Aligning Suppliers with Value

A recent article on SupplyManagement article entitled "Accent on delivery" by Paul Carter Hemlin of Contract Management Direct (4 September 2008) provided the following insights...

"Harold Geneen, former CEO of US giant International Telephone and Telegraph Corporation, once said: "Performance is your reality. Forget everything else." This has never resonated more than in the current climate.

More recently, Forrester Research said most contracts would be based on the value they add rather than cost savings by 2015. If this is true, it will require a shift in mindsets for purchasers to move away from strict targets and service level agreements (SLAs) in their contracts to a culture of providing incentives for suppliers that can provide mutual benefits.

Incentives in contracts can be dangerous and can run contrary to your ultimate goals if not drafted and managed correctly. Less than five years ago, it was common for contracts to include significant bonus provisions for over-achievement. Now, with the exception of a contract and SLA for ejector-seat reliability, why would a customer wish to pay for over achievement? You agree the deal on what you want, need, or sometimes what you can live with. So why pay more for service at a level you do not need, or indeed asked for?"

Our comments

One business discipline leading this practice is Marketing Procurement where Incentive Compensation (and now Value-based Compensation) is extensively used to link the value that advertising agencies deliver with $$$ incentives.

One of the major differences between the practices of Incentive Compensation, as opposed to Contract Compliance, is that over-achievement is typically measured using strategically oriented qualitative metrics.

So we fully agree that it is not over-achievement on SLA metrics that should be rewarded, but more focus should be placed on the strategic drivers which are perhaps not so clearly defined in the contract. How about looking at qualitative criteria such as "innovation", "understanding of the market", "alignment of goals" and "ease of doing business" etc as ways in which to create a scorecard to underpin incentive programs?

Author: Richard Benyon (Decideware)