Strategic Outsourcing Delivering on Great Expectations. Part 3 of 4

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1 Strategic Outsourcing Delivering on Great Expectations Part 3 of 4

2 Strategic IT Outsourcing - Delivering on Great Expectations A well-crafted service level agreement (SLA) correctly sets expectations for both sides of the relationship and provides targets for accurately measuring performance to those objectives. This article (part 3 of 4) advises readers to be mindful of the elements of a well-constructed SLA. In previous discussions, we ve established that IT organizations turn to outsourcing for any number of reasons, and to fulfill a variety of needs. Whether the goal is to transform the business, to obtain expertise, to reduce costs, or to offload application maintenance, outsourcing is here to stay. Typically customers outsource their systems over many years, and the multi-year contract is governed by setting the terms and conditions between the client and outsourcer for the duration of their relationship. To measure whether that relationship is successful, and working well, service level agreements (SLAs) are established. Several critical factors must be considered to develop a good outsourcing agreement. As our earlier article shows, the emphasis from the start should not be on who gets the best deal (i.e. thereby promoting a win-lose relationship), but rather on negotiating a win-win deal for both parties. In addition, both the organization and the outsourcing vendor need to agree on the contractual terms and conditions for the duration of the contract, which also includes potential changes to the contract. The SLA should also take into consideration the different phases that an outsourcing arrangement must ultimately go through (i.e. planning, transition, steady-state), and build in the necessary terms to recognize and cover specific customer situations for each phase. Finally, a joint project team and a steering committee must be in place to guide and steer any potential differences during the implementation stage towards common objectives and expectations. Even before an organization reaches the contract stage, the manner in which inscope employees (i.e. those who are directly affected by the outsourcing agreement) are handled during the outsourcing process managers should ensure the involvement of in-house human resource (HR), contract and legal staff throughout the process. The organization should also consider using outside consultants with expertise in outsourcing matters depending on the specialization of the organization. An outsourcing contract will last for a long time, and both the organization and the vendor must understand how the relationship will be managed throughout the life of the effort.

3 The Metrics Selecting the appropriate metrics and key performance indicators (KPIs) to measure project performance is a critical step for any outsourcing engagement. A variety of metrics is required to manage the numerous aspects of an outsourcing project. While most metrics are unique to a given project, the key principles driving the selection process should be common to all outsourcing projects. A poor choice of metrics will result in SLAs that are difficult to enforce or achieve and may motivate the wrong behavior to comply to avoid penalties. Some of these SLAs on hindsight analysis did not seem useful. The selection process is complicated by the enormous number of potential metrics and must be tempered by considerations such as organizational experience with metrics, the type of behaviors to be motivated and cost and effort of collection. Always keep in mind that the goal is to ensure a successful and positive working relationship between the service provider and the client. Therefore, organizations should consider the following principles: Motivate the right behavior - Each party to the relationship will attempt to optimize their actions to meet the performance objectives defined by the metrics. For example, incentivizing customer contact staff by the number of calls they handle in a day will almost certainly lead to a decline in call service quality, resulting in more unhappy customers. First, focus on the behavior that you want to motivate. Is your organization s main requirement to reduce costs, or to obtain new skills? Is it to improve production quality, or to speed time-to-market? Bear in mind that there will be certain elements to be traded-off for improvements in another area. Once you ve established the metrics, the acid test occurs when you put yourself in the other party s shoes to test out the metrics. As a client, imagine how you would optimize your performance, if you were wearing the service provider s hat. It is normally at this stage that both parties recognize the need for secondary metrics, in order to provide checks and balances. Also, never make the mistake of leaving the metrics with room for different interpretations.

4 Metrics within service provider s control - Ensure that the metrics measure items within the other party's control. Unfortunately, in the initial spirit of good nature, agreements tend to miss the obvious. For example, a simple requirement that invoices be received within 48 hours may not take into account any delays in the postal system. Conversely, if the service provider's ability to meet objectives is dependent on an action from the client, the client's performance should be tracked and measured. For example, a service provider may be held accountable for the speed of a system enhancement, but delivery times may have been held up by the client's approval cycle. Refrain from being a back-seat driver: choosing SLA metrics that attempt to dictate how the service provider is to do its job is almost always a bad idea. Presumably, an outsourcing provider's core competence is in performing IT tasks, and embodies years of collected proven practices and experience. Attempting to regulate these tasks will only introduce inefficiencies. Instead, clients should concentrate on ensuring that the delivered work products meet quality, time or cost expectations. Easily collected measurements Metrics in the SLA must be easily collectible so as to rightly measure the effectiveness of contract. While all metrics should (ideally) be captured automatically, in the background, with minimal manual intervention, the truth is that few organizations will have the tools and processes in place to do so at a reasonable cost. Therefore, use metrics that are readily available, and revise when appropriate. In some cases, it will be necessary to devise proxy or alternative metrics if the required data is not easily obtainable. For example, taking our case of a customer call centre further, if a client wants to track customer satisfaction, separate customer surveys should ideally be conducted to get an accurate measure, but at the expenditure of additional time and cost. It may make more sense to track the number of complaints coming in to the call centre, which would serve as an easier proxy of customer satisfaction. While the end result is not identical, the underlying goal - motivating improved quality - is met at a fraction of the cost of an ideal method. Set a proper baseline, and reward accordingly - For metrics to be useful, they must be set to reasonable, attainable performance levels. It may be difficult to select an initial, appropriate setting for a metric, especially when a customer does not have any readily available performance metrics or a historical record of meeting those metrics. Companies with active metrics programs will have the data needed to set a proper baseline. Others will have to perform an initial assessment to establish that baseline. Incentivize the vendor to meet and exceed the contracted performance standards. Reward service credits when the vendor exceeds expectations and charge penalties when performance falls below expectations. Ensure the service credits reflect and are consistent with the overall goals of the project.

5 Anticipate change - Since change is the only constant in business as in life, a outsourcing arrangement should accommodate the cycles of demand that require an adjustment in services. If, for example, an organization becomes smaller, it could find itself paying for services that were priced based on conditions that no longer exist, similar situations will arise should an organization grow larger. To deal effectively with changing environments and requirements, the contract should provide for a formal relationship management structure (such as a governance body, or a steering committee), which links the customer and vendor at various levels in the organization. This structure typically takes the form of joint management teams that have responsibility for day-to-day, tactical, and strategic aspects of the relationship. Each team has a clearly defined responsibility, agenda, and relationship to the other teams. During the transition phase, the teams should ideally meet frequently, as teething and tactical issues will most likely surface during this period. Once well into the steady-state phase, these teams should meet periodically, such as once every six months, and then only on key strategic issues depending on the specific customer environment. Keep it simple - Finally, avoid choosing an excessive number of metrics, or metrics that are too complex. At the outset of drafting the SLA, an organization may be tempted to include too many metrics, or those which are extremely convoluted, reasoning that the more measurement points it has, the more control it will have over service provider performance. In practice, this rarely works. Instead choose a select group of metrics that will produce information that can be simply analyzed, digested and used to manage the project. If the metrics generate an inordinate amount of data, the temptation will be to ignore the metrics, or subjectively interpret the results, negating their value in the SLA. Conclusion In the final analysis, the metrics used to measure and manage performance to SLA commitments are the heart of a successful agreement, and absolutely critical to long-term success. If you need to remember only one thing, it s this: for any outsourcing agreement, always remember to keep the metrics SMART - Specific, Measurable, Achievable, Realistic, and Time-bound. Our final article will discuss the role of strategic IT outsourcing in transforming businesses to meet the requirements of the On Demand era.