Gartner Research

Outsourcing Incentive and Penalty Best Practices

Published: 22 December 2003

ID: G00119134

Analyst(s): Richard T. Matlus, Kevin S. Parikh, William Maurer


The popularity of using external service providers has led to a wide variety of outsourcing deal types and numerous types of service-level agreements. These agreements are enforced through incentives and penalties. This report describes the best ways to use such contractual elements.

Table Of Contents
  • Management Summary
  • Introduction
  • The Service-Level Agreement
  • What Are Incentives and Penalties?
    • Definitions
    • Cultural Aspects
  • How Should Incentives and Penalties Work?
    • Incentive Key Factors
    • Penalty Key Factors
    • Other Penalty Considerations
    • Are Incentives and Penalties Effective?
  • How Do Enterprises Build a Business Case?
  • Determining What Contract Clauses Enterprises Should Use and How to Use Them
    • Penalties as a Contingent Liability
    • Contract Clauses
    • Definitions
  • Risk Scenarios
  • Measuring ESP Performance
  • Conclusion
  • Acronym Key

©2021 Gartner, Inc. and/or its affiliates. All rights reserved. Gartner is a registered trademark of Gartner, Inc. and its affiliates. This publication may not be reproduced or distributed in any form without Gartner’s prior written permission. It consists of the opinions of Gartner’s research organization, which should not be construed as statements of fact. While the information contained in this publication has been obtained from sources believed to be reliable, Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Although Gartner research may address legal and financial issues, Gartner does not provide legal or investment advice and its research should not be construed or used as such. Your access and use of this publication are governed by Gartner’s Usage Policy. Gartner prides itself on its reputation for independence and objectivity. Its research is produced independently by its research organization without input or influence from any third party. For further information, see Guiding Principles on Independence and Objectivity.

Already have a Gartner Account?

Purchase this Document

To purchase this document, you will need to register or sign in above

Become a client

Learn how to access this content as a Gartner client.