4 ‘carrots’ to incentivise Service Provider performance

4 ‘carrots’ to incentivise Service Provider performance
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“Our Service Provider is useless” is a quote we often hear when we get called in to fix a dysfunctional contract. To be honest, our clients often use more colourful language than that when they describe The Disapointment Gap!

Only a few clients use KPIs that allow them to pinpoint where the problem with the Service Provider’s performance exactly is. But even in contracts with great KPIs we find that they are often toothless tigers – there are hardly any consequences attached to the Service Provider achieving or not achieving their targets.

Often our client’s frustrations are a result of misaligned expectations. It’s a simple fact that the Service Provider has different goals to achieve than their client. The following table summarises these expectations for both contractual parties:

Client Service Provider
Manages down cost Seeks to build revenues
Seeks improved services Aims to reduce cost
Seeks innovation Seeks higher profits
Manages risk by contract term Aims to extend length of contract

While the above explains why contract management is a constant battle, it also hints at the solution.

Let’s summarise our client’s expectations as: “the client requires a high performing contract”.

While the Service Provider’s expectations are often a reason for our client’s frustration, they can also be seen as a huge opportunity. An opportunity to come up with contractual incentives to achieve our client’s expectations of a high performing contract.

For example, if the Service Provider wants to reduce their cost, how can our client use that to their advantage? And if the Service Provider wants to keep our client for as long as possible, how can our client drive their performance with this knowledge?

Try dangling these four carrots to incentivise performance

Place these four effective “carrots” in your contracts to incentivise high performance. They can be used in the both the public and private sector.

1. Growth in scope of the contract

Principle: Do well in what we’ve asked you to do and we’ll also engage you for optional services.

A government agency has recently engaged a training provider to deliver eight training courses. The tender for that work asked for pricing for additional courses after that. Immediately the market knew, that if they perform well in the first eight courses, they will get more work. What an effective carrot! And the client knew that the received pricing was competitive.

When using this incentive, it is important that the price for additional work is agreed under competitive tension. A Schedules of Rates for optional services should be included in every tender.

2. Profit motive

Principle: Help us save money or implement innovative ideas and we will split the benefits with you.

A tertiary education provider in NSW has recently been approached by their cleaning provider who asked to substitute paper towels in the bathrooms with hand dryers. They estimated savings of about $300,000 per annum. A profit share clause in the contract allowed this profit to be split evenly between the parties, which was a great outcome for both organisations.

3. Longevity of the contract

Principle: Do well during the initial contract term and we’ll use all extension options in the contract.

It’s common for contracts to award extensions of time after the initial term of the contract. Unfortunately, most often these extensions are granted as a result of the client not being willing or able to put the time into testing the market. To drive performance, the contract document should be very clear that the contract will only be extended if the Service Provider can prove to the client that they have performed exceptionally well.

4. Payment terms

Principle: Do well and we will pay you quicker.

We have used this incentive in a panel arrangement for legal services. Typically invoices in that industry are paid within 90 days. For panellists with a high level of performance, invoices are paid within 45 days.

This is a great incentive that doesn’t cost our client a lot of money and is especially effective with small and medium Service Providers who are constantly worried about cash flow.

Often turning around a contract starts with identifying:

  • the performance expectations for a given contract
  • how the achievement will be measured using KPIs
  • the contractual incentives attached to good performance.

Incentives, rather than punitive measures, have another great aspect: they should be relatively easy to introduce into existing contracts via a variation process.