Service providers sometimes simply book through the penalty and the quality of execution remains at the undesirably modest level.

Clients then ask themselves: How can that be?

The outsourcing specialist often recognizes how they can produce with the highest profit margin already during the offer. Often, it works by reducing the "expensive costs" for team and project management, as well as training and quality assurance. The possible additional turnover in the form of the target remuneration or even a bonus may absorb the expense for the costs often referred to as "overhead".

Aim for 20% (plus/minus 5%)

Your service provider works on your behalf and your company is liable to the outside. Therefore, use contractual penalties in your bonus/penalty system for particularly critical aspects. Think of data breaches, omissions or insults. Introduce penalty payments for these things and require acting in accordance with the law.

For instance: If, for example, the agent of the service provider does not register the opt-out, does not immediately forward an emergency or scolds a conversation partner, you demand a hefty fine. Compliance is not rewarded, but non-compliance costs money.

Introduce penalty payments for particularly critical aspects.

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All too often, the client and the contractor agree on configurations as in this first example:

• An amount of EUR x is incurred per transaction (event).
• In addition, the client pays a fixed monthly fee for project management.
• If certain targets are exceeded or not reached, there is a bonus or penalty payment. However, only on the operations.

Or:

• The service provider receives an amount of EUR xy per hour.
• If the outsourcer reaches the set goals, they will receive a bonus of EUR z per success. If they can't do it, there will be a penalty of EUR z.

In practice, these mixes lead to undesirable incentives:

a) If the processes are not worthwhile, the service provider simply reduces the effort or waives the non-profit turnover with processes. The project management fee probably provides a more attractive return.

→ The work remains unfinished.

b) The service provider will make every effort to achieve its internal target turnover per hour with as little effort as possible. In the end, it will be relatively indifferent to him whether there is a bonus or a penalty. In the mixed calculation it does not matter.

→ Again, the work is not carried out as the client wishes.

c) The bonus payments may be so attractive that the service provider reduces the basic service to the customers as much as possible. The more chances there are for bonus business, the better.

→ Customer satisfaction spirals. Operations remain unfinished.

Never mix remuneration types. This will allow you to leverage bonus/penalty systems perfectly.

"Performance should be worthwhile, then people will be more involved."

True to this motto, customers sometimes attempt to break bonus/penalty systems down to the individual employees of their service providers.

Be careful. In this way, a client directly intervenes in the remuneration of its service provider and, among other things, these implications may arise:

• Where and when exactly is the boundary to hiring out employees reached? This results in enquiries from authorities, payments on arrears, employment lawsuits, etc.
• How do other clients remunerate? There may be internal competition within the service provider for work on your project.
• What to do in case of bad performance? Employee salaries are generally not subject to reductions.
• What do you do when bonus payments mutate into the expected salary component in the third year of the collaboration? All of a sudden, your service provider's personnel issues become your topic.

Avoid interfering with your service provider's internal pay structures. That is its territory.