ITSM and Performance Based Contracting

By Rick Leopoldi

Performance-Based Contracting (PBC) has been identified as an effective way to acquire quality goods and services within available budgetary resources and to maximize performance, innovation, and competition. As services become an increasingly significant component of what organizations buy, they must ensure to acquire them effectively and efficiently.

Service requirements should be articulated using: results required rather than methods of performance of the work; measurable performance standards (i.e., in terms of quality, timeliness, quantity, etc.); quality assurance plans; and specific procedures for reductions of fee or price when services are not performed or do not meet contract requirements. In addition to these basic requirements, contracts also include positive incentives for performance exceeding the minimum standard, wherever appropriate.

A Service Contract is viewed as one that directly engages the time and effort of a contractor whose primary purpose is to perform an identifiable task rather than to furnish an end item of supply. PBC methods are intended to ensure that required performance quality levels are achieved and that total payment is related to the degree that services performed meet contract standards.

The Components of Performance Based Contracting
The following are contract characteristics of based on performance:

• Soliciting bids based on the results to be achieved rather than the activities to be performed
• Defining clear performance expectations and measures
• Clearly documented due dates and milestones
• Incentives for performance
• Flexibility in exchange for results accountability
• A way to monitor and measure performance against the contract

There are several Performance Based Contract types, such as Fixed Price, Cost Reimbursement, and Time and Material/Labor.

Critical Success Areas for PBC
To ensure success of a Performance Based Contract, the following disciplines must be addressed, engaged, and fully employed during the development and management of the contract:

• Project Management
• Risk Management
• Asset Management
• IT Service Management (best practices based on ITIL^®)