In my Vested books and speaking engagements I frequently cite the Wright brothers’ first contract as a great and early example of a win-win, outcome-based incentive plan.
The challenge with any outcome-based plan is to understand the business at hand, align the parties’ interests and then clearly define and measure the results.
The Wright brothers’ contract with the United States Army for the development of a motor-powered airplane included these terms:
Target price: $25,000
Minimum speed requirement: 36 mph
Target speed: 40 mph
Incentive: For every mph over the 40 mph target, the Army would pay an additional $2,500; for every mph under the target, the Army would deduct $2,500, down to the 36 mph minimum, below which point the contract was void.
Remember that this was in 1909 – so that money was, well, real money!
The result was history on a couple of levels, one of course obvious—the first powered flight—and the other more subtle: a groundbreaking incentive plan. Orville and Wilbur delivered a final speed of 42 mph, so they earned an additional $5,000. The contract target statement was the measure of success, or metric, for that objective.
In our work with companies adopting the Vested approach, we recommend they create a standard (and tolerances if acceptable) to clearly define and measure the Desired Outcome. In the Wright brothers example, the standard was 40 mph and the tolerance was a minimum of 36mph with no maximums.
Success against the Desired Outcomes is defined by the performance statement standards, and the service provider is measured against those standards.
While this is logical, most practitioners find it easier said than done. A common mistake companies make is creating overly detailed service provider SLAs rather than establishing the type of useful metrics that will appropriately manage the business and drive it toward success against the Desired Outcomes.
I mentioned the idea of useful metrics – it’s important to have a clear idea of what needs to be measured and not to over-measure, or engage in “measurement minutiae.” On the surface it might seem like a good idea to measure everything—but the reality is that it is not really possible or desirable. Often what happens is that the most useful metrics will get short shrift or lost in the general blur of numbers.
The best business and outsourcing agreements are shifting away from measurement minutiae and slimming down by measuring the critical few measures that drive optimal behaviors. The overarching Vested agreement and governance framework should focus on those critical few metrics that are linked to the Desired Outcomes.
In the Wright brothers example, focusing on the critical few metrics—and tying incentives to them—created a tremendous amount of focus for the service provider.
They clearly knew what success would mean – and 103 years later, so should you.
Image: Wright Brothers Memorial Park by Jared Cherup via Flickr