Consider the Source

Continuous improvement and innovation in services agreements – making it really work

By Cynthia Batty, Global Competency Lead, Service Management, TPI

It sounds like a great idea: continuous improvement and innovation are commonly included in outsourcing contracts, generally in two ways. First, TPI’s method for continuous annual improvement of service level performance has become the industry standard. We highly recommend this approach which has enjoyed nearly two decades of successful deployment.

The other way that continuous improvement and innovation are included is typically a clause in the Master Service Agreement that requires the service provider bring forward three to five ideas each year to improve services and technology or save money. Because these ideas may cause a reduction of the fee to the Service Provider, these clauses are normally supported by Gainshare clauses.  This means if there is significant reduction of the fees, then a structured program will allow the Service Provider to also reap some of the financial benefit for a period of time after the idea is implemented.

The challenge with continuous improvement and innovation in contracts is that the achievement of the objectives involves both the service provider and the client – it’s not a one-way street. Unfortunately, in the rush of daily service delivery, often neither party returns to the contract to recall that these promises were made, or to create a process through which they could be delivered. Most of the midlife engagements we see have such clauses in the agreements, which have never been executed – or even thought about by either party!

Continuous improvement and innovation are creative conditions; ideas do not simply materialize out of thin air in the course of service delivery. Every client situation is unique, and potential innovations must be proposed in the context of the situation. We recommend that clients create a specific focus on innovation in their governance process.  This requires that an innovation structure is created and time is set aside for both teams to think about potential ideas, review industry conditions, take input from the service provider’s experience in other engagements and best-practice think tanks, and come up with proposals that the leadership teams can evaluate.

Merely having an idea is not enough for the innovation process; there are technical feasibility studies to be done, contract review to ensure that the idea is really a new one and not contemplated already in the agreement, and the financial business case to support investment or validate gainsharing. The Innovation team will reach out to the Client’s Service Management & Governance team members for support – the Contract Manager, Finance Manager, and Service Delivery Managers, and often business stakeholders. Retained functions such as Architecture and Security teams may also be involved on both sides of the relationship. This innovation process creates buy-in across the two organizations which will have to represent the value of the idea to their respective leadership teams, making the likelihood of the idea’s implementation much greater.

Continuous improvement and innovation are a way of thinking that can only thrive in a well-governed relationship. Governance excellence is essential – and we find that clients who focus on structure and process in their relationships not only are able to realize the benefits of continuous improvement and innovation, but that other benefits also come along: friction between the two teams is dramatically reduced, problems get solved in an orderly way, and the management chain knows exactly what is going on in the services relationship. TPI has created a tool to help clients look at the continuous improvement of their own governance and management capability – our SM&G Maturity Assessment. This tool can be used to baseline a client organization’s shared and sourced services management capability, and repeated periodically over time to measure continuous improvement in this essential capability. A well-managed relationship is a happy, productive, and innovative relationship.

They Who Dare Win, Or: Gainsharing, Part One

My colleagues and I have worked for more than a year on what we believe to be the essential next step for the outsourcing industry: defining the principles for employing so-called gainsharing.

I’ve decided that this topic is one that I’d really like to work through via the blog as a means of widening the community helping us to set a stake in the ground. So please consider this the opening of a dialogue on the concepts we are deploying. Please respond – publicly or privately – and expect to hear more about the topic in TPI’s public-speaking engagements.

At the outset I want to thank the clients, service providers and law firms that have been helping us develop our gainsharing concepts. Their input has been innovative and essential.

To further set the stage, some definitions are in order.

In the context of outsourcing, “gainsharing” is meant to refer to the rewards ($) earned by a service provider for creating value ($) for a client under terms agreed to in advance and that directly derive from the expertise and acumen of the provider.

Gainsharing differs from traditional outsourcing in that both parties are looking for derived business benefits. If a prospective client is mainly cost oriented, gainsharing is not the way to go: A focus on percentage of savings is not true gainsharing.

That’s the formal definition. Now add some important nuance: Gainsharing is value created for the client that is “outside the box” of the provider’s scope of responsibility.

So, yes, providers must be expert at delivering the service they were hired for, but they also must be willing and able to partner for derivative benefits to the client.

These benefits do not include process improvements for managing IT. That ought to be part of the core services agreement. What we’re talking about is using technology management to generate more revenue or profit for the client.

I know what you’re thinking: Great, but can that really be done?

In the weeks ahead we’ll review some of the ways that my colleagues and I think it can. But the net of it all is that ambitious organizations should select services providers based on two filters: ability to deliver core services at favorable prices AND willingness to take on the extra risks and rewards of creating value outside the box.