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Minimise risks in service contracts


Tangible goods are easy to specify, evaluate quality and manage the contract.


Service contracts to the contrary are very tricky and most institutions opted to outsource the requirements to specialists.

Outsourcing then brings an element of delicate procurement that needs to be effectively managed.

Effective procurement requires clear specifications, which are easy to design for tangibles.

Tangibles specifications may be functional or performance related and it is easy to establish the compliance to requirements.

It is difficult to come up with quantitative measures for intangibles, for various reasons.

There are two classes of services. We have professional services and non-professional services.

Professional services relate to services that require a certain level of intellect to perform.

Non-professional services are general services that do not require complicated skills and are mostly offered by non-skilled and semi-skilled labourers.

The challenge emanates from the definition of needs, since we acknowledge that they are mainly non-core elements of the business, where the level of skills and experience within an organisation will be in the periphery.

Intangibility is an abstract phenomenon, you cannot touch, test, sense or feel the services that are procured by various institutions.

The only available measure is qualitative where one makes a judgment on reliability, responsiveness, empathy and assurance of the service.

Qualitative measures do not have scientific means of establishing the level of quality and the judgment is dependent on the perception of the reviewer.

This then poses a huge risk during the process of designing specifications, evaluation of proposals and contract management.

The inseparability of the service from the provider brings upon a human element that is difficult to control in service contracts.

There is an element of heterogeneity, implying that there is no uniform or standard.

All these elements influence the pricing models that are shaped by the character of perishability in that you cannot store a service.

Some services may have fluctuating demand characterised by some peak and low periods.

Lastly, pricing is also determined by the inseparability element where different people would have different levels of output.

Most organisations recognise that they do not have skills to determine the quality and quantum of specialist services.

They actually employ the specialists to assist in designing the specifications of what is needed. This is the opposite when it comes to non-professional services.

Organisations jump to conclude specifications of elements such as security and cleaning when they have limited knowledge on the subject.

The risk then lies with the one who designed the requirements. In non-professional services, the procuring entities are at risk of over- or under-specifying requirements and this has significant costs and quality implications to the business.

During the evaluation process, the level of quality is determined by the references submitted, since it is a perishable that cannot be stored.

As discussed earlier, service quality is not statistically measurable. There is no standard or uniform because of its heterogeneity.

There is a tricky element of inseparability since it is difficult to detach the service provided from the employee who provided it.

Contracts for professional services insist that the proposed skills and individuals must be maintained during the life of the contract to achieve the quality supported by the submitted referees.

This elements does not exist in non-professional services, thereby, compromising the quality at the end of the day.

Procurement and contract management of service contracts becomes very difficult. It is, therefore, critical to employ the right skills capable of managing service level agreements to manage the cost and quality of services.

Nyasha Chizu is a fellow of the Chartered Institute of Procurement and Supply writing in his personal capacity.

Feedback: nya.chizu@gmail.com Skype: nyasha.chizu

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