A guide to outcome-based agreements A better way to do business

Transcription

1 A guide to outcome-based agreements A better way to do business

2 Contents Foreword and acknowledgements 03 Introduction 04 What is an outcome-based agreement? 05 The necessary pre-conditions for success 06 Helping the process: top tips to ensure a successful agreement 07 Case studies 09 Conclusion A guide to outcome-based agreements - a better way to do business

3 Foreword and acknowledgements The debate has moved on. Today, nobody questions the need to use ICT to deliver modern public services or a competitive, responsive private sector. Such technologies are the power tools and productivity aids of the 21st century. The challenge is in the how? So I am delighted to support the work of the Outcome-Based Agreements Group; their report makes a valuable contribution to this question. Research shows, and common sense tells us, that an agreed outcome, expressed in simple language that all parties understand, lies at the heart of the quest for greater public services at a cost we can afford and a wider commerce that is agile, innovative and profitable. Customers and citizens demands continue to increase. In today s economic climate, businesses and public sector organisations need to be leaner and spend less to achieve more. Outcome-based agreements underpin this. John Higgins Director General, Intellect The enabling capabilities of contemporary ICT have become so deeply pervasive in, and vital to, the operations of both business and government that the achievement of performance outcomes now requires a shared supplier/customer approach to the delivery of the technology, processes and people that underwrite them. In this report we set out the case for the development of a new way of working, underwritten by new procurement approaches focused on the delivery of business outcomes. We propose that, when working in the heart of our customers businesses, relationships should no longer be based around the arm s length supply of technology services, but on a partnership focused on the business outcomes in which both parties have a committed stake. My personal appreciations for the many contributions that have helped create this report. I know that there is a strong interest and determination to now work to deliver the transformational agenda we set out here. Dr Richard Sykes Chair, Outcome-Based Agreements Group About this report The paper was produced by Intellect s Outcome-Based Agreements Group. The Group represents members with a direct interest in the development of outcome-based agreements, including suppliers with experience of such contracts and lawyers concerned with the distinctive legal challenges they pose. Intellect would like to thank the following member companies in particular for their contributions: Fujitsu Mike Grundy, independent consultant Symbia Ltd Software Measurement Services Dr Richard Sykes A guide to outcome-based agreements - a better way to do business 03

4 Introduction The aim of this report This report is written primarily for a Board/ C-level audience, in both the private and public sectors. It is intended to increase both the awareness and knowledge of outcome -based agreements. OBAs represent a more effective way of tackling an old challenge maximising the likelihood of success in a contractual relationship whereby supplier and customer share a commitment to the delivery of assessable improvements in performance measures specific to business outcomes. Why the OBA is important In the early days of the ICT industry, the prime focus in supply contracts was on getting the technology to work and deliver as intended, often using inputs prescribed by the buyer. This has created a major legacy of contractual practice based on technology services, their related service level agreements and risk management structures, scoped in terms of the technical inputs intended for the customer s operations and rooted in a tradition of cost-based adversarial bidding procurement processes. Efficiency has often been considered paramount, resulting in a focus on transactional costs and efficiency improvement at the expense of innovation, added value and the effective delivery of the end-customer s desired outcome. Now that the enabling capabilities of contemporary ICT have become so deeply pervasive in, and vital to, the operations of business and government, it is the achievement of business and performance outcomes that needs to become the prime focus of contracts. Both supplier and customer achieve more value when working as partners with stakeholder interests, sharing a common interest towards a successful business/performance relationship. Moreover, the achievement of business and performance outcomes requires a new shared supplier/customer approach to the delivery of the technology, processes and people that underwrite them, based on business understanding and partnership working. There should no longer be an arm s length supply of technology services, but an integrated relationship in the delivery of business and performance outcomes in which both parties have a committed stake. In this joint endeavour, a mutual commitment to the interests of both parties must lie at the core: a business relationship with foundations strong enough to respond flexibly, creatively and positively to the inevitability of changing business and technology circumstances. This argues against existing procurement processes and in favour of a different approach rooted in the a priori identification of strategically sound business as the foundation to effective deal brokering. Only then can both parties work together in an open fashion to understand process performance issues, the different approaches to solving those issues and managing associated risks, and to delivering effective innovation. A shift of the ICT industry and its public and private sector customers towards OBAs will thus mark a break from the established customs, requiring the development of a corpus of new practice. This will include re-addressing how the interests of suppliers and customers in integrated supply chains, in supplier consortia, and in other multi-vendor models, are best aligned. There may well be a requirement for the services of independent third party auditors and assurors to underwrite and build mutual confidence in outcome-based processes by stepping outside the agreement to shape and test its resilience and coherence. It is important to note that not every supplier/ customer relationship or business deal will be best addressed through OBAs. However, this report sets down the criteria that favour their use. Finally, the authors of this report believe that the further development of OBAs will do much to improve the business effectiveness of both the customer and the supplier, and in parallel raise the confidence of our customers that genuine and sustainable value can be delivered through effective relationships with our industry. To that end the Intellect Outcome- Based Agreements Group will continue to utilise its relationships across industry to develop practical means of delivering the transformational agenda set out in this report. 04 A guide to outcome-based agreements - a better way to do business

5 What is an outcome-based agreement? Definitions and examples The authors of this report define an OBA as: An agreement between a customer and supplier in which the supplier is contracted to directly achieve business outcomes for and with the customer - rather than being contracted in terms of delivery of the supplier s inputs, outputs or deliverables. The agreement thus represents a joint endeavour between both supplier(s) and customer and is dependent upon working relationships and shared understanding. It is also possible to contract for partial achievement (a defined contribution to a defined outcome). The Office of Government Commerce (OGC) distinguishes between outcomes and outputs (and how they interrelate) in the public sector context as follows: Outcomes The outcome of a project is the contribution it makes towards the goal of the organisation. For a government department an outcome may be the achievement of a PSA target, or of a lower level target that directly contributes towards the goal of the organisation. 1 Outputs Outputs are intermediary objectives that support the delivery of outcomes. Improved IT systems (hard and software) are often outputs to projects. These contribute towards outcomes that directly contribute to organisational goals (for example improving benefits payments), but the achievements of those outcomes are also dependent on the actions of employees (they must use the system effectively). 2 The British Computer Society defines outputbased contracts thus: Output-based contracts: an agreement between a customer and a supplier, which creates a relationship for the delivery of services or products. The driving force behind the contract is that it focuses on what the deliverables are in business terms rather than on how they should be delivered. 3 The table below presents some illustrative examples: These case studies are based on circumstances where an agreement exists between a supplier and customer to measure the performance of the outcome as stated in the table below; it does not reflect an exact definition of what an outcome in such an agreement should look like. All deals will be different depending upon the objectives of the contract, business circumstances prevailing at the time and where the risks lie. Example Output-based contract Outcome-based agreement The modernisation of the rule handling system for a car manufacturer The successful delivery of a state-ofthe-art rule handling capability Number of correctly specified cars assembled according to the build plan The establishment of a student information services environment Application support and maintenance to agreed service targets Number of students using the newly established services Infrastructure managed service for an airline IT Infrastructure operating within an SLA No aircraft take-offs delayed by technical problems preventing check-in The installation of a sales and marketing application The delivery of the application within time, budget and performance parameters Number of qualified leads generated for dealers The outsourcing of a website for online ticket sales The delivery of a website that is operational and fully supported 24x7 Number of tickets sold through the website A guide to outcome-based agreements - a better way to do business 05

6 The necessary pre-conditions for success The purpose of this section is to de-risk OBAs by highlighting those pre-conditions that need to be in place that will help the development of a mutually beneficial agreement. The overriding message is that the right dialogue needs to be facilitated to create the right business environment to minimise risks. Key to achieving this is designing a procurement process that will facilitate the identification, development, and maintenance of a strategic relationship that will allow these pre-conditions to emerge. A business relationship that would be suitable for an OBA must have: 1. A foundation in shared values An OBA is a joint business relationship that focuses on achieving agreed and shared business outcomes. Such a relationship needs to have strong foundations and requires shared values that encourage, rather than hinder its effectiveness. 2. A stable and clear baseline An OBA requires an agreed baseline, against which the intended outcome can be measured. If that baseline cannot be measured, then the project will not be suitable, as, for example, intended changes or improvements will be impossible to measure objectively. 3. Openness and transparency An OBA is a joint endeavour, and will require a willingness of both parties to operate with transparency and openness, which are key to ensuring success against the background of inevitably changing circumstances. 4. A standardised measurability An OBA requires outcomes that are clearly specified in mutually agreed, definitive and quantitative terms that can be measured objectively. There has to be a shared understanding of performance causalities that underlie the outcomes. This may be particularly relevant to specific sectors (eg public administration, retail, automotive) where the measurements may be correct but perceptions may vary between different stakeholders. There may well be a positive role here for a third party or independent auditor or assessor. 5. A set of clearly stated accountabilities An OBA requires that the accountabilities of all parties concerned in achieving the outcomes are clearly stated and accepted contractually and the remedies for default made appropriate to the contribution of, and impact on, each party. To facilitate the right environment for an OBA, the following should be undertaken, ideally as part of the deal brokering between the two parties: 1. Identification and control of external factors Agreed policies for mitigating and controlling of risk, based on a contractual risk register, should be documented. Any factors beyond the direct control of the parties directly involved should also be identified in a contractual risk register, with impact analyses and agreements on how the parties are likely to be affected. It is important to carry out a horizon scanning process to identify the potential external factors that the risk register can then address. The approach adopted needs to be flexible and adaptive as it will be impossible to predict all possible change. 2. Full and ongoing due diligence All parties must play a full part in the due diligence process, ensuring full knowledge and a consensus on current assets and on the state of all other present (and where possible future) factors which may impact the achievement of the desired outcomes. 3. Governance The governance involved with the contract should be defined at an early stage of the sourcing process. All parties need to follow this approach, which helps to build trust in a relationship, enabling it to deliver. However, the governance procedures should be flexible, allowing for constructive response to unforeseen developments and should include business stakeholders as well as representatives from the commercial and legal departments. It is crucial that the agreement enables the partners to benefit from the opportunities presented by change as well as to manage threats. 4. Checkpoints and acting upon issues together Frequent mutual checkpoints should be taken where contributions to-date and progress towards the outcomes are clearly measured, made visible, and where any issues arising are acted upon. 5. Incentive alignment and balance It is important that objectives are aligned for all parties. This creates a mutual ownership that ensures the benefits and outcomes are aligned in the most productive manner. Furthermore, the risks and opportunities that each party is bearing should be relative to what they are contributing, ensuring fair shares. 06 A guide to outcome-based agreements - a better way to do business

7 Helping the process: top tips to ensure a successful agreement 3. A collaborative team Corporate values, individual values and a delivery mindset based on openness and honesty should underpin the relationship between the customer and supplier. IT is a capability that humans deliver with - the customer and supplier combine to leverage the expertise of the IT professionals to deliver an effective and efficient service from technologyintensive systems. A relationship, based on mutual respect and trust, needs to be firmly established prior to finalising the agreement. This section provides a number of tips to help ensure a mutually beneficial OBA. They are drawn from the practical experience of those who have pioneered OBAs within industry. 1. Outcomes and outputs keep them separate, understand the difference Although the agreements should recognise complex contractual structures, where possible the business outcomes should be defined clearly and covered separately from other functions where input or output based terms are used. 2. Intermediate outcomes, not primary business outcomes Avoid high-level outcomes like improving shareholder value that have many contributory factors. Understand the hierarchy of outcomes in play - focus on intermediate business outcomes such as process performance, unit sales, or another key performance indicator. Ensure that all parties clearly understand value as arbitrated by the end-customer(s). Target the sensible, tangible and aligned to business objectives and avoid the over-ambitious while setting a clear course. Ensure the intermediate outcomes clearly deliver value from the customer s perspective or dysfunctional behaviour will be incentivised. Too heavy a focus on the cost of individual transactions can, counter-intuitively, reduce the focus on the desired outcome and increase costs of the end-to-end value stream. The process for renewal (and/or exit) should also be recognised and put in place, especially as key personnel will inevitably move on over time. This may require teams to take time out to get to know each other, particularly where multiple suppliers are engaged. collaboration can be a complex matter requiring considerable commitment. Established techniques such as integrated team-working can support effective collaboration. 4. Cultural alignment When selecting potential service providers, customers need to look for organisations with an established cultural track record in working successfully in ways sympathetic to the customer s own corporate culture. Suppliers will be expected to demonstrate how they made these relationships work. Ideally, potential suppliers who understand the customer s business, ethos and culture should be chosen. (The same applies, vice versa, from the supplier s point of view.) Key service delivery personnel should be involved from the earliest stage of developing the potential sourcing engagement to assess the cultural harmony and ability to work effectively together and be observed working together to resolve problems. Deal-intent sales teams who then disperse are best avoided as they are not in the long-term interest of either party. A guide to outcome-based agreements - a better way to do business 07

8 Helping the process: top tips to ensure a successful agreement 5. Mutually compatible objectives Shared objectives underpin the customer/ supplier relationship and should be a direct consequence of an OBA that focuses on the achievement of the customer s business objective. However, the aims and interests of each party should be considered to ensure effective shared commitment and alignment. Efforts should be made to ensure a considered understanding of any divergent interests and how they are to be dealt with. It may be considered beneficial to consult an independent third party in this context. 6. Contractual flexibility Both parties to the OBA will be equally at risk when business environments and priorities change. Therefore flexibility to manage any changes to the agreement and realign with the new priorities and opportunities should be incorporated in the agreement. This means developing business change processes that go beyond standard change control. 7. Mutual respect The supplier and customer will each bring a different skill set and knowledge-base to the contract and some areas will be more complementary than others. As such, mutual respect should underpin an appreciation of each party s strengths so these can be mutually exploited to the benefit of each party. Similarly, the relationship should be strong enough to identify weaknesses so that these can be mitigated - again, to the benefit of each party. 8. Integrated working and planning Integrated working and planning is crucial. A comprehensive understanding of what the outcome entails requires a common understanding of shared goals and objectives, albeit seen through different eyes. Ideally this should be built into the procurement process and go on into the operational mode particularly at senior stakeholder levels. 9. Communications Communications between partners should be unconstrained, frequent, and be of both of a delivery and social nature. It is best enabled through the shared use of common knowledge bases, tools, practices and procedures that also serve to provide an agreed archive of actions, activities and events. One key confidence-building factor in ensuring open communication in the OBA is a mutual clarity from the start as to the ownership of intellectual property rights. Effective and pooled record keeping underwrites mutual confidence in the forward ownership of intellectual property rights created through the operation of the OBA. 10. Work as one team Having a common singular goal helps build a one team attitude but it is further helped by close interaction between the supplier s and customer s teams, preferably on a daily basis. When practicable, co-location of teams at the same premises makes this more effective and enables differences and problems to be eliminated earlier and before they become divisive issues. 08 A guide to outcome-based agreements - a better way to do business

9 Case studies Airline ticket website When an airline considered outsourcing their website, they wanted to ensure that the service provider was just as interested as they were in selling as many tickets as possible. To achieve this, instead of paying a set amount for the provision and availability of the ticketing website, the airline instead agreed with the service provider that they would be paid a small amount for each ticket sold. This transformed the service provider s interests from a technical service level to a common business objective or outcome. Such an agreement required greater due diligence by the service provider to understand current and expected ticket sales to assess the additional risks transferred to the service provider. Such an agreement has a simpler contract and requires less measurement and reporting of ancillary service measures that do not directly contribute to the business outcome, saving time for both parties and keeping the focus on ticket sales achievement. For the customer, it moved the agreement from a traditional supplier and buyer contract to a shared goal that would require less contract management. Furthermore, it incentivised the supplier to provide the right level of service and propose innovations that deliver more ticket sales. Government agency When a government agency, operating in the transport space, re-competed their ICT service provision, the organisation had gathered an extensive list of investment projects it needed to undertake in order to fulfil its obligations as an agency. An outcome-based agreement was considered appropriate as it gave greatest flexibility to the long term business needs of the organisation. The procurement was designed to allow the competing suppliers to define a programme of change linked to business outcomes. Having transferred and stabilised the infrastructure into a new steady state service, the customer and supplier embarked on a negotiated programme of budgeted investment and change driven by the strategic objectives of the business. Each initiative was subject to a strategic change control process and only implemented when both parties agreed the business case. The supplier offered to put an element of its remuneration at risk, recognising that over a period of time the application of technology to the organisation s key business outcome was central to the success of the business partnership. As such, the supplier was partially remunerated on the agency s business outcome. A guide to outcome-based agreements - a better way to do business 09

10 Case Studies Information systems supplier A publicly funded health organisation s existing IT supplier contract was coming to an end. Many potential projects and services in the information systems strategy were not fully defined at the time of contract, nor could they be, as the business circumstances were likely to evolve before the organisation was ready to undertake the work. The organisation was determined that any new outsourcing arrangement would not be constrained by choice of technology infrastructure, nor by a contract that would obstruct the delivery of future business driven needs. They also wanted a relationship which was effective from day one and would not decay after the initial take-on and projects were implemented. The success of the partnership was anchored in the alignment of team culture, sound partnering principles, jointly defined and executed governance processes and a framework of services unconstrained by technology choice. Team building took place during the procurement; the customer supplied the knowledge of the business while the supplier brought technological skill and expertise. This combination brought a focus to both parties around a shared understanding of the business goals and the forging of a programme of activities and services designed to deliver business outcomes. The whole process was undertaken in the context of a well-planned and managed Competitive Dialogue. A bespoke commercial agreement was negotiated around a number of continuous services and discrete projects. This was set out in a balanced programme of activity which could evolve and be maintained throughout the life of the partnership. For example, development projects were defined, added into the programme bounded by the customer s ability to fund, resource and manage the change. Remuneration was layered according to the nature of each package of work balancing discrete outputs (accepted deliverables) with a top-slice of spend allocated to successful delivery of business outcomes set out in a Balanced Scorecard. 10 A guide to outcome-based agreements - a better way to do business

11 Conclusion Outcome-based agreements are not a panacea. However, they do represent a better way of doing business and offer a positive alternative to the contractual orthodoxy that exists. OBAs are not new, but have been pioneered over the last 15 years, and are growing in popularity. The case studies in this document, drawn from existing practice, demonstrate the improved supplier/customer relationship that can be constructed, with a greater alignment of shared objectives. We hope this document serves to increase the awareness of OBAs within the procurement community. Furthermore, we hope that the increased knowledge of OBAs will lead them to become more widely applied and accepted as effective business practice, with better results for all parties. A guide to outcome-based agreements - a better way to do business 11

12 Intellect s mission is to use our expertise and knowledge to provide the highest quality of service and intelligence to our members in the information and communications technologies (ICT), electronics manufacturing and design, and consumer electronics (CE) sectors, including defence and space-related IT industries, helping them to make the right business decisions to deliver commercial solutions and achieve growth and profitability. We do this by fostering improved business performance, encouraging thought leadership, and making the shaping of markets and influencing of policy possible. We are constantly striving to provide work environments where our members can meet their potential and thrive in an atmosphere of excellence through working closely with the government, regulatory bodies, policy makers and businesses. For more information visit Intellect Russell Square House Russell Square London WC1B 5EE T F E info@intellectuk.org W Intellect May 2009