On Penalty Clauses and Dashboards

Here's a great line from META Group VP Michael Doane on the topic of penalty clauses in outsourcing contracts: “It’s going to have to be substantial enough to put the service provider back on their heels.” If a penalty clause is invoked and 5% of the fee is returned to the client, big deal: The sad fact is that it's built into the margin set by the vendor. It will simply create a sense of complacency and inspire the vendor to seek out new stuff to sell to the client firm that will give it higher margin business, leaving your currently outsourced IT services gasping for attention and energy.

Mr. Doane said that one of the things he and his META associates look for in the contracts they're evaluating is a reference to “innovation.” “If there's no mechanism to make that happen, big problem.”

He shared a slide showing a metaphorical “governance dashboard.” It consisted of primitive little clocks with hands pointing to “invest,” “penalize,” “escalate,” and “pay.” “It's passive,” he said. “It's too late… I want a dashboard that shows me how my business processes are going before it gets to 'penalize'.” As an example, he cited the example of an organization with a penalty clause in its contract for staff turnover. “If it's 8% and the provider is at 6%, make sure you have a way to learn about that.”