Alter value measurements as the contract progresses to ensure that you get the most out of your outsourcing contract, says John Creber
When managing outsourced relationships, it is vital to use all available means to demonstrate to the business that the outsourced provider is delivering value.
There are a number of techniques and mechanisms you can use to give senior management an accurate perception of the provider, including service dashboards, benefit analyses, benchmarks, in-house cost comparisons and savings registers.
Discussion among those tasked with managing outsourced infrastructure or business processes often revolves around their company's perception of the provider, which can be summarised (politely) as "the SLAs are all green but the business perception of the outsourced services is very poor".
The areas of outsourced delivery that really add extra value are often neglected. Commonly these include business projects, innovation, continuous improvement and - a rare commodity - imagination.
Contract managers produce service reporting in a variety of ways. These range from standard service lists with performance metrics, to sophisticated service dashboards with red-amber-green risk and value analysis.
Less common are measurements of the intangible aspects of an outsourcing relationship, and it is these less tangible elements that often give the best indication of the real value being delivered to the customer.
The crucial measures
These include subjective measures of key areas such as:
- How much is the provider aligned to the strategic goals of the business?
- How well does the provider understand the business and what efforts do they make to further this understanding?
- What innovation is being delivered to solve long-term business issues?
- What is the overall perception of the provider within key areas of the business?
- How well does the relationship work at adding value to core business operations?
Although these are subjective measures, as long as they are consistently defined and tested they will give a baseline from which improvements can be made. When published alongside pure service metrics, they give a better reflection of the total relationship.
Over the lifecycle of an outsourcing relationship these intangible measures change. At the outset the main objective is to transition the services or processes with as little disruption as possible. During this phase the key relationship measure is its ability to work as a team, and it could be argued that innovation is less of a priority. But later on businesses will expect to see improvements delivered, normally to reduce ongoing costs.
At this point innovation is key. It is important that whatever relationship measures are implemented, they can be modified as the business environment changes.
A good return?
Value for money has become more important over the the past three to four years. Service delivery personnel may concentrate on demonstrating that the contracted services are delivered to committed service levels, and relationship or contract management may reflect less specific measures, but there are other mechanisms for demonstrating the degree to which the arrangement is working.
In-house cost comparisons provide comfort that specific services could not be delivered more cheaply and to the same quality in-house, but should be seen as part of a phased value-analysis programme.
When applied in conjunction with a formal benchmarking process, these two measures can demonstrate to the business how well their provider competes against market rates, and to compare service levels.
The third phase is often a formal re-negotiation of service levels and charges, sometimes accompanied by a revision of the contract term to maximise the commercial pressure that can be brought to bear on the provider.
Combined with standard service reporting enhanced by measuring the relationship itself, the formal process of in-house costing and benchmarking followed by contract re-negotiation can give a comprehensive picture of the most important consideration - how the provider is delivering value to your business.
John Creber is contracts manager (managed services) at tobacco company Gallaher
This was first published in December 2004