Comments on: Outsourcing Contract Penalties: Do Vendors Respond to the Pain?

By: Traoloch Collins

Traoloch Collins — Wed, 13 Jan 2010 17:00:13 +0000

This is a very good blog and touches on lots of the key points I have heard both service providers and clients talk about. I think the truth is that performance management is really still in its infancy in outsourcing. Whilst clients invest lots of time and effort creating KPIs they are rarely managed effectively. A lot of this is related to the focus that tends to be put on ‘issues’ rather than service quality. Many operational people on the client side can feel they are too busy dealing with issues to manage at the serivce level. When KPIs need to be managed with spreadsheets and e-mails then this is an understandable sentiment. We have taken on the task of trying to simplify the whole performance management process through our product but are extremely conscious that what’s needed are simple flexible solutions. I do not agree for a minute that clients should ever lose control of the detailed service data – trust with information is just stupid blind faith = and despite what service providers might like to say it is always a commerical client/vendor relationship.

By: Bill O'Neill

Bill O'Neill — Mon, 11 Jan 2010 14:02:29 +0000

Question – are contract penalties actually enforceable in the US?

From what I’ve been able to find – US contract law does not provide for contract penalties or punitive damages. Thus, liquidated damage provisions are enforceable only when they compensate a party for damages that are difficult to quantify and reflect a reasonable estimate of expected damages calculated at the time the parties enter into the contract. They must also be exclusive in that they are a substitute for any actual damages that may be incurred.

By: DL

DL — Tue, 03 Nov 2009 16:06:38 +0000

At the risk of diverging from the original point, but in answer to CC’s post, reporting on its own can, in a mature engagement, be relied on. As the engagement matures, the customer should be moving away from control (detailed data analysis at the contract, service and engagement layers) to a level of trust (automated, trusted reporting data) To hold onto a large degree of control for an indefinite period can be detrimental to the relationship. In the extreme it can result in a perceived problem turning from just that to an unrecoverable one and termination being served without the vendor actually understanding why. The customer is then back where they started and applying control over the new vendor and eventually know no different.

As for penalties, I dont believe they work, since the vendor has usually factored them into their costs and expects them. Only if the vendor is greedy and wants to keep the fat, will penalties have an effect……..and do you really want to work with a greedy vendor. Far better is to lock the vendor into your success. Offer bonuses aligned to areas of your business that the vendor can have an influence upon. Not easy, I admit, but much more beneficial to both sides.

By: CC

CC — Thu, 24 Sep 2009 21:18:51 +0000

Don’t forget the processes and people you have to put in place to monitor the oursourcing firm. They have become very good at hiding behind abstract reporting, conflicting statistics, etc. It becomes a lot of work to “proove” SLA’s are made or missed. You cannot count on reporting alone…

By: Manu Johary

Manu Johary — Fri, 26 Jun 2009 09:34:38 +0000

Good article. my comment on the underline question is that – vendor financial penalties cause lot of pain to outsourcer if this is not well supported by strong governance and executive buy-in.

There are many areas where vendor performance is expected to meet SLAs. In today’s outsourcing environment and considering the business sensitivity of outsourced work. It is important to see vendor perform and stay a step in front to any of customer’s security compliance requirements. Concept of vendor penalties in risk and security requirement adherence area, supported by strong governance and reporting mechanism is extremely effective and useful.

By: Tom Sherman

Tom Sherman — Tue, 09 Jun 2009 13:42:32 +0000

What I have found to be more useful than financial penalties, yet has a financial impact is requiring doubling up on resources to solve the problem. For example, if QA is not up to par for a second consecutive month, then instead of requiring the vendor to continue to perform QA in the same manner, require additional monitoring to occur. So if 5 monitoring per month per agent is standard, then require 10 per month per agent. This should drive quality more than a financial penalty and yet to accomplish the 10 monitoring per agent per month, it will also require the additional quality resources to complete which is also a financial impact. Quality should be improved unless there is a serious process issue that no matter how many monitorings and coachings are completed, it wont solve the problem.

By: Outsource Account

Outsource Account — Fri, 30 Jan 2009 07:39:26 +0000

You could find the vendor’s B Team showing up to complete the project, then the C Team, and so on. Most project owners want a finished project, not a languishing project.

By: Kendall Gordan, SE

Kendall Gordan, SE — Mon, 01 Dec 2008 20:52:44 +0000

I’ve also found that if the vendor ends up in penalty land, they will defer the project behind actual paying clients.

Kendall Gordan, SE
http://www.foxfiresoftware.com

By: Nuckles

Nuckles — Thu, 27 Nov 2008 16:23:21 +0000

Over time I’ve found that vendors are more responsive to fee incentives/rewards than outright penalties. But I often use some combination of both for my clients. A fee incentive for producing a key set of deliverables with quality, on time and within budget, and then penalties if the key set of deliverables is not produced on time, etc.

The danger with penalties is that they cannot be overly punitive. If a vendor finds itself in penalty land, and its working to finish a project at a greatly reduced rate, you could find the vendor’s B Team showing up to complete the project, then the C Team, and so on. Most project owners want a finished project, not a languishing project.

By: it outsourcing

it outsourcing — Wed, 19 Nov 2008 20:50:48 +0000

Capped risk is an interesting idea, not sure how you control excused non performance. While it’s not a perfect world, where do you draw the line when it comes to lapses in it outsourcing quality control??