Outsourcing deals are almost always based on a simple premise - the outsourcing supplier will deliver the client a service which is better than they currently have, and/or which is cheaper. This almost goes without saying. In normal circumstances why would any client organisation outsource if one or other, if not both, of those statements applied?
Q: But how does the client know if the service they are getting is better?
A: Client sophistication in the field of outsourcing has grown massively in recent years, partly demonstrated by the boom in the use of advisors. As a result, few organisations enter into outsourcing arrangements without a pretty robust business case. In other words, clients know what the service costs to deliver. They also tend to have a pretty good idea about volumes, and at least some idea about the relationship between volumes and costs (although the use of real transaction-based, variable pricing is much rarer than might be supposed from some of the marketing hype).
But they almost always have little idea about the quality of the service. And this is the missing leg to the stool - cost, volume and quality. Without knowing the quality, by which we mean performance against key measures, the other two are largely meaningless.
Q: What about SLAs, KPIs and Continuous Improvement?
A: Of course lip service is paid to SLAs, KPIs, Continuous Improvement and all the other buzzwords and crutches of the industry. But the fact is that most outsourcing contracts contain words to the effect of "the service will be at least at the level which has been delivered over the previous 12 months" without any fact-based knowledge on either the supplier or the client side as to what that level was.
Q: What are the two possible outcomes of this?
A: The first possible outcome is that the "shrewd" supplier will realise he might not have quality commitments to meet at the beginning. A process will typically be put in place to baseline the service in the early months of the contract and SLAs will be based on the findings of that exercise. Of course this de-risks the process hugely for the supplier, who controls the measuring process against services which often he himself is delivering, rather than against the service which had been delivered prior to the upheaval of the contract announcement and transition (during which it will almost certainly dip).
Q: And the second?
A: Alternatively, the "shrewd" client will insist that the supplier meets some arbitrary performance standards, perhaps theoretically based on "industry standards". These will probably be at an aspirational level far higher than those actually achieved in the past, and as a result the supplier is condemned to either fail to meet them, or to incur additional costs in striving to do so.
Q: So what is the alternative?
A: The alternative is to take responsibility early in the outsourcing process for baselining service quality. This is harder to do than baselining costs or volumes. It means determining the KPIs which should apply, setting up a system to measure performance against those KPIs, and measuring performance over an extended time period - at least a few months. Hard work, and typically a cultural challenge for most client organisations, even where they have existing shared service centres - most are not used to measuring the kind of output-based performance which forms the basis of contractual SLAs.
Q: How does this reduce risk?
A: But if it is done it massively simplifies the contracting and transition process, because both client and supplier can deal with the facts - neither has to take an unquantified risk. More than that, it keeps the client in control of the service it will receive, which is the key to successful outsourcing.
