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Learn how to better measure long-term value in outsourcing

 

 

Decisions sign in the sky

 

Our Top Ten series returns with some handy hints on how to measure – and drive – long-term value in outsourcing…

In the words of Albert Einstein: “Not everything that can be counted counts, and not everything that counts can be counted.”

Einstein may have been thinking about the universe, not business performance, but this statement can ring surprisingly true when it comes to outsourcing.

To measure the effectiveness of an outsourcing arrangement, we must understand what is being sought from the deal. Capturing and measuring the benefits – tangible and intangible – can seem daunting. But only by establishing a credible baseline can the arrangement consequently be judged.

Organizations are broadening the remit of outsourcing; from simple transactional-based arrangements (such as cloud-IT-enabled ‘pay-per-use’ models) through to innovative outcome-based procurement and joint partnering arrangements. Cost reduction remains the single biggest driver, but buyers are increasingly looking beyond “same for less” to engage outsourcing partners for competitive edge: “different for less” is back on the agenda.

As the voice of the customer is brought further into traditional businesses, other drivers can be equally compelling, such as improving service quality, and raising innovation or organizational agility.

These drivers of long-term competitive “edge” are forcing a rethink of how to measure and predict outsourcing performance. The following tips relate to measuring and driving long term value through outsourcing, beyond simplistic “cost and SLA” measurement.

 

1. Start with the basics

A sound business case is the crucial reference point to assess whether outsourcing is a success. It needs to be stated, in writing, and include all the tangible and intangible reasons for outsourcing, as well as the benefits they bring to the business (ideally quantified). It’s crucial these are regularly reviewed and updated to stay as relevant as possible at all times.

2. The level of resource the buy-side puts into service management

Services can be outsourced, but not performance accountability. As a buyer, you are required to invest time in actively managing this and participating in relationships with suppliers, working together to drive delivery and improvement. The quantity and quality of “service management” resource in the buyer organization matters – and should be tracked. This should include budget to access specialist advice, to audit arrangements objectively, and to seek legal advice before escalations occur. Quantity can be measured easily via headcount and budget. Qualitative metrics – such as HR ratings, and senior leader or internal customer confidence in the service – are increasingly important to deal with complex contracts and change in the usually fast-paced business environment of most organizations.

3. Use meaningful SLAs

The right answer won’t come “off the shelf”, but many standardized SLAs to baseline and measure cost reduction and service improvement targets will have value; automate these so they are cheap for service providers to supply – but recognize their limitations. Too many of these can become a burdensome overhead for all. They must focus on real contract outputs, rather than micro-managing inputs. SLAs are not a cheap alternative to thinking properly about the real drivers of performance. They should be an insurance policy to ensure a minimum level of service, rather than a primary mechanism that drives truly effective outsourcing. In complex outsourcing arrangements, service level agreement performance is often a very long way down the list when assessing satisfaction.

4. Measure the alignment of corporate cultures and expectations

This is of limited benefit to “buying widgets” but essential where risk-sharing and partnering occur. How well aligned are the organization’s strategic drivers and goals? Are the parties to the deal aligned? If not, this should prompt concern and attempts to address the difference through governance and design of the right long-term incentives.

5. Strength of relationships

These matter, but even key people move on (especially once a contract is signed). Assess the strength of corporate relationships. Quick and insightful measures include: the amount of time and money both parties invest in informal time together; and, the extent and ease of co-location of people – whether temporarily on projects or more permanently. Cross secondment of talent indicates strong relationships.

 

6. Governance strength, role clarity and incentives

Just as there are different corporate strategies, there are different types of governance. Governance design and review should consider what not to govern, what to govern through ‘process and compliance’ and what to govern through workforce empowerment. The easy measures here are the regularity of review of governance arrangements, and who is commissioning those reviews. Senior leadership tends to advocate empowerment; internal audit tend to advocate “process and compliance”; capable service management “governing less”; and weak service management (or in a failing relationship) sees “govern more”.

7. Don’t resort to contractual mechanisms

If you resort to the contract, and contract-mandated escalations, then you’ve already failed. Whilst not a universal truth, and not popular with lawyers, this is a good guide. Service changes and relationship hiccoughs occur, and it is easy and valuable to understand whether the key parties have, historically, sorted things between themselves, or had to resort to external mechanisms. And when using external support, whether this is “soft” – like facilitation or objective third-party review – or “hard” with legal requirements and binding judgements.

8. The joint ability to effectively manage change

Our recent Barometer on Change research proved that most organizations do not manage change well. This is especially true in an outsourced environment where different organizations are involved. Firstly, how well did the service transition to the new arrangement? Was it well planned and executed, and on time? Employee engagement data from all parties shows whether staff members are motivated, or disengaged and change-resistant.

9. Innovation

Without it, services will stale and become unfit for purpose, and the cost will cease to be competitive. The right level of innovation and risk appetite is important. An easy measure is assessing the workforce incentives to put forward ideas, and reviewing what happens to them. A good culture of innovation has many ideas from all parts of the workforce, across contract boundaries. Agile governance is required to “bet small and often” and winnow down quickly, driving funding in stages to ideas that continually make the grade. This innovation funnel can be defined and measured.

10. Would the parties to the contract recommend each other’s business? This is a deceptively simple test of the effectiveness of the contract. And it’s a better test than “would they choose to work together again”, because corporate relationships should have a finite life, unless they become a merger!

 

Article published on www.outsourcemagazine.co.uk

Written by Alasdair Ramage

Source : www.outsourcemagazine.co.uk

 

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