No sane person should believe that something is subjective merely because it cannot be settled beyond controversy .
Hilary Putnam, American Philosopher

In choosing ideal performance measures to be used in Performance Based Contracts (PBCs) there is much debate on whether they all need to be objective, or whether some subjective performance measures can be used?

For clarity, the Oxford dictionary defines objective as “Based on or influenced by personal feelings, tastes, or opinions” and subjective as “(Of a person or their judgement) not influenced by personal feelings or opinions in considering and representing facts”.

Objective measures are usually those related to physical activities or deliverables. For example, how many parts were received by the required delivery date or whether the maintenance was completed by the scheduled completion date. One reason for the desire for all performance measures to be objective is when linked to contractor payment, there is a clear and repeatable process between contractor performance and payment, regardless of who is undertaking the assessment.

While these type of performance measures are easily understood and therefore accurately measured (e.g. the part either did or did not arrive on Monday) sometimes performance measures include business rules to account for factors outside the contractor’s control. For example, what if the contractor tried to deliver the part on Monday but there was no customer to accept the part? What if the inventory management system was down at the time the part was delivered? So the question becomes how to account for these factors in the performance measure, and importantly, who decides whether these adjustment events apply and does the application of business rules make it subjective?

In addition to the business rules, many agree there are a range contractor attributes that should be discussed on a regular basis, and potentially taken into account when considering performance incentives and/or contract extensions. For example, what is the health of the relationship between the buyer, seller and other third parties? What about the safety culture of the organisation? What about the customer satisfaction?

So how do we measure things that are inherently subjective and how do we use these to drive contractor performance?  And how do we make a subjective performance measure repeatable?  One important factor in their use is that they are not typically linked to monetary rewards and sanctions, but rather to non-monetary rewards and sanctions such as contract extensions.  By doing this, the subjective performance measures acts as a point of conversation in the performance exchange between the buyer and seller.  But to do this, the design of an effective performance measure must define the attribute(s) for each performance level (e.g. say for good, fair and poor performance) which guides and informs the performance assessment.  But more on this in the next post.

So in summary, highly successful PBCs use both objective and subjective performance measures given the benefits to both buyer and seller. But the key to their effectiveness is in the detail of their design and what monetary or non-monetary rewards and/or sanctions (consequences) they are linked to.