wordpress.com/2010/10/04/the-costs-of-poor-contract-management/)

 Other blogs that might interest you include:

 https://tcummins.wordpress.com/2009/12/01/perspectives-on-contracting-today/

https://tcummins.wordpress.com/2010/09/08/contracts-risk-deepwater-horizon/

https://tcummins.wordpress.com/2009/11/13/risk-management-behavior-is-key/

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