Performance-based contracts work better

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.