Excitement Builds Around Incentives

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Excitement Builds Around Incentives
By Peter Bendor-Samuel, CEO, Everest Group

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Fireworks This issue of the Outsourcing Journal describes the trend toward incentives in outsourcing. We interviewed customers, suppliers, analysts and a lawyer. All were wildly enthusiastic about the relationships an incentive contract created. And this excitement extended across all segments - government agencies and commercial entities both praised the progress of the relationship once incentives entered the picture.

In my many years of writing about outsourcing, I have never seen this kind of universal response. In fact, no topic in recent memory created as much positive feedback as outsourcing incentives.

Here's why. (In my book, Turning Lead Into Gold: The Demystification of Outsourcing, I have devoted several chapters to this topic. But here is the executive summary.)

In the older outsourcing paradigm, both parties spend a great deal of time concerned about obligations. In my observation, a disturbingly large portion of relationships between outsourcing suppliers and buyers unfortunately develops a significant adversarial component. These adversarial components pit the supplier's requirement to increase revenues against the buyer's requirement to increase profits.

Now factor in the only constant in business: change. Who pays for rapidly changing technologies that occur after the contract is signed - like the rise of the Internet? In today's Web speed world, business objectives are subject to rapid change. How does an outsourcing contract remain flexible enough to happily satisfy both parties' needs?

I like to think of an outsourcing contract as being much like a container. As the adversarial components operate, they introduce additional pressure into that container as time goes by. The pressure comes from both sides.

Incentives Become the Needed Safety Valve

These pressures are inherent in our business world and are inevitable. Therefore, we must make containers out of the strongest materials, designing them to withstand pressure as much as possible. We must build in a safety valve that can be used to relieve pressure when it occurs--in order to avoid an explosion that would blow the thing to smithereens! We must also seek ways to reduce those external and internal pressures as much as possible.

Incentives do just that.

Incentives give the supplier a path to make more money and harness the power of outsourcing to make a greater return for its shareholders. Creation of value is always a good thing in my book. Buyers receive a result they want at a lower cost.

Incentive contracts create a method to align motivations in a more powerful way. Historically, buyers have attempted to align motivations by penalizing the supplier if it did not perform according to the prescribed metrics. Inherently, this point of view breeds a defensive stance. It's a mindset that forces both sides to focus on failure, which is not the best way to influence behavior nor a fun way to operate.

Incentives Are a Powerful Motivator

Being a husband and father, I know it's far more powerful to focus on success. And that's what incentives do: they allow the supplier to focus on success so it can make more money while providing extra value to the customer. The buyer and supplier suddenly have common goals as they face the uncertain future.

This point of view requires less wear and tear on both parties. It's far easier to align objectives with a reward. Suppliers generally aren't happy when buyers constantly stand over them with a stick in hand.

Incentives can be a powerful motivator. NASA uses them to ensure its space centers operate seamlessly. The state of Florida uses them to protect the dignity and health of patients at a large mental health care facility. Note: a buyer should only pay an incentive if the supplier provides value to the customer.

Using incentives is one of the easiest ways to improve an existing outsourcing relationship. The beauty of incentives is you don't have to rewrite an existing outsourcing contract if you want to add them to your present outsourcing arrangement.

Here at the Outsourcing Center our consulting subsidiary, Everest Group, Inc. has experience with incentives. Our consultants are frequently called in to remediate an existing agreement because one party is unhappy with the results. Incentives often solve the problem to the satisfaction of both players.

Incentives as a Business Investment

How do you add incentives to an outsourcing contract? Suppliers, naturally, are always interested in incentives. Buyers, however, need the courage to ask for them. Buyers, have to make sure the behavior they are encouraging is more important than the cost of the incentive to make it happen. I view incentives as a form of business investment.

Finally, incentives tend to generate good will between the parties. They force both parties to overlook the petty injustices that occur in any relationship as they proceed toward achievement of the common goal. In my experience, incentives sweeten a relationship well beyond the price of the incentive. It's like surprising your wife with flowers.

Incentives create a truly win-win solution.

My question to you: How can incentives improve your outsourcing relationship?

Lessons from the Outsourcing Primer:

Incentives improve outsourcing relationships because they:
- Don't cost the buyer anything but they provide value to the organization.
- Sweeten the relationship
- Align motivations.
- Harness the natural pressure of the supplier to improve profits while achieving the buyer's goals.
- Focusing on successes instead of failures is a more powerful motivator.
Publish Date: July 2000

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Copyright © 2000 - Everest Partners, L.P.

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