Penalties and rewards in Telco Managed Services contracts

A lot of our time is spent helping Service Providers and Operators create a framework for managing what is most important to both businesses.

 

From a commercial point of view this is crucial because the Service Provider’s performance against agreed KPIs will determine service-level penalties and rewards paid by the Operator. We have seen interesting differences in Managed Services contracts of varying sizes around the world in terms of the Operator’s approach to penalties and rewards.

 

Here’s a typical example:

 

• KPI success >= 99.97% – reward of 5%
• KPI success >=99.93% but <99.97% - no reward, no penalty
• KPI success <99.93% but >=99.88% – penalty of 5%
• KPI success <99.88% – penalty of 10%

 

In this case hitting 99.97% and above gives a 5% reward to the Service Provider, whereas failing to hit 99.88% gives a penalty of 10%.

  

We have seen some contracts where there is no provision for reward but only small penalties; others where the balance is relatively equal; and others still that have enormous potential upsides and significant penalties for underperformance.

 

It is difficult to draw any universal conclusions or patterns in these approaches because it depends on so many different factors, including the maturity of the outsourcing relationship, the difference in size and importance of the Service Provider and the Operator, the level of development of the country’s infrastructure, and the experience of the individuals involved.

 

However, we are starting to see the discussion on rewards and penalties being framed as part of a wider debate about moving from technical network KPIs to end-to-end metrics that genuinely reflect the Operator’s business objectives, because it is far more satisfactory for both parties to link the Service Provider’s rewards to KPIs that represent tangible business benefits that the Operator can derive from the Managed Service.

 

So, when setting up this sort of discussion, make sure you incentivise and penalise behaviour that you want to control, and be fair, in order to avoid running into problems with the relationship later in the contract period.