Outcome Based Procurement

Across all industries, organisations are under an increasing amount of pressure to achieve and deliver more value within a constrained budget. This has resulted in organisations turning towards an Outcome Based Procurement model for a solution.

What is Outcome Based Procurement

Outcome Based Procurement is significantly different from other more traditional procurement models. The contracts derived from this model focus more on the ‘What’ than on the traditional ‘How’, this means that organisations can focus on defining to a service provider what they want instead of trying to provide that themselves and thinking of the how to provide it.

This procurement model works by the organisation providing outcomes that they want met. This removes the need for the organisation itself to come up with a solution, instead the organisation transfers this responsibility to a service provider.

The service provider is then free to develop a solution as they see fit, evolving the solution to any technologies that might suffice Since service providers are equipped to host services it means that an organisation doesn’t have to send huge amounts of money implementing and maintaining a service.

Ever since the early 1960s interest for Outcome Based Procurement has increased to a point where organisations like Rolls Royce have adopted this model into their own support and maintenance contracting model. This was used for the maintenance for their commercial jet engines. Rolls Royce was then able to charge customers per flying hour instead of charging customers for repairs/maintenance and parts required to keep the planes flying.

How does it affect an organisation?

This growing approach to procurement can add some serious benefits to an organisation that decides to migrate to it. The first benefit of Outcome Based Procurement is the potential to save considerable amounts of money because of the way the model works, this means that the development of the solution is shifted to the service provider.

Since the service provider wants to save money whilst earning money too, they will want to come up with the most cost effective solution they can so they can earn the most amount of money possible from the contract. This means that the provided service is the most cost effective solution which meets the set objectives without going over or under the needs of the organisation which could happen with a more traditional approach.

Furthermore, this model allows for benefits that help both the organisation and the service provider. One of the key benefits of Outcome Based Procurement is the fact it supports innovation for service providers which is finally provided to organisations. This allows for faster development of better solutions. This links in with the other benefit that service providers can be extremely flexible with how they deliver a solution, adapting to new technologies without being limited by organisational specifications. Overall this provides an organisation with a better solution to their ‘Wants’ without having to worry about the ‘Hows’.

Challenges facing Outcome Based Procurement

There are however some challenges that face Outcome Based Procurement.

A different mindset is required of those defining the outcomes so that they can be interpreted correctly by the service provider.

This mind set means that instead of going into great detail e.g. “A Customer says that they want a desk built out of a certain material using certain joints and have enough room for a computer” the outcomes would be e.g. “A Customer says that they want a desk strong enough and with enough room for a computer”. This way it’s still meeting the goal of the customer but allows the service provider to be flexible with how they provide that solution (“The Desk”).

Another challenge that faces Outcome Based Procurement is that organisations must choose appropriate service providers for specific services. Many service providers resist having to take on a big risk service if they are not equipped to handle it. This could also link to the previous challenge where the wording of your outcomes is crucially important for when the service provider goes to see if they can meet them or not. Being able to maintain that mindset is critically important to this model.

Pricing can be challenging when it comes to this model because it doesn’t work off of lump sums or fixed fees like normal models. Instead the final fee is based off the achievements that are met by the service that is provided. Even though this drives innovation because the service provider will be driven to provide the best service to earn the most amount of money, it could also cause issues if the service provider doesn’t provide the required achievements.

The biggest challenge when using Outcome Based Procurement is mainly with how employees deal with procurement within their organisation. The key point is that employees who previously ran the services have to relinquish control of services to service providers. This step is critically important as service providers cannot develop the best cost effective solution if the services are still in control by someone within the organisation already. With further training and insight into how the model works, this can be overcome.

 

Summary of Outcome Based Procurement

Organisations are under a lot of pressure to reduce the costs annually and to increase the value of their own services, whilst still producing results and maintaining a competitive attitude using innovation. This has caused a wave of organisations to adopt Outcome Based Procurement to help mitigate the issue of over expenditure and allow them to lower costs whilst keeping services and boosting their value. As more organisations become familiar with the model, the advantages of the model will grow as they get more publicised. This means that this Procurement model is set to grow and expand into many organisations and it’s important that all parties understand the challenges that face it but more so the advantages.

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