Shared Risk and Reward Is Taking New Shapes

In the past, risk-reward was tightly circumscribed. Now, in what's being called value billing, outside metrics are coming into play as yardsticks.

Shared risk and reward is not a new concept in outsourcing and business consulting, but it is a contract model thats getting pulled and stretched into new and interesting shapes these days.

IBMs Business Consulting Services, made up mainly of the former PricewaterhouseCoopers Consulting, is writing risk and reward clauses into more of its contracts than ever before, according to Mike Blum, who heads business transformation outsourcing for banks at BCS, in New York.

"Its a major, major shift in the consulting industry," said Blum.

In the past, risk-reward was tightly circumscribed. Most of it was focused on internal goals such as cutting costs or reducing head count, said Blum, in a recent interview. Now, in whats being called value billing, or the more blatant "contingency payment," outside metrics such as the cost of sales, customer satisfaction, profitability, speed of product development and distribution are coming into play as yardsticks.

How does it work? Say a company outsources to transform a process, with the goal of increasing its customer base by 20 percent. The outsourcer goes to work, but how do you know if the work is yielding results? Both parties have to agree to monitor the project in an unbiased way, and, in some cases, a third party may need to be brought in, said Blum.

That third party could be a consultant, a lawyer or an arbitrator. Before you stop reading, theres another option: You could form a steering committee comprising managers from the customer and the vendor. The committee will need to hammer out the criteria for judging progress, the method of monitoring and what the reward payments will be.

"Hopefully, when you do this, the two parties are mature," said Blum. "This is a business discussion. The customer should want to do something thats fair. If its not, they should know youll take a lot of time with a lot of your people but have no incentive to do well. You, the vendor, have to open the kimono and say what your costs are and what profit you want to achieve."

Blum hesitated to name customers specifically, but he did say that in the case of a major Spanish bank, IBM BCS transformed the banks back office and was paid on the results in the marketplace. The bank was taking too long to create new financial services products and wanted to shorten the time from 18 months to two months. IBM BCS succeeded in reaching the two-month goal and received a reward based on that achievement.

Blum said more such deals are in negotiation. "Any way the customer measures his own business in the market could be a way for us to measure our results," he said.

Out and about

the canadian maritime province of Nova Scotia is campaigning to be known for more than its fishing fleet. Provincial officials are promoting it as a choice location for nearshoring IT services. With 15,000 IT employees in a population of just under 1 million, the province is small potatoes compared with India or Eastern Europe, but it is churning out 2,200 tech engineers each year, and theyve got to work someplace.

Having had success with call centers, the province seeks to pull in mainstream software development work by pitching companies on the attractions of nearshore work.

Prime selling point: Canada has the lowest costs of any major developed country, and, asserted Stephen Lund, president and CEO of Nova Scotia Business, in Halifax, that province has the highest-educated work force in Canada. Already on the ground in the Halifax area are Keane and Canadian systems integrators CGI and Aliants xwave unit.

Lund cited a study by KPMG that found software development can be done in Nova Scotia for 20 percent less than in Toronto and for 35 percent less than in Boston. He noted other selling points, as well: common language, similar culture, short (by air) travel distance, well-developed infrastructure and similar intellectual property laws. Then, theres that work force. "During the dot-com boom, many Nova Scotians moved to California," said Lund. "But now many are coming back."

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