There has been much in the news around measurement or payment by results over the last week or so whether it is the reforms proposed within the UK justice system or the bonuses of top executives. What ever we call it rewarding by results has been around for many centuries and can be seen in many contexts, however, in the modern dynamic and connected business world, creating an approach that is balanced for all parties is more challenging.
I listened to Chris Grayling, the Secretary of State for Justice in the UK on the radio last week talking about the changes that he has proposed for the probation service. My interest was not primarily in the changes but that a fair proportion of the interview focused on the approach of ‘payment by results’.
Payment by results is often portrayed as a way for private companies to get their feet in the door in order to ‘cherry pick’ the work that delivers the outcomes and therefore profits. This is of course a risk if the approach to measuring the results is too simplistic and doesn’t match the aspirations of both parties.
What was reassuring was the interview this morning was the first time that I had heard a robust and thought through response to this challenge from a government representative. What Chris Grayling got across was that whilst measuring the desired outcomes would not be simple in this case, what was needed was a blended approach, including a set of coherent measures, and a portfolio view of the outcomes.
Whilst time on a prime time interview is short and we only see a top level view it shows a window into perhaps a more mature set of thinking. If I unpack the points above another level then:
Blended Approach – the art here is finding a blend that matches the opportunity and risk profile. The idea of having a 100% success based approach is likely to be appropriate for a small number of opportunities, however, they are likely to be of relatively low risk for the supplier and/or require a relatively low investment. At the other end of the continuum, guaranteed payment is likely to only appropriate where there is a relatively high risk and/or a high level of investment. The majority of opportunities will likely suit a blended approach where suppliers have relative certainty to cover their investment and/or costs plus a low rate of profit and are then rewarded to drive performance.
Coherent Measures – as I mentioned in my opening paragraph often understanding ‘success’ as defined by each of the parties is a significant challenge. The agreeing of the measures and the setting of the targets must be done as a joint activity, it should consider a more dynamic approach though time to raise the bar and encourage innovation, and should have a robust review process built in. Often during the development and negotiation phases of opportunities the parties spend too little time on these areas preferring to spend time negotiating limits on liability and indemnification. Each year the IACCM looks at the most negotiated terms and it was heartening this year to see an increase in the importance of ‘scope and goals’, and ‘responsibilities of the parties’.
Portfolio Approach – so much of what we see as ‘balanced’ is underpinned by a portfolio approach, yet how often do we fully consider the measures as a multi-dimensional portfolio? Often we test the solution or judge the outcomes based on a simplistic one-dimensional snapshot in time. If we are to unlock the power of the portfolio to create a balanced approach then we will need to bring to bear new skill sets and tool sets such as modelling, analysis, and visualisation.
At the end of the day measurement by results makes sense in so many scenarios and the real challenge is ensuring that we create, manage, and evolve the approaches to ensure that they operate in the zone of acceptability for each opportunity. This can only be done in an environment where there is openness, and trust between the parties in terms of their goals and aims. This must be underpinned by strong communications and the appropriate allocation of time and resource to create, implement and manage the framework.