Use of service credits and other financial incentives in Government contracts

The National Audit Office (NAO) has reported that government departments make limited use of service credits and other financial incentives to drive supplier performance. The NAO cites government's perception that claiming service credits might damage the customer's relationship with the supplier, or would not improve supplier performance.

Improvements in performance could be achieved if more risk sharing takes place and the following could be an approach that OCA would propose as a change to service performance and efficiency in meeting the departmental goals:

• Refinement of goals against efficiency: how can the contracted ICT service really improve the provision of the public services that it underpins? Is there scope for meeting more recent government goals such as climate change goals through more effective use of ICT? Audio and video conferencing as substitute for travel may be an opportunity. This would lead to an alteration of the baseline contract price at a (lower) SLA level of performance; and
• A bonus or gain share if the services meet higher service levels throughout an average (monthly or quarterly) measurement period; and
• A further potential "higher gain share" to reflect the true added value of performance which goes above and beyond the ICT service levels and more effectively provide the public service.

Advantages of this approach are that it encourages suppliers and departments to work together on how ICT can achieve the public service outcomes. This is often easier after contracts have been signed and working relationships have been built.

Focus on the government's outcomes means suppliers have increased incentives on performance which is much in the press at the present time and where efficiency gains can be encouraged that will meet the public service remit of departments more effectively. One disadvantage may be that the book value of the contract reduces. This may in fact be inevitable given pressure to reduce costs is intense at the present time; and the opportunity to earn back through service credits may be a way of recovering what otherwise may be a cost reduction.

If this is coupled with a term extension then total contract value may not change materially.

Overall the approach has the advantage that it creates an incentive for better performance and puts the onus on the supplier to enhance and improve performance. This is a way of meeting the increased political pressure to improve efficiency in the provision of goods and public services.

Download the full report here.