In long-term services contracts, often customers expect continuous improvement from the service provider. The challenge is how to contractually impose that on the service provider. One approach is to include a continuous improvement schedule in the contract.
The continuous improvement schedule sets out any specific obligations related to improving the value of the services over the term of the contract. It sets out:
- specific service streams that are subject to continuous improvement;
- activities to be undertaken as part of the continuous improvement process;
- processes and procedures for proposing and agreeing changes resulting from the continuous improvement regime; and
- specific cost provisions
In general terms, the key principles and objectives underlying the continuous improvement process should be to improve quality and efficiency, reduce costs and encourage innovation.
It is important that the process reflects the need to achieve value for money over the full term of the services contract. The need for the type of specific obligations set out in the continuous improvement schedule should be considered on a project-by-project basis.
It should be noted that service levels could provide for a gradually increasing level of performance or for additional service levels to be added through the life of the project. However, service levels tend to take a more structured approach where a continuous improvement provision will usually be more flexible and ad hoc in its operation.
However, sophisticated continuous improvement regimes in more complex projects may use a combination of devices to provide a stringent and structured approach to the improvements and obligations to achieved them
Devices often used for continuous improvement are benchmarking exercises, targets for cost reductions and key dates for service revision/review based on predictable changes to the customer’s business processes or requirements.
When drafting detailed continuous improvement provisions, the customer will need to consider what types of improvement the customer intends to achieve and how they can be achieved. It will also need to consider effects on other aspects of the contract and how it relates to other contractual mechanisms.
While it is difficult to settle on position for the points set out at the start of this article, it is important that the customer has a clear idea of what it intends to achieve through the continuous improvement regime. The detailed provisions will need to be developed in collaboration with the service provider and each service provider will have a different approach.
The guiding principle of a continuous improvement process should be to deliver benefit to the customer, primarily as value for money. A key benefit to be achieved is reducing costs and it is important that this is passed to the customer.
In certain circumstances it may be appropriate, and even desirable, to allow the service provider to share in the costs benefits of a continuous improvement change. As a rule of thumb it may be appropriate to share a saving with the service provider if they suggested the improvement or implementing means the provider incurs costs.
Where a change is suggested and/or driven by the service provider, a benefit-share is appropriate and the value to the customer of that sharing is clear. The service provider needs to be encouraged to exceed its obligations whenever possible and the only way of ensuring this is to deliver an incentive.
It is far more effective to incentivise good performance than to deter poor performance i.e. setting realistic obligations and encouraging over-performance rather than setting more robust obligations and deterring under-performance. It is important to remember that it is not in the service provider's interests to propose a change that could undermine its margin. It might be prepared to do so where its margin is bolstered through a benefit-sharing mechanism.
Either party may identify improvements as part of the service review process, or suggest them ad hoc. Each party should have the right to propose improvements, although the customer will usually retain the right to decide whether a change should be implemented or not. Where a benefit-sharing mechanism is applicable, service providers will often refer the final decision as to whether a change should be made to a joint forum.
The customer should be wary of relinquishing its discretion in relation to implementation of changes and any move towards a "joint decision" would only be appropriate where it is proven that the change is a genuine improvement rather than a cost cutting exercise that could result in a diminution in quality.
It is with mandatory improvements (for example, hardware refresh obligations) that the customer has the right to compel the service provider to implement the requisite change and the provisions in the contract relating to these types of improvement need to be clear and enforceable.
Changes as a result of improvements identified after the contract has been signed should be implemented through the change control procedure. This provides transparency both in terms of time, costs and impact on the contract and services associated with implementing the improvement.