6. Consequences. The simplest and most extreme example of a consequence is termination of a contract for non-performance. In price-driven outsourcing, consequences are limited to termination and non-payment. In non-price-driven outsourcing, other types of consequences are employed more frequently to influence performance. Examples of positive/negative consequences include incentive payments, service level credits, favorable references and press releases, and shared rights in development work.
Figure 3 shows a sliding scale comparison of how these key features become more and less important in price-based outsourcing and in non-price-based outsourcing. For example, competition is a key feature when outsourcing based on price, while visibility isn’t given the added costs it entails. Services are viewed as deliverable products and the flow of work and payment is tightly controlled. There are no consequences for poor performance unless the work is not completed.
Practical Considerations. The principles in basic purpose-driven outsourcing are equally applicable to outsourcing in all industries and all business activities, because they are based on business goals like cost savings or innovation. For example, sealed bidding works very well for outsourcing information technology development projects and paralegal projects. Technology can be easily subjected to specifications and standards, and there are many providers. But the model may not work as well for outsourcing critical business processes like customer relationship management, depending on the business goals. Systems and business processes can be documented, but a greater degree of ongoing management is called for and performance is harder to judge. For wholesale divesting of creative and dynamic operations like marketing, sealed bidding would most likely be impractical regardless of the goals.
About the Author: Eric Esperne is president of James River Consulting, a Massachusetts-based firm specializing in IT and business services outsourcing contracts. Esperne has 15+ years experience as an in-house attorney with multinational tech companies. Contact Eric at firstname.lastname@example.org.