A common concept in outsourcing called “watermelon” service levels refers to service levels that a vendor is meeting but a customer is unhappy with (green on the outside, but red on the inside, like a watermelon). In other words, the vendor is complying with the contract, but that is not enough to satisfy the customer. This is not limited to customers. Often, vendors aren’t happy either.

This condition, in which the parties are in compliance with the contract but are unhappy with their deal, can permeate throughout the relationship and have grave consequences. These include destroying the morale of both parties’ employees, tanking a perfectly good change-management program, and making it difficult for the customer or the provider to realize the deal’s benefit.

Watermelon service levels occur for many reasons, but one common one is failing to understand and take into account the difference between deal financials and deal economics. Deal financials are about money, plain and simple—which is very important, but incomplete. Deal economics, on the other hand, are about motivating behavior and allocating scarce resources (in this case, time constrained personnel on both sides). So, although having good financials may be a powerful motivator, it is only part of the picture.

Consumers of services can easily forget that they are also selling themselves as good customers. As an example of how deal economics differ from financials, consider the following questions for evaluating a customer/supplier relationship:

  • Does governance encourage the right people to address the right issues and opportunities?
  • Are there governance requirements that may have the unintended consequence of discouraging good people from working on this deal?
  • If there are incentive bonuses and other such fees, do they motivate the right people?
  • Are there requirements in the contract that are unduly burdensome for the benefit gained?
  • Do the schedules to the agreement tie together as intended, or do they set up unintended resource constraint issues?
  • Do the people managing the relationship use the contract as a roadmap and guide, or do they use it as a weapon that discourages meaningful discussion and problem solving?

The topic of forming healthy and happy deals could be covered extensively, but we hope that this provides a helpful introduction. Whether forming a new deal or renegotiating with an incumbent, taking deal economics into account can make a significant difference in writing a contract that works for the relationship that parties are trying to forge.