Incentivising supplier performance under an outsourcing arrangement
Produced in partnership with Ian Edwards of Bird & Bird LLP
Incentivising supplier performance under an outsourcing arrangement

The following Commercial guidance note Produced in partnership with Ian Edwards of Bird & Bird LLP provides comprehensive and up to date legal information covering:

  • Incentivising supplier performance under an outsourcing arrangement
  • Introduction
  • Service credits, earnback and service bonuses
  • Late delivery payments and early delivery bonuses
  • Gainsharing
  • Results-based contracting
  • Oversight arrangements

Most outsourcing contracts will contain a range of mechanisms intended to incentivise suppliers by either punishing poor performance, or rewarding performance that exceeds the required level.

This Practice Note focuses on the following common methods of supplier incentivisation:

  1. Service credits, earnback and service bonuses

  2. Late delivery payments and early delivery bonuses

  3. Gainsharing

  4. Results-based contracting

  5. Oversight arrangements

Introduction

The tools discussed below are only part of a wider picture when it comes to incentivising supplier performance. Outsourcing contracts are often long-term arrangements requiring an ongoing relationship between the parties. As such, it often makes sense for the customer to recognise that:

  1. it may be prudent to take a reasonably balanced approach and avoid pushing all risk onto the supplier

  2. it has an ongoing role in ensuring the success of the services and the supplier relationship generally

  3. formal legal remedies are not always the best way to solve problems, and

  4. the supplier should be able to make an appropriate return on its services

Service credits, earnback and service bonuses

Overview

Most outsourcing contracts will include a service level regime. These are intended to provide an objective method of defining the performance standards expected of the supplier.

The rationale for such regimes is that occasional performance failures are inevitable in any long-term contract. However, for non-critical failures, it will not be appropriate for the