For too long, buyers and sellers of IT services have engaged in traditional commercial deals that are safe but suboptimal — based on headcount and fixed costs rather than results. Although these models are easy to understand and implement, they have several shortcomings.
From the buyer's perspective, traditional service contracts require them to assume all the risk. Providers get paid to indirectly “show up” with a fixed service and availability, rather than having their work directly tied to performance and impact. And the absence of effective measurement mechanisms makes it difficult for buyers to compare the effectiveness of competing providers.
From the provider's perspective, traditional service contracts fail to provide the necessary ownership to proactively realize continuous improvement. They don't incentivize beyond manpower‑linked linear growth, which leads to declining profitability over time. And they make a provider reliant on labor arbitrage, rather than performance.
But there is another way. As businesses confront increased globalization, continued economic uncertainty and seek ways to productively unleash SMAC Stack™ technologies (social media, mobile, analytics, cloud), IT buyers are turning to output‑ and outcome‑based service contracts to better incentivize and empower IT services providers to deliver optimal results, while mitigating risk.