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In the mid-1990s and early 2000s, SLAs found their way into the managed services profession, often for no reason other than for many MSPs borrowing service contracts from hosting providers. However, PSM that did not offer hosting services struggled to secure some outcomes, especially if the results were linked to a financial penalty. The model has been adopted internationally in the public sector as the preferred procurement strategy for many years. So what has prevented it from adopting more widespread adoption, especially in the private sector? We look at some of the key challenges that clients and service providers face when drafting and negotiating a results-oriented contract and identify ways to manage them. Proponents of results-based contracts point to the following benefits: In road maintenance contracts, for example, where the use of results-based contracts is now widespread (including across Australia), performance standards would generally include: What is results-based procurement and how does it differ from more conventional contract models? It is not only the parties who describe and agree on certain results of the contract. A strong and well-developed business case should be released to ensure this internal alignment. In turn, the service provider must want to align their business with the customer and have confidence that the customer is committed to a true risk and reward model. A true results-based model requires significant strategic planning on the part of the client before connecting with service providers. A client must be able to perform introspective analysis to understand, develop and communicate their business values and strategic agenda. The same goes for IT service providers. Purchasing doesn`t know how to buy IT services in another way, customers don`t know how to measure their business metrics with IT systems, and service providers don`t know how to build their financial models based on success/value. I`ve heard it many times: « I don`t care how you do it – but we have to get the job done. » This can be a dangerous mindset if you want to tackle a results-oriented project.

If the client states this, they have missed the point of a results-oriented agreement and should reconsider their approach. In addition, as a customer, you must be able to modify the contract for that particular project from procurement to commercial responsibility. No supply would be able to negotiate such a contract because it does not have enough know-how on the company. There are many types of contracts for an IT project. In this article, I will focus on value- and results-oriented contracts, which can be a viable way to structure IT services contracts. They link the project price to measurable results, which means you can directly measure the impact on your business. Read on to learn more about the benefits and risks of signing value- and results-based contracts and when they deserve to be considered. Government agencies have been the largest users of results-based contracts to date. They are used in a variety of public programs and services, including defense and aerospace contracts, health services, logistics, transportation infrastructure maintenance and welfare, employment, and skills programs. The parties must trust each other enough to ensure a higher level of transparency than is usual with other contractual models. If a party notices changes in its interests, business strategies or claims, it is important that this information be shared in sufficient detail so that the parties can make any changes that may be necessary. In a results-based approach, a client negotiates and pays for business results provided by a service provider and not for defined activities, tasks or assets.

The contract focuses on the desired result of the work to be performed (the « what ») and not on how it is to be performed (the « how »). The service provider decides how to meet customer requirements – and therefore a certain degree of control and risk transferred to the service provider. For example, what would be the outcome measure for an MSP working with internal IT departments? How would such a contract be drafted if the MSP is not solely responsible for administrator rights, third-party access and other factors that would directly affect the integrity or network of the system? Pricing models must be clear and beneficial to both parties. In many situations, these agreements are entered into through a tendering and negotiation process. The company sets the goals and the overall budget and the contract goes to the supplier with the best skills, plans and experience, but that`s not the end. Prices are not always fixed. For example, if the parties agree that a website`s goal is to get 10,000 sales per month, will the seller receive a credit if they only receive 5,000? What happens if there are 20,000 sales? Does he receive a bonus? Since agreements can also have consequences for the non-achievement of objectives, they should also be included. A simple one to consider might be time. This would come into play if the provider created a great website that generates sales but delivers a month late. For each day or week that the publication of the website has been delayed, a reasonable penalty may be imposed.

SLAs in the modern MSP market are actually unusual. Service guarantees exist within the hosting industries and between software-as-a-service (SaaS) providers. Nevertheless, these are the only entities in the IT services family that maintain a service contract with an SLA metric. Rolls Royce « Power by the Hour® » is one of the oldest and best-known examples of a results-driven business model. More than 20 years ago, Rolls Royce changed its model support and maintenance contract for commercial aircraft engines. Instead of charging customers for repairs, maintenance, and the supply of spare parts, customers paid a fee per hour based on the number of flight hours for an engine. The company realized that by focusing the contractual agreement on the customer`s actual underlying need – to keep a jet in the air – it could bring greater customer satisfaction while reducing inefficiencies and increasing its own sales. This contractual structure has now become the industry standard in commercial aviation. One of the fundamental characteristics of a results-based procurement strategy is the direct relationship between performance and fee payments. Fees are not calculated on the basis of a transactional pricing model, but are linked to the achievement of agreed outcomes. This is where the results-based model has the greatest potential to be a « win-win » scenario – the better the performance for the customer, the more financially the service provider needs to earn. Since the customer has not imposed prescribed process specifications, the supplier is free to develop innovative and cost-effective solutions for the benefit of both parties.

If clients are unable or unreduced to undertake these tasks, they should consider hiring a consultant who understands the complexity of a results-based approach. Someone who can help with the foundation of relevant existing services and the creation of a real risk and reward program is crucial. Is it possible to mitigate these risks in any way? In fact, this is the case, but it requires moving away from the formal procedure of: « The contract sends the contract, the supplier accepts, because they have no way to actually negotiate it ». We need to sit down together and come to a tailor-made agreement that takes these risks into account in certain scenarios. These key elements of a results-based contract are interdependent – results must be translated into measurable performance standards – and delivery against performance standards is used to determine the amount of fees paid […].

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