Does 'Risk & Reward' Really Work in IT Services and Outsourcing Relationships?


Sourcing Bulletin - July 26, 2006

Companies often talk about implementing risk & reward mechanisms in their IT services or outsourcing

relationships, but what does “risk & reward” really mean in practice and is there really such a thing as a

genuine, balanced “risk & reward” mechanism? Maybe there’s no single magic bullet, but what structures can

be combined in a fair and balanced way?

Customers tend to focus on the risk element – in terms of shifting risk on to a service provider; whilst service

providers are obviously more interested in the reward element and less interested in accepting risks over and

above their standard model. This article looks at a number of risk & reward mechanisms and considers the

pros and cons of those various mechanisms.

Risk & reward can mean different things to many people. Broadly speaking, the mechanisms fall into three


at the “conventional” level, the risks include a “penalty” payment for underperforming and the rewards

include a cash bonus for over performing;

at the “collaborative” level, the incentive involves a share of the improvement achieved or a percentage

of the revenue achieved by the business; and

at the “transformational” level, the incentive could be a share of a new business venture or the

establishment of a new product line.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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