Performance-Based Services Contracting (PBSC) is concerned with the structured of the results and measurable outcomes to be achieved rather than the manner by which the work is to be performed. Performance-Based Services Contracting approach is about defining what the required results of a service will rather than how the contractor will perform the tasks.

1. Taking a Performance-Based
Services Approach to Improve
the Effectiveness of
Outsourcing
Alan McSweeney

2. Performance-Based Services Contracting (PBSC)
• Concerned with the structured of the results and
measurable outcomes to be achieved rather than the
manner by which the work is to be performed
• Performance-Based Services Contracting approach is about
defining what the required results of a service will rather
than how the contractor will perform the tasks
• Supplier becomes responsible for how service is
accomplished
April 10, 2012 2

3. Service Becomes “Black Box”
Results/
Requirements Service Outcomes
Measures
Data
Expected vs.
Actual
April 10, 2012 3

4. Types of Outsourcing Arrangement
Complexity of Outsourcing Arrangement
Business
Efficiency/Utility Transformational
Enhancement
(Make It Cheaper) (Make me Money)
(Make it Better)
Focuses primarily on cost
Partnership between the
control and, over time, Improve business
service provider and
cost reduction, with the productivity resulting in
service recipient that is
goal of maintaining movement toward
focused on innovation
consistency in the defined business goals
and new business
delivery of services
April 10, 2012 4

5. Why Use Performance-Based Services Contract
Approach?
• Can be used to achieve innovation within an outsourcing
arrangement
• Useful where supplier is taking over an unstructured/undefined
service/state with a mandate to change and improve
• Should increase customer satisfaction because results are improved
• Promotes frequent communication between the customer and the
supplier
• Demands good contract management to ensure results are achieved
• Shifts the risk to the supplier
• Can improve supplier performance
April 10, 2012 5

6. Concerns With Performance-Based Services Contract
Approach
• Requires regular and frequent communication between the
customer and the supplier
• Requires good contract management by of the customer to ensure
results are being achieved
• Requires an understanding of what the objectives of the proposed
outsourcing arrangement are and the problem you are trying to
solve
• Requires commitment and resources to get outsourcing definition
right
• You can outsource anything except the management of what is
being outsourced
• Outsourcing ≠ Fire and Forget
April 10, 2012 6

7. Types of Outsourcing Arrangement and Use of
Performance Based Service Contracts
Complexity of Outsourcing Arrangement
Business
Efficiency/Utility Transformational
Enhancement
(Make It Cheaper) (Make me Money)
(Make it Better)
Performance Based Service Contracts
Focuses primarily on cost
Partnership between the
control and, over time, Improve business
service provider and
cost reduction, with the productivity resulting in
service recipient that is
goal of maintaining movement toward
focused on innovation
consistency in the defined business goals
and new business
delivery of services
April 10, 2012 7

8. Key Components of Performance-Based Services
Contract
Performance-Based Services Arrangement
Performance
Incentives
Performance Measurable
(Where
Work Statement Performance
Appropriate),
(PWS) Standards
Overall Cost
Model
April 10, 2012 8

9. Overall Outsourcing Service Framework
Requirements PARs Affect
Service Contract and
Feed Into Payments
Cost/Payment Model
Contract
Contract Governs Overall Service Delivery
Quality
SOO
Assurance
Statement of Expanded
Surveillance Plan
Objectives (SOO) Into Detailed Delivery of (QASP)
PWS PWS
Measures by
QASP
QASP
Performance Reported on
Work Statement in PARs
(PWS)
Performance
PWS Contains Assessment
Requirements
Detailed Report (PAR)
Requirements
April 10, 2012
Requirements Feed Into QASP 9

10. Performance Work Statement (PWS)
• Statement of work for performance-based services that describes
the required results in clear, specific and objective terms with
defined and measurable outcomes
• Focuses on what the results of performance will be
• Describes the work in terms of the required results
• Enable assessment of service delivery performance against
measurable performance standards
• Defines a measurement framework
• Defines measurable performance standards and financial incentives
to ensure suppliers develop and implement innovative and cost-
effective methods of performing the services
April 10, 2012 10

11. Performance Work Statement (PWS)
• Questions to consider when developing a PWS
− Why do we need the service performed?
− What kinds of results – quality/time - do we want from it?
April 10, 2012 11

12. Statement of Objectives (SOO)
• Statement of the overall performance and other objectives
for the service
• Defines what is required in terms of the results of the
services to be performed
• Designed to enable the maximum flexibility to a supplier to
propose an innovative approach to service delivery
April 10, 2012 12

13. Performance Objectives
• Performance Objectives define the performance level
required to meet the service delivery and operation
requirements
• Performance Objectives need to be measurable and
structured to permit an assessment of the supplier’s
performance of service delivery and operation
April 10, 2012 13

14. Performance Assessment
• Based on Quality Assurance Surveillance Plan (QASP)
• QASP follows-on from requirements listed in the
performance work statement (PWS)
• Defines the procedures to ensure the required
performance standards and levels of services are provided
by the supplier
April 10, 2012 14

15. Quality Assurance Surveillance Plan (QASP)
• QASP enables you to evaluate if the supplier is meeting the performance
standards/quality levels identified in the PWS
− Measures the supplier’s performance against the agreed and defined performance
standards
• Ensures you pay only for the level of service provided
• Defines the systematic methods and processes used to monitor performance
− Surveillance techniques/methods
− Assess and assure contract compliance
− Measure against defined Acceptable Quality Level (AQL)
− Reporting
− Reviews and Resolution
• Identify the required documentation
• Detail the resources to be employed, roles and responsibilities
• When shared with the supplier, the QASP is a communication tool that allow both
the customer and supplier focus on what is most important
April 10, 2012 15

16. Performance Assessment Report (PAR)
• Evaluation of the services supplied
• Frequency of PARs production defined in overall service
contract
• Contains
− What the supplier was required to do
− What measurements were defined
− How the supplier is performing
− What actions are being taken based on performance
April 10, 2012 16

17. Performance Assessment
• Measures and metrics inform the supplier how the
requirements are being met
• High and low thresholds defined – exceed/not meet
requirements
• Need to define measurement intervals to identify supplier
non-performance
• Define interval within which corrections can be made
• Customer needs to create Quality Assurance team to
regularly and frequently verify supplier compliance with
defined Performance Objectives
April 10, 2012 17

18. Performance Measurement Framework
Customer
Collects Analyses Provides
Review Respond
Defines and Monitors and Takes Performance
and to
Metrics Supplies Compliance Requests Actions Assessment
Respond Feedback
Data Actions Reports (PARs)
Supplier
• Requires regular and frequent communication between the customer and the
supplier
• Requires good contract management on the part of the customer to ensure
results are achieved
April 10, 2012 18

19. Performance Assessment Reporting Framework
Month Month Month Month Month Month Month Month Month Month Month Month
1 2 3 4 5 6 7 8 9 10 11 12
Quarter 1 Quarter 2 Quarter 3 Quarter 4
Annual
• Define tiered performance reporting framework – operational and
strategic - and adhere to it
April 10, 2012 19

20. Performance Metrics
• Need to define set of metrics that capture what is important to the
service delivery
• Balance between too few and too many
• Metrics need to tell you when the performance standards have been
met
• Need to assess that the definition of metrics will cause supplier to
take actions to optimise their value which may lead to undesirable
consequences
• Define tiered metrics to match tiered reporting: operational and
strategic
• Define measurement framework that measures performance and
interactions across service landscape
• Measure what is important and what has an impact
• Measure outcomes – the what rather than the how
April 10, 2012 20

21. Define Measures Linked to Key Service Elements and
Processes
Metric 1 Metric 2 Metric 3 Metric 4
Metric 5
Metric 8
Metric 6
Metric 9
Metric 7
Metric 10 Metric 11 Metric 12 Metric 13
April 10, 2012 21

22. Define Measures Linked to Key Service Elements and
Processes
• Create service landscape/architecture with cross-
functional processes
• Define hierarchical metric framework that measures
outcomes for individual service components, collections of
service components and overall service
April 10, 2012 22

23. Metrics Hierarchy
High-Level Metrics Which
KPI Measure Progress Toward
Strategic Service Objectives
Align Metrics
to Allow Roll-
up
Process Metrics – Roll-up
Process Metrics of Operational Metrics
Results Metrics Operational Metrics
April 10, 2012 23

24. Outsourcing Contract Types
• Different types of contract (payment) structures available
to customer
• Many contract types available
• Need to consider contract type and associated payment
structures that will motivate suppliers to increase
efficiency and maximise service performance
• Need to select a contract type and price (or estimated cost
and payment structure) that will result in reasonable
supplier risk and provide the supplier with the greatest
incentive for efficient and economical performance
• Contract type and price negotiation are linked
April 10, 2012 24

25. Outsourcing Contract Types
Contract Types
Time-and-
Cost-
Fixed-Price Indefinite-Delivery Materials, Labour- Agreement
Reimbursement
Hour, and Letter
Time-and-
Firm-Fixed-Price Cost-Only Basic
Materials,
Fixed-Price with
Cost-Plus-
Economic Price Labour-Hour Basic Ordering
Incentive-Fee
Adjustment
Fixed-Price Cost-plus-Award-
Letter
Incentive Fee
Fixed-Price with
Cost-Plus-Fixed-
Prospective Price
Fee
Redetermination
Firm-Fixed-Price,
Level-of-Effort
Term
April 10, 2012 25

26. Outsourcing Model High-Level Approach and Steps
Build the Sourcing Team With Executive
Sponsorship and Support
1. Form the
Sourcing Team
Conduct Analysis of Previous Sourcing Arrangements
Define Stakeholder and Customer needs
2. Review
Current Sourcing
Strategy
Analyse the Market and Identify
Potential Suppliers
3. Perform
Market Research
Define Requirements
4. Define
Requirements
Define Sourcing Approach and Create
5. Define Sourcing Strategy – Strategic or Tactical
Sourcing
Strategy
Select the Most Appropriate Supplier
6. Execute and Implement Sourcing Strategy
Sourcing
Strategy
Build Supplier Relationship
7. Manage Monitor and Manage Performance
Performance
April 10, 2012 26

27. Requirements
• Defining requirements is crucial to the entire sourcing process
• Requirements need to be well-defined, realistic, achievable and
measurable
• Requirements need to have an associated quality level and schedule
• Requirements provide the basis for the PWS
• Requirements need to be defined in terms of desired results rather
than specifying how the work should be done
• Each requirement needs to have an associated measurement
methodology
• Requirements may have cost reduction for non-achievement or
incentive for exceeding defined performance
• Requirements must be unambiguous and easily understood
April 10, 2012 27

28. Requirements
• Requirements measured against performance
• Performance must be linked to a performance objective
• Must be able to know what performance level is needed
by the business in order to define the requirement
• Must know why the performance is required
• Why are you asking for this requirement, why is it
important, why is it needed, why business
outcome/objective is achieved?
April 10, 2012 28

29. SOO MoSCoW Prioritisation of Requirements
• MoSCoW
− Must Have
• Requirements that are fundamental to the operation of the service
• Without them the service will be unusable and useless
• Must Haves define the minimum subset services
− Should Have
• Important requirements which are not necessary for service operation in
the short-term but which will contribute
− Could Have
• Requirements that can be omitted but which are part of the long-term
service and will be beneficial to the service being provided
− Want to Have
• Requirements that are effectively optional
April 10, 2012 29

30. Requirements Structure
Business Outcome
Objective 1 … Objective N
Performance Inspection/ Validation Incentive/ Penalty
Performance Objective Data Source(s)
Standard(s) and
Frequency
Measure(s)
Minimum Acceptable
Measure
Quality Level
April 10, 2012 30

31. Performance
• Performance standards define what level of performance
must be met to satisfy the performance objective
• Objectives must be objectively measurable
• Data to create measures must be available and collected
• AQL (Acceptable Quality Level) is an acceptable deviation
from the standard
− Example: 95% of requests to be satisfied within standard
− You will almost never achieve 100% of performance 100% of the
time without incurring significant cost
− AQL specifies the allowable tolerance
− What AQL is acceptable and appropriate and why?
April 10, 2012 31

32. Inspection/Validation
• Inspection is needed to know if the standard is being met
• Customer needs to perform inspection/verification
• Inspection/verification requires
− Definition of information needed
− Sources of information
− Frequency of collection
− Method of collection
− Metrics generated/derived from data
• Inspection/verification itself needs to be inspected and
validated
• Inspection process requires resources – essential part of
contract management
April 10, 2012 32

33. Incentives/Penalties
• What are the impacts of meeting or not meeting the
standards of the objectives?
• Should penalties be specified for not meeting standards
for a defined interval?
• Should incentives be specified for meeting or exceeding
standards for a defined interval?
• Penalties/incentives need to be linked to:
− Realistic cost of not achieving/benefit of achieving
− Encouragement of good behaviour
− Change does not occur based on positive incentives alone
April 10, 2012 33

34. Prioritisation of Requirements
• Determine which performance objectives are the most
important and weight accordingly
• Assign a higher penalty/weight to these
• When evaluating suppliers assign greater
importance/score to meeting these factors
• Form part of overall service contract
April 10, 2012 34

35. Requirements Structure
Objective
Performance Inspection/ Validation Incentive/ Penalty
Performance Objective Data Source(s)
Standard(s) and
Frequency
Measure(s)
Minimum Acceptable
Measure
Quality Level
April 10, 2012 35

36. Requirements Structure
• Objectives need to be specified in terms of
− Performance
• Which specifies
− Performance Objective
• Subject to
− Standard(s) and Measure(s)
• With defined
− Minimum Acceptable Quality Level
• Which are measured by
− Inspection/Validation
• Which specifies
− Data Source(s)
• From which performance information is collected with a defined
− Frequency
• That is then used to generate a defined
− Measure
− And subject to
• Incentive/Penalty
April 10, 2012 36

37. Summary
• Getting outsourcing right is not easy
• PBSC provides a potential approach for maximising results
• PBSC is good where what is being outsourced is not stable and is
subject to change
• PBSC provides a means for embedding flexibility and innovation in
outsourcing arrangement
• PBSC does impose overheads in service definition and supplier
selection and in subsequent supplier management that you need to
be aware of and accept
• Not easy but is worth getting right
• Remember: You can outsource anything except the management of
what is being outsourced
• Outsourcing ≠ Fire and Forget
April 10, 2012 37

38. More Information
Alan McSweeney
alan@alanmcsweeney.com
April 10, 2012 38