In the previous article (see Inputs, Output and Outcomes – Part 1) I looked at the difference between inputs, outcome and outcomes from a Performance Based Contracting (PBC) perspective in order to highlight the benefits and pitfalls of this approach. However, we didn’t look at how you could response to this challenge by aligning both collective and individual requirements (i.e. the performance measures) with specific rewards and remedies (i.e. the consequences).
Acknowledging the difference in 2012, the Australian Department of Defence created three tiers of performance measures to reflect input, outputs and outcomes with the later named Strategic Performance Measure (SPMs). Each of the tiers of performance measures are linked to different levels of commercial rewards and remedies reflecting this concept of input, outputs and outcomes. Figure 1 highlights the relationship among each of these with the definitions provided in Table 1.
|Strategic Performance Measure (SPM)
|Performance measures that reflect “enterprise” (end customer) outcomes; that is, the highest-level outcome acknowledging that the seller may not be solely accountable for failure or success of this outcome.||Given the indirect nature of SPMs, they are typically not linked to money, but rather to other non-monetary rewards and remedies.|
|Key Performance Indicator (KPI)
|Performance measures that are directly related to seller performance against their individual scope of work where they have sole accountability; outputs.||Given the direct linkage of a KPI to Contractor performance KPIs are linked to money resulting in them being quantitative and lag in nature.|
|System Health Indicator (SHI)
|Performance measures that give insight into past and future seller performance by highlighting drivers and constraints to this performance.
Typically, the role of a SHI is to provide confidence in the delivery of the KPIs.
|Given the indirect nature of SPMs, they are typically not linked to money, but rather to other non-monetary rewards and remedies|
Table 1: Definition of Tiers of Performance Measures
Solution: Both buyers and sellers need to acknowledge the difference between inputs, outputs and outcomes to ensure the expectations and commercial models are aligned. It is critical that everyone fully understands the differences in their roles and responsibilities. However, many organizations, similar to our online grocery delivery example, find it difficult to accept the consequences of holding organizations accountable for a shared, end customer outcome as opposed to individual output. This is especially true when commercial remedies are involved such as reduced payment or service contracts. The key is for both buyers and sellers to align their understanding and expectations of their individual contract output with that of the end customer (enterprise) outcome, and how and when the various commercial consequences apply. Specifically, this includes:
- what the seller is directly accountable for (e.g. outputs),
- what shared responsibility all organizations have when delivering outcomes; and
- aligning the commercial consequences, both positively (rewards) and negatively (remedies) with these different tiers of performance measures.
Our ever increasingly complex, interwoven commercial relationships and supply chains require more clarity of what success looks like and to whom. Moreover, as stated earlier, although the move to outcomes is laudable, both buyers and sellers need to acknowledge the difference between inputs, outputs and outcomes to ensure the expectations and commercial models are aligned.
So, when next confronted with an “outcomes based contract” asked yourself whether the contract is asking for inputs, outputs or outcomes, and whether the commercial rewards and remedies align with them. If not, we just may get oranges instead of apples; and who’s fault would that be?