4 Problems with Performance Based Contracts

More and more customers use performance based contracts, especially public agencies. However, measuring service has more potential pain than a bag full of broken glass.

Most customers don’t doubt contractors’ integrity. Many just can’t tell how well services were delivered, or even if they were delivered at all.

Performance based contracts put some portion of contractor payment at risk, based on performance. Customers want reassurance they’ve received everything they paid for. That’s fair, isn’t it?

However, if measurements aren’t appropriate, or are flawed in their design, it spells trouble written in fewer contractor dollars.

Measuring Service is Hard

Services by their nature are very difficult to measure. Why? Service research shows that:

  • Services are performances, not things
  • Performance varies by worker, by contractor, by customer, even day-to-day
  • Services are performed on-site, often in front of customers

Service Delivery as Important as Outcome

To make it even harder to measure services, customers don’t evaluate service solely on the outcome (i.e. a clean lobby, or zero thefts last night); they consider how service was delivered (i.e. is the day porter friendly? does the guard act professionally?)

Here’s what customers have come up with.

The Lingo –> KPIs

Key Performance Indicators (KPIs) are metrics. Customers try to gauge performance from them.

“Try” is the key word here. And the beginning of contractors’ concerns about performance based contracts.

Problem #1 –> Not all KPIs are in Contractors’ Control

The biggest problem with performance based contracts are KPIs outside the contractor’s control.

For example, a guard contractor may have customer satisfaction as one of it’s KPIs. The customer surveys their own employees about security and results say security is too hard, too militaristic. Why?

Because the customer’s security policy requires 100% package searches and ID badge compliance at all times. As a result, the customer satisfaction KPI is below acceptable and the guard contractor suffers financially. Because they’re doing their job well.

Doesn’t seem right, does it? KPIs outside contractors’ control are red flags screaming for negotiation.

Problem #2 –> Customers’ Perception & Expectation

A cleaning contractor has a KPI for quality inspections, to be performed separately by the customer and the contractor.

The contractor self-scores their quality rigidly, not wanting to appear self-serving. However, the customer, looking at exactly the same window ledges and blinds, sees a different story.

Now, the contractor was capable of cleaning to the customer’s expectations. They just didn’t know what they were. Customer expectations are never in the specifications.

As a result of the unacceptable scoring, the contractor suffers financially. Why? Because their understanding of the customer’s expectations and perceptions was way off.

Also, customers’ expectations change over time. The great job the contractor’s been doing for some time is now the new expectation level. So, the bar continually raises. And KPIs can reflect that to the contractor’s disadvantage.

Problem #3 –> Too Many KPIs

Some customers, usually those new to measuring service, fall into the trap of having too many KPIs.

How many are too many? 10-20-30? KPIs by definition are the “vital few” measurments, not the “useful many”. My recommendation is between 3 to 7.

A Boeing 747 has 27 feet of instrumentation in the cockpit. However, pilots can’t monitor all of them at once. So, there are 6 critical gauges they check. If something’s off in one of those, only then do they check other gauges. The same should be true for KPIs, only the “vital few”.

Problem #4 –> Service Performance vs. Vendor Performance

However, not all KPIs measure service performance. Some measure vendor performance, such as invoice accuracy and timeliness.

These KPIs indicate how well a contractor works with their customer. Although customers don’t hire a contractor only for quick, error-free invoices, customers will incentivize contractors to make their life easier.

Why is this important? If contractors distinguish between these different KPI types, they’re in a better position to manage customer expectations – they can educate customers by pointing out the difference and adjusting importance.

What Are Your Horror Stories?

If you’ve been involved in a number of performance based contracts I’m sure you have one or more horror stories. Especially in government (public agency) contracts. Would love to hear them. Post your stories here.

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