What happens if you threaten to punish an outsourced supplier? Does its performance improve or get worse? For the purposes of answering this question, which I looked at in my MBA dissertation, “punitive measures” should be taken to mean contractual measures to secure adherence or deter non-performance such as service credits.
When an outsourcing contract is first implemented, the outsourcer is mostly viewed as a direct extension to the customer’s internal IT team. This is a hindrance to maximising the business value of deals because experience shows the customer will typically micro-manage the outsourcer.
The reinforcement of service delivery should be managed by more positive means in a mature relationship – such as a gainshare mechanism, or the outsourcer receiving an additional bonus (monetary or otherwise) for over achievement. Instead, it is often negative reinforcement measures that are implemented.
It is difficult to understand why such negative reinforcement is seen as the way to maximise value creation and innovation in a mature relationship. A risk free/lower risk environment drives more opportunity for the outsourcer and customer to see whether innovations work without penalty for failure. One criticism often levelled at outsourced providers is lack of innovation, but a joint client-provider approach to recognition and reward for innovation would help bridge the gap.
Punishment can help and hinder the customer-outsourcer relationship and associated performance. If applied to very specific tasks and undertaken as a joint success or failure, it can be an incentive. It is also important to periodically review the right punishments to be applied. Penalties have greater significance when a relationship is still immature.
The marketplace will continue to see a benefit in the reduction of punitive measures in support of overall value creation and partnership working. However, this will most probably take many years to become typical practice as both the customer and outsourcer will remain cautious that the theory of improved performance from punishment relaxation may be hard to manage in practice.
The likely short to medium-term trend will be to continue to implement the likes of gainshare and earnback, which is already a shift from traditional adversarial measures to a more balanced sharing of risk and reward. However, my prediction is that earnback in particular is a stepping stone from outright punishment to true joint ownership of business goals and objectives. Organisations in a true partnership with only positive enforcement measures in place will create significant value and competitive edge.
* Tony Stacey is a supply chain manager for CSC