Performance-based contracting - Revision history

Muurholm: /* Key Performance Indicators */

2019-03-04T21:22:20Z

Key Performance Indicators

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	''' 1) Profit:''' One of the more straightforward KPIs which may include both gross and net profit margin.		''' 1) Profit:''' One of the more straightforward KPIs which may include both gross and net profit margin.

	''' 2) Cost:''' The cost of running the organization as a good measure for managing and reducing expenses.		''' 2) Cost:''' The cost of running the organization is a good measure for managing and reducing expenses.

	''' 3) Revenue vs target:''' It can be useful to compare the actual revenue the organization ~~is making~~ against the projected revenue.		''' 3) Revenue vs target:''' It can be useful to compare the actual revenue the organization makes against the projected revenue.

	*'''Customer metrics'''<ref name="SSBM">18 Key Performance Indicator (KPI) Examples Defined </ref>		*'''Customer metrics'''<ref name="SSBM">18 Key Performance Indicator (KPI) Examples Defined </ref>

Muurholm: /* The Seven Sourcing Business Models */

2019-03-04T21:20:11Z

The Seven Sourcing Business Models

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	An example of the difference between the traditional input-based contracts and performance-based contracts could that of a water utility.<ref name="Utility">Performance-based contracting for services: A new mechanism for increasing water utility efficiency</ref> A water utility will traditionally contract out works to a contracter paying a fixed fee for specific deliverables. In this case the focus is mainly on the inputs such as replacing pipes, delivering a study or building a wastewater plant without consideration of the direct impact of the contract. The impact would here be the output for the utility such as improved operational performance, reduction of leakages or the amount of wastewater treated. The contracter would here be paid based on the finished deliverables regardless of how well the provided service solves the problem such as whether the number of leaks in a pipe has gone down.		An example of the difference between the traditional input-based contracts and performance-based contracts could that of a water utility.<ref name="Utility">Performance-based contracting for services: A new mechanism for increasing water utility efficiency</ref> A water utility will traditionally contract out works to a contracter paying a fixed fee for specific deliverables. In this case the focus is mainly on the inputs such as replacing pipes, delivering a study or building a wastewater plant without consideration of the direct impact of the contract. The impact would here be the output for the utility such as improved operational performance, reduction of leakages or the amount of wastewater treated. The contracter would here be paid based on the finished deliverables regardless of how well the provided service solves the problem such as whether the number of leaks in a pipe has gone down.

	With a performance-based contract however completion of the work would also be paid at a fixed price but additional bonusses may be rewarded based on the outcome of the service such as how well the leakages in the pipe has been reduced. The combination of fixed payments and variable payments make most PBCs hybrid schemes and the real difference traditional contracts and PBCs lies in the percentage of the payments made through variable payments. In order to be considered a "real" PBC a contract should contain 20-30 % of the payments in the form of variable fees.<ref name="Utility">Performance-based contracting for services: A new mechanism for increasing water utility efficiency</ref>		With a performance-based contract however completion of the work would also be paid at a fixed price but additional bonusses may be rewarded based on the outcome of the service such as how well the leakages in the pipe has been reduced. The combination of fixed payments and variable payments make most PBCs hybrid schemes and the real difference between traditional contracts and PBCs lies in the percentage of the payments made through variable payments. In order to be considered a "real" PBC a contract should contain 20-30 % of the payments in the form of variable fees.<ref name="Utility">Performance-based contracting for services: A new mechanism for increasing water utility efficiency</ref>

	*'''Vested Business Model'''		*'''Vested Business Model'''

Muurholm: /* The Seven Sourcing Business Models */

2019-03-04T21:16:45Z

The Seven Sourcing Business Models

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	==The Seven Sourcing Business Models==		==The Seven Sourcing Business Models==
	Performance-based contracting is a part of the so-called Seven Sourcing Business Models which are fundamental supply business models that are established with the supplier to support the purchase requirements. The models are useful within procurement management and can be used to create value and manage risk in various different ways.		Performance-based contracting is a part of the so-called Seven Sourcing Business Models which are fundamental supply business models that are established with the supplier to support the purchase requirements. The models are useful within procurement management and can be used to create value and manage risk in various different ways.<ref name="SSBM">Seven Sourcing Business Models to Create Value and Manage Risk </ref>

	A fundamental question a company or organisation needs to ask itself is how to obtain the goods and services required to run the business. On the one hand it they can be "bought" on the marked externally or on the other hand they can be "made" via insourcing internally in the company. A hybrid approach also exists in between the two extremes. This is illustrated in Figure 2.		A fundamental question a company or organisation needs to ask itself is how to obtain the goods and services required to run the business. On the one hand they can be "bought" on the marked externally or on the other hand they can be "made" via insourcing internally in the company. A hybrid approach also exists in between the two extremes. This is illustrated in Figure 2.

	[[File:Wiki_test_v2.PNG\|500px\|thumb\|right\|Figure 2. Sourcing Continuum. Made with inspiration from <ref name="SSBM">Seven Sourcing Business Models to Create Value and Manage Risk </ref>.]]		[[File:Wiki_test_v2.PNG\|500px\|thumb\|right\|Figure 2. Sourcing Continuum. Made with inspiration from <ref name="SSBM">Seven Sourcing Business Models to Create Value and Manage Risk </ref>.]]

	Depending on the sourcing situation a given organisation or company is in, the most appropriate Sourcing Business Model should be chosen in order to optimize for the business environment the organisation or company ~~is navigating~~.		Depending on the sourcing situation a given organisation or company is in, the most appropriate Sourcing Business Model should be chosen in order to optimize for the business environment the organisation or company navigates.

	As seen in Figure 2 the Sourcing Business Models include:<ref name="SSBM">Seven Sourcing Business Models to Create Value and Manage Risk </ref>		As seen in Figure 2 the Sourcing Business Models include:<ref name="SSBM">Seven Sourcing Business Models to Create Value and Manage Risk </ref>
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	*'''Preferred Provider'''		*'''Preferred Provider'''
	The suppliers are here chosen specifically and exclusive arrangements may exist allowing for more streamlined ~~buying~~ processes and easily repeatable business. The main purpose with this model is to achieve best value or volume discounts via longer-term contracts. The Economic Model is transaction-based and the Relationship-model is relational.<ref name="SSBM">Seven Sourcing Business Models to Create Value and Manage Risk </ref>		The suppliers are here chosen specifically and exclusive arrangements may exist allowing for more streamlined purchasing processes and easily repeatable business. The main purpose with this model is to achieve best value or volume discounts via longer-term contracts. The Economic Model is transaction-based and the Relationship-model is relational.<ref name="SSBM">Seven Sourcing Business Models to Create Value and Manage Risk </ref>

	*'''Performance-Based Agreement/Contracting'''		*'''Performance-Based Agreement/Contracting'''

Muurholm: /* Sourcing Business Models */

2019-03-04T21:12:34Z

Sourcing Business Models

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	**''Business outcomes in which the reward (and risk) is shared''		**''Business outcomes in which the reward (and risk) is shared''

	A business should ask itself what would be the right Relationship Model for them as well as what ~~they~~ right Economic Model would be. Based on these decisions this should result in the optimal choice of Sourcing Business Model as seen in Figure 1.		A business should ask itself what would be the right Relationship Model for them as well as what the right Economic Model would be. Based on these decisions this should result in the optimal choice of Sourcing Business Model as seen in Figure 1.

	With an understanding of what a Sourcing Business Model is, it is now possible to study seven fundamental business models known as The Seven Sourcing Business Models.		With an understanding of what a Sourcing Business Model is, it is now possible to study seven fundamental business models known as The Seven Sourcing Business Models.

Muurholm: /* Annotated Bibliography */

2019-03-04T21:07:40Z

Annotated Bibliography

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	''Performance-based contracting for services: A new mechanism for increasing water utility efficiency'': This article discusses the concept of makes a performance-based contracts and how they are relevant to the water industry. It provides some good examples of how performance-based contracts are different than traditional input-based contracts as illustrated from a utility company perspective. It praises the idea of performance-based contracts while also providing a critical look at the types of contracts which may not suit all organizations and industries.		''Performance-based contracting for services: A new mechanism for increasing water utility efficiency'': This article discusses the concept of makes a performance-based contracts and how they are relevant to the water industry. It provides some good examples of how performance-based contracts are different than traditional input-based contracts as illustrated from a utility company perspective. It praises the idea of performance-based contracts while also providing a critical look at the types of contracts which may not suit all organizations and industries.

	''Performance-based contracts: KPIs that drive performance and strategic outcomes'': This article introduces how Key Perfomance Indicators are the measures used to insentivise and have concrete goals to achieve the desired performance and output of a given project. It gets into how KPIs should be used in a sensible and relevant way.		''Performance-based contracts: KPIs that drive performance and strategic outcomes'': This article introduces how Key Perfomance Indicators are the measures used to insentivise and have concrete goals to achieve the desired performance and output of a given project. It gets into how KPIs should be used in a sensible and relevant way as well as how they should be clearly defined in order to work towards a well defined goal.

	== References ==		== References ==
	<references/>		<references/>

Muurholm: /* Annotated Bibliography */

2019-03-04T21:05:44Z

Annotated Bibliography

← Older revision		Revision as of 21:05, 4 March 2019
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	''Performance-based contracting for services: A new mechanism for increasing water utility efficiency'': This article discusses the concept of makes a performance-based contracts and how they are relevant to the water industry. It provides some good examples of how performance-based contracts are different than traditional input-based contracts as illustrated from a utility company perspective. It praises the idea of performance-based contracts while also providing a critical look at the types of contracts which may not suit all organizations and industries.		''Performance-based contracting for services: A new mechanism for increasing water utility efficiency'': This article discusses the concept of makes a performance-based contracts and how they are relevant to the water industry. It provides some good examples of how performance-based contracts are different than traditional input-based contracts as illustrated from a utility company perspective. It praises the idea of performance-based contracts while also providing a critical look at the types of contracts which may not suit all organizations and industries.

			''Performance-based contracts: KPIs that drive performance and strategic outcomes'': This article introduces how Key Perfomance Indicators are the measures used to insentivise and have concrete goals to achieve the desired performance and output of a given project. It gets into how KPIs should be used in a sensible and relevant way.

	== References ==		== References ==
	<references/>		<references/>

Muurholm: /* Contract */

2019-03-04T20:58:59Z

Contract

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	==Contract==		==Contract==
	In order to provide some background to the idea of performance-based contracting it can be useful to first get a sense of what a contract is broken down on a basic level. A contract can be described as a promise made between two or more persons or organisations in which each participating party agrees to do certain things.<ref name="Artslaw">https://www.artslaw.com.au/legal/raw-law/what-is-a-contract </ref> The contract is a written list which describes the agreed upon items and it is therefore useful because it can be used to:		In order to provide some background to the idea of performance-based contracting it can be useful to first get a sense of what a contract is when broken down on a basic level. A contract can be described as a promise made between two or more persons or organisations in which each participating party agrees to do certain things.<ref name="Artslaw">https://www.artslaw.com.au/legal/raw-law/what-is-a-contract </ref> The contract is a written list which describes the agreed upon items and it is therefore useful because it can be used to:

	*State what is expected of the agreeing persons or organisations		*State what is expected of the agreeing persons or organisations

Muurholm: /* Abstract */

2019-03-04T20:55:44Z

Abstract

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	In this article a review of performance-based contracting, as utilized in project, program or portfolio management, will be presented. Performance-based contracting (PBC) is one of seven fundamental business models known as The Seven Sourcing Business Models. The general concept of Sourcing Business Models as well as The Seven Sourcing Business Models will be explained in this article and it will be elaborated how PBC fits into this theory. Performance-based contracting is a product support strategy in which the procurement model is based on clearly defined objectives and key performance indicators (KPIs) <ref name="Pitcher">Performance-based contracts: KPIs that drive performance and strategic outcomes </ref>. The objectives and Key Performance Indicators are the driving forces to encourage behaviours from the supplier that will ultimately achieve the required project objectives and procurement. Specific KPIs such as cost, quality and completion are the basis of project consequences, in the form of risk and reward, for the involved contract participants. The concept of KPIs will also be studied in this article along with a brief description of what a contract is in general. In performance-based contracting the incentivized performance measures serve the purpose of motivating the supplier to improve performance and cost effectiveness through enhanced internal practices. This is different than the more traditionally used transaction-based contracting, also known as waterfall approach, in which payments are made based on completion of agreed milestones and project deliverables. Roughly speaking the key difference between the two methods lies in the fact that performance-based contracting describes the work in terms of the required results rather than "how" the work should be accomplished <ref name="nigp">Public Procurement Practice		In this article a review of performance-based contracting, as utilized in project, program or portfolio management, will be presented. Performance-based contracting (PBC) is one of seven fundamental business models known as The Seven Sourcing Business Models. The general concept of Sourcing Business Models as well as The Seven Sourcing Business Models will be explained in this article and it will be elaborated how PBC fits into this theory. Performance-based contracting is a product support strategy in which the procurement model is based on clearly defined objectives and key performance indicators (KPIs) <ref name="Pitcher">Performance-based contracts: KPIs that drive performance and strategic outcomes </ref>. The objectives and Key Performance Indicators are the driving forces to encourage behaviours from the supplier that will ultimately achieve the required project objectives and procurement. Specific KPIs such as cost, quality and completion are the basis of project consequences, in the form of risk and reward, for the involved contract participants. The concept of KPIs will also be studied in this article along with a brief description of what a contract is in general. In performance-based contracting the incentivized performance measures serve the purpose of motivating the supplier to improve performance and cost effectiveness through enhanced internal practices. This is different than the more traditionally used transaction-based contracting, also known as waterfall approach, in which payments are made based on completion of agreed milestones and project deliverables. Roughly speaking the key difference between the two methods lies in the fact that performance-based contracting describes the work in terms of the required results rather than "how" the work should be accomplished <ref name="nigp">Public Procurement Practice
	PERFORMANCE BASED CONTRACTING. </ref>. The advantage of using this business model is therefore that it leaves the contractor with more room for innovation and creative solutions that actually have the purpose of solving a problem in the best way possible rather than strictly carrying out a piece of work merely because a contract says so. This results in a win-win situation for both partners in the partnership as both parties have interest in achieving the best possible solution.		PERFORMANCE BASED CONTRACTING. </ref>. The advantage of using this business model is therefore that it leaves the contractor with more room for innovation and creative solutions that actually have the purpose of solving a problem in the best way possible rather than strictly carrying out a piece of work merely because a contract says so. This results in a win-win situation for both partners in the partnership as both parties have interest in achieving the best possible solution.
	Finally the limitations of the Performance-based contracting will be reviewed. Such limitations may for instance come from the argument that KPIs are not well suited for all businesses as they may lead to internal conflicts and unhealthy work environments among employees. Another limitation to PBC may be that the contracts tend to be more complex which can lead to unnecessary conflicts between the parties due to misunderstandings.<ref name="Utility">Performance-based contracting for services: A new mechanism for increasing water utility efficiency</ref>		Finally the limitations of the Performance-based contracting will be reviewed. Such limitations may for instance come from the argument that KPIs are not well suited for all businesses as they may lead to internal conflicts and unhealthy work environments among employees.<ref name="KPI">At leve i et KPI helvede</ref> Another limitation to PBC may be that the contracts tend to be more complex which can lead to unnecessary conflicts between the parties due to misunderstandings.<ref name="Utility">Performance-based contracting for services: A new mechanism for increasing water utility efficiency</ref>

	__TOC__		__TOC__

Muurholm: /* Abstract */

2019-03-04T20:51:13Z

Abstract

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	==Abstract==		==Abstract==
	In this article a review of performance-based contracting, as utilized in project, program or portfolio management, will be presented. Performance-based contracting (PBC) is one of seven fundamental business models known as The Seven Sourcing Business Models. The general concept of Sourcing Business Models as well as The Seven Sourcing Business Models will be explained in this article and it will be elaborated how PBC fits into this theory. Performance-based contracting ~~(PBC)~~ is a product support strategy in which the procurement model is based on clearly defined objectives and key performance indicators (KPIs) <ref name="Pitcher">Performance-based contracts: KPIs that drive performance and strategic outcomes </ref>. The objectives and Key Performance Indicators are the driving forces to encourage behaviours from the supplier that will ultimately achieve the required project objectives and procurement. Specific KPIs such as cost, quality and completion are the basis of project consequences, in the form of risk and reward, for the involved contract participants. The concept of KPIs will also be studied in this article along with a brief description of what a contract is in general. In performance-based contracting the incentivized performance measures serve the purpose of motivating the supplier to improve performance and cost effectiveness through enhanced internal practices. This is different than the more traditionally used transaction-based contracting, also known as waterfall approach, in which payments are made based on completion of agreed milestones and project deliverables. Roughly speaking the key difference between the two methods lies in the fact that performance-based contracting describes the work in terms of the required results rather than "how" the work should be accomplished <ref name="nigp">Public Procurement Practice		In this article a review of performance-based contracting, as utilized in project, program or portfolio management, will be presented. Performance-based contracting (PBC) is one of seven fundamental business models known as The Seven Sourcing Business Models. The general concept of Sourcing Business Models as well as The Seven Sourcing Business Models will be explained in this article and it will be elaborated how PBC fits into this theory. Performance-based contracting is a product support strategy in which the procurement model is based on clearly defined objectives and key performance indicators (KPIs) <ref name="Pitcher">Performance-based contracts: KPIs that drive performance and strategic outcomes </ref>. The objectives and Key Performance Indicators are the driving forces to encourage behaviours from the supplier that will ultimately achieve the required project objectives and procurement. Specific KPIs such as cost, quality and completion are the basis of project consequences, in the form of risk and reward, for the involved contract participants. The concept of KPIs will also be studied in this article along with a brief description of what a contract is in general. In performance-based contracting the incentivized performance measures serve the purpose of motivating the supplier to improve performance and cost effectiveness through enhanced internal practices. This is different than the more traditionally used transaction-based contracting, also known as waterfall approach, in which payments are made based on completion of agreed milestones and project deliverables. Roughly speaking the key difference between the two methods lies in the fact that performance-based contracting describes the work in terms of the required results rather than "how" the work should be accomplished <ref name="nigp">Public Procurement Practice
	PERFORMANCE BASED CONTRACTING. </ref>. The advantage of using this business model is therefore that it leaves the contractor with more room for innovation and creative solutions that actually have the purpose of solving a problem in the best way possible rather than strictly carrying out a piece of work merely because a contract says so. This results in a win-win situation for both partners in the partnership as both parties have interest in achieving the best possible solution.		PERFORMANCE BASED CONTRACTING. </ref>. The advantage of using this business model is therefore that it leaves the contractor with more room for innovation and creative solutions that actually have the purpose of solving a problem in the best way possible rather than strictly carrying out a piece of work merely because a contract says so. This results in a win-win situation for both partners in the partnership as both parties have interest in achieving the best possible solution.
	Finally the limitations of the Performance-based contracting will be reviewed. Such limitations may for instance come from the argument that KPIs are not well suited for all businesses as they may lead to internal conflicts and unhealthy work environments among employees. Another limitation to PBC may be that the contracts tend to be more complex which can lead to unnecessary conflicts between the parties due to misunderstandings.<ref name="Utility">Performance-based contracting for services: A new mechanism for increasing water utility efficiency</ref>		Finally the limitations of the Performance-based contracting will be reviewed. Such limitations may for instance come from the argument that KPIs are not well suited for all businesses as they may lead to internal conflicts and unhealthy work environments among employees. Another limitation to PBC may be that the contracts tend to be more complex which can lead to unnecessary conflicts between the parties due to misunderstandings.<ref name="Utility">Performance-based contracting for services: A new mechanism for increasing water utility efficiency</ref>

Muurholm: /* Annotated Bibliography */

2019-03-04T20:46:22Z

Annotated Bibliography

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	==Annotated Bibliography==		==Annotated Bibliography==
	''Seven Sourcing Business Models to Create Value and Manage Risk'': This teaching material from The Forefront Group provides an in-depth description of what a sourcing business model is as well as a concise overview of the Seven Sourcing Business Models explaining their usefulness and details about each of the seven fundamental models. It also provides hands-on guidance of how to use the model for a given organization type.		''Seven Sourcing Business Models to Create Value and Manage Risk'': This teaching material from The Forefront Group provides an in-depth description of what a sourcing business model is as well as a concise overview of the Seven Sourcing Business Models explaining their usefulness and details about each of the seven fundamental models. It also provides hands-on guidance of how to use the model for a given organization type.

			''Performance-based contracting for services: A new mechanism for increasing water utility efficiency'': This article discusses the concept of makes a performance-based contracts and how they are relevant to the water industry. It provides some good examples of how performance-based contracts are different than traditional input-based contracts as illustrated from a utility company perspective. It praises the idea of performance-based contracts while also providing a critical look at the types of contracts which may not suit all organizations and industries.

	== References ==		== References ==
	<references/>		<references/>