Measuring the Value of Outsourcing in Real Numbers

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    Gartner analyst Bill Maurer is an expert at measuring IT results. At the Gartner Symposium ITxpo this week in San Francisco, he provided some meaty insights into how to measure the value of outsourcing.

    The basic philosophy consists of three points:

    • Communicate the results across the organization.
    • Use results to measure the BVIT or business value of IT.
    • Put the results into a continuous improvement process.

    It starts with service levels. A service level, as Mr. Maurer defines it, is a “process-based performance goal that relates to meeting the business’ minimum requirements.” I put “minimum” in bold, since he emphasized it.

    You can tell whether you’re succeeding or failing at the given process by comparing the specified service level to the results of your measurements. Those results, presumably, will get the service provider to behave the way you want it to.

    But a lot of organizations make mistakes in the kinds of things they’re measuring. “Today, we’re measuring a lot of technical things and we should be measuring some big things,” said Mr. Maurer. In fact, he says, the service levels shouldn’t come from IT or from the service provider. They should come from the business units using IT processes — user satisfaction, market share, and so on.

    Aside from selecting the appropriate service levels, the incentives and punishments need careful consideration. Setting penalties at the one to three percent range isn’t sufficient. Setting it at the 25%, 40% or 50% range drives a different behavior. The vendor will, says Mr. Maurer, ask itself, “How can I cut costs?” The best target, he says, is 10-20% of the vendor’s fees. Spreading them over fewer measures gives each a greater intensity and focus that you’ll lose if you have a hundred service levels as part of the contract.

    Regarding incentives, he suggested this: If you have a reason to induce a service provider with bonuses, “you must be able to measure the business value to be greater than or equal to the incentive.”

    He says the balanced scorecard is still a “sound approach,” but it needs to encompass the user perspective (satisfaction levels and market share, for instance), financial perspective (ROI, cash flow, and expense/revenue), internal business perspective (time to market and cycle time), and innovation and learning (revenue sharing, reskilling, and so on). The idea is to set up a strong cause-and-effect relationship in the process. User satisfaction is driven by speed of fulfillment or responsiveness to inquiries, for example.

    Bridging the IT value gap means moving your organization from IT measures (lines of code or function points, agent calls, desktop moves) to business measures (personnel performance or quality, process performance or effectiveness, costs per unit or efficiency. But it doesn’t stop there. In high-performance companies, the technical and performance measures are linked to the company’s critical success factors (increased market share, time to market, increased revenue/margin) and properly communicated.

    In communication, you need to understand your “audiences” first and foremost. Then you’ll know what kinds of views they want into the service levels. Dashboards and portals are an appropriate mechanism for communication, because they allow you to provide different gateways into performance metrics that focus on what’s important to given stakeholders. It also allows a particular audience to drill down into details at the level they like. (Paper works too, but obviously provides no interaction with the results.)

    He also provided some advice about situations in which you’re dealing with multiple service providers:

    Sourcing agreements in a multisourced environment should contain the requirement to adopt a common service delivery language, for example that of the Information Technology Infrastructure Library (ITIL). Agreements should also contain standards and measurable obligations for providers to cooperate in the interests of the enterprise. These agreements comprise what Gartner calls operating level agreements (OLAs).

    You can start by setting up a sourcing management office that is in charge of overseeing the efforts and results. They define the hand-offs from one provider to another and map out those OLAs so that providers don’t get access to another provider’s proprietary information but do gain access to the “inputs, outputs and dependencies.” You can help justify the expense of setting up an oversight office with this bit of data. Gartner estimates that each area of handoff can increase costs of the business process by 3% if not done correctly.

    Mr. Maurer shared a case study about an insurance firm that had 172 service levels with a technology focus. They whittled that down to 20 metrics tied to process and then realigned penalties and incentives to those new measurements. The focus was shifted to business impact and customer satisfaction — and, in fact, those are the only measures that the service provider is now compensated by.

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