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In a performance-based contract, the supplier provides the Postal Service with specific benefits, such as cost reductions or revenue generation, and in return, the supplier shares in the value created. A portion of the price of the contract is linked to a series of KPIs that the supplier is responsible for meeting and to business benefits achieved by the Postal Service through the fulfillment of the contract. The Postal Service shares risks with suppliers in a performance-based contract and allows them to define the methods of performance, thus differing from traditional contracts.
Performance-based contracting agreements create an incentive for the supplier to control its costs. In some contract types, the Postal Service and supplier have conflicting motivations (e.g., the Postal Service wants to minimize costs, but the supplier is motivated to increase its revenue); however, performance-based contracts align the interests of both parties. Performance-based contracts tend to encourage closer relationships with suppliers. The purchase/SCM team specifies the outcome or result it desires and leaves it up to the supplier to decide how to best achieve the desired outcome. This can include what to do, when to do it, how to do it, where to do it, or whether to subcontract out (if restrictions do not exist).
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