Penalty charges during incident management

Nothing focuses the mind quite like the possibility that the money you have earned through the diligent provision of valuable IT services could be ripped away from your clutches due to poor performance or non-compliance with previously agreed penalty clauses. Punitive penalties are common place within the IT outsourcing market place and can significantly affect the profitability, or indeed very survival, of the service provider.

Are incidents or performance levels that incur penalties clearly defined?
• Is the way non-performance is measured clearly understood?
• Are the penalties time boxed or can they accumulate indefinitely?
• Are service level periods defined? Are these based upon fixed periods or a rolling window of performance?
• Are penalties limited by an upper threshold?
• Are payment terms for penalties defined?
• Are there any arbitration processes described in case of disputes over penalties?

It is essential that those responsible for the delivery of the service are involved in the review of the contractual penalties being agreed. It is all too easy for a sales team to get carried away and sign up for a contract within which it is impossible to meet the defined performance requirements. Hard won experience of operational reality is needed to be able to review such clauses and to determine whether it is viable for the organisation to take on the business and make a profit.