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This is a guest blog by Venessa Wong, who joined BusinessWeek’s Innovation+Design team in June.
I’ve recently had several conversations about outcome-based outsourcing for product development with Gordon Brooks, president and CEO of Symphony Services, an outsourcer headquartered in Palo Alto, Calif. with 4,000 employees in the U.S., India, and China. Can this model become widespread in product development?
Like the majority of info-tech companies, Symphony Services emphasizes innovation, but its outcome-based business model really forces it to deliver the goods. In the past 18 months, clients have accepted 2,000 ideas—ranging from improving processes to creating IP—and implemented 500; 33 ideas have been patented.
Risky, performance-based contracts have been used in IT projects and hosted solutions, but Brooks says he is one of the first to do it in the software engineering space. He hopes to “change how people think about buying.”
So far the model seems to working for Symphony Services—revenues grew by 39% in 2008 to just under $200 million, with about one-fifth of contracts based on outcome. But experts at Forrester Research and TPI do not yet see long-term, outcome-based contracts in the mainstream. Most companies are not resourced to effectively manage the risk. Still, there is demand for partnerships to become strategic as clients look for more value from outsourcers.
Typically, clients pay Symphony a percentage of the contract upfront—the amount is negotiated based on their needs and circumstances—but withhold a percentage based on the outcome. This usually means delivering the promised product, in addition to other results such as improved efficiency, profits, and margins. As an incentive for the vendor to deliver the product on time, on target, with the promised effect, the partners might share the financial benefits, such as savings or profits, after the project is completed.
For example, in 2004, Symphony Services took on a multimillion-dollar road map acceleration project for Hyperion, a performance management software provider acquired by Oracle in 2007. If Symphony did not achieve a suitable outcome, Hyperion would withhold 5% of the contract value. If it succeeded—and it did—it could earn up to 110% of the contract, based on a sliding scale of 10 metrics.
To facilitate idea generation, Symphony’s innovation system streamlines the processing of employees’ proposals. Employees submit ideas, both small and large, into an electronic portal that is handled by Symphony’s team of “innovation mentors.” The portal tracks which ideas are accepted and implemented, to distinguish the performers.
Managing outcome-based deals is far from simple and requires a labyrinthine system of metrics. “One of the challenges in software development is there is no real set of measures that are simple and make sense,” says Dave West, a senior analyst at Cambridge (Mass.)-based Forrester Research.
The partners first need to clearly define the scope of the engagement—a quandary in complex projects as many points need to be tracked and the scope can change. “Both parties should have well defined change control procedures to manage these changes,” says Steven Hall, a partner at sourcing advisory firm TPI in Houston
There are third-party companies that work in the measurement aspect of outsourcing or “function points,” setting the scope and proofing that the contract is going well, for example. Hall says productivity, timeliness of delivery, and software quality remain the primary metrics. Symphony handles these metrics in-house and has developed a culture to support it. A 16-person team led by a chief quality officer tracks performance and a risk management group monitors 156 risk areas.
Dedication to metrics like this helps Symphony manage projects–and stay profitable. “We understand risk and opportunity and manage that really tightly,” says Brooks.
Whether this model gains widespread adoption has yet to be seen, but West expects greater emphasis on honest, transparent relationships between client and vendor in the future. “Vendors and clients both want to improve,” he says. Outcome-based contracts offer one way to align their goals.
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