Market & Sourcing

Optimising penalties
for IT outsourcing

by Rene Funke

A matrix for an outsourcing contract sorts the consequences of underperformance by a provider into several escalation levels.

In our outsourcing agreement consulting practice, we frequently find cases in which the client - often under time pressure - has set the wrong priorities, failed to consider the different criticality of services, or did not align SLAs with business requirements. In addition, it is important to formulate the penalties or service credits with a sense of proportion: A penalty that does not hurt the provider is ineffective, while excessive penalties overshoot the mark.

Our sample matrix groups the impacts of poor provider performance into multiple escalation stages. Deviation levels are assigned for each service level. For example, server availability (bronze): If the performance misses the SLA by 0.1%, stage S1 applies; at 0.5%, stage S2 applies. The monthly charge for the service is reduced by the value determined in this way.

But it must also be clear: service providers calculate the potential penalties and the risk into the price. If they then perform in accordance with the contract, they have additionally earned the budget "reserved" for the penalties. The customer must therefore ask himself at each service level whether and when it makes sense to trigger a penalty payment. In a few cases, bonus payments are also included in the contract - if the customer can actually use the additional service and is happy to pay for it.

Rene Funke

Rene Funke

René Funke has held various manage­ment positions in the IT industry for over 20 years - with an excursion into the wonderful world of construction machinery. He is head of marketing and sales at Metrics.