Outsource Magazine

We often think of service level agreements and metrics as a key way to hold the service provider accountable for meeting its contractual obligations. But the purposes of metrics can go well beyond “getting what we paid for.” And ill-defined or poorly established metrics can prevent us from achieving our outsourcing goals.

Why measure performance systematically?

The failure to measure the right things in an outsourcing relationship can have significant negative consequences. Consider the financial services firm whose global operations team had outsourced its business continuity services to a leading technology company.  Not a year into the contract, team members had become frustrated by the pace of delivery enhancements; one even said the service was “truly appalling.” Articulating a very different view, the provider believed it had “rolled out the red carpet” for a highly valued customer by completing key activities faster than it had for other customers!

One of the key causes of the divergence in perspectives was the lack of systematic measurement of activities critical to the success of the engagement. The metrics being used did not align well with the customer’s business objectives; priorities such as the delivery of enhancements and set-up of machines in a shared workspace weren’t being measured, contributing to frustration.

What to avoid when measuring performance

Historically, parties to outsourcing contracts have relied on functional, objective, easily quantifiable metrics – typically those things the buyer used to measure for themselves, or those things the provider could easily point to as indicators that they were delivering what they had committed to delivering.  Providers understandably insist that if they are going to be held accountable for achieving certain levels of performance, the metrics used must be highly objective and quantifiable, so they are not at risk of being penalised over differences of opinion.

But not surprisingly, highly objective, easy-to-monitor service levels or performance indicators lead to the all-too-common situation in which the dashboard may be green, but the buyer is unhappy with the service provided (just ask the financial services company mentioned above). When that happens, things start to break down: the provider feels unfairly treated – they are doing what they promised, but their customer is still dissatisfied. 

A guide to measuring what matters

Measuring what matters requires a balance between measuring outcomes or outputs, and the enablers of those outcomes or outputs. Outcome or output measures need to come from the buyer’s purposes in outsourcing and from how the outsourced function contributes to the buyer’s strategy. 

Such metrics can serve to measure whether buyers are getting what they thought they were buying, and to allocate rewards (or burdens). Given the strong cost-savings driver in many outsourcing deals, it is usually helpful to divide outcome measures into two categories: financial (and quite tangible) metrics, and strategic (and potentially less tangible) metrics. Examples of financial measures might include net savings achieved, cost per transaction or per employee, and IT spend as a percentage of enterprise operating expense. Examples of strategic measures will vary more dramatically, but could include market share gains, customer satisfaction, or speed to market.

Enabling measures (as opposed to outcome measures) cover a broader set of issues, because they address a number of different purposes. Enabling measures can serve as early warning signals that some outcome measures will not be met. They can also help buyer and provider uncover the underlying causes of the problems they face, so they can address them systemically before problems recur or worsen.  Some of these measures will be fairly operational and tangible. Those that are probably the most familiar include defect rates, throughput, and transaction volume. 

But increasingly, buyers and providers recognise that the working relationship is also a key enabler of business outcomes, and that it is important to measure its health and quality, too.  Relationship health measures might include efficiency of decision making, degree of alignment, quality of communication, and level of trust.

Enabling measures should address not only those things that the service provider must do, but also what buyers need to do to enable effective delivery.  Regardless of how these measures are used, it’s critical to identify what buyers need to do to ensure success, and to make sure those things are happening.  As with the case of strategic measures, these metrics need to be carefully tailored to the deal and to what the service provider actually needs from the buyer, but they might include, for example, efficiency of knowledge transfer, willingness to collaborate, and number of customisation requests. 

Measurement of many of the items suggested here will require working hard to identify suitable proxies for necessary underlying factors.  It will require making use of some subjective or qualitative measures.  And it may require doing things differently from how they may be spelled out in the contract.  But the alternative is trying to achieve significant goals without being able to measure performance effectively. 

To take action, ask your teammates and your counterpart in the other organisation: how well are our metrics serving us? Are we measuring what matters?  If the answer is “no,” then it’s time to do something about it.

• Ask yourselves – what do we want from our metrics? What purposes are we trying to serve? 
• Whatever your answers, broaden your menu – consider both objective and subjective measures; look at what both the buyer and provider are doing; consider both operational and business outcomes, and what those outcomes depend on.
• Create a scorecard that is well suited to your purposes.
• Most importantly: use your metrics to help spark and enable good dialogue about what is working or not and why.

(This article was co-written by Joe Bubman, Senior Negotiation & Relationship Management Consultant at Vantage Partners.)