Successful multi-year Outsourcing contracts are sustainable to the degree that certain attributes of the agreement, such as clarity and flexibility, are achievable by both parties. This article explores, from a practitioner’s viewpoint, one method that contributes to such sustaining attributes: the Resource Baseline.

The practice of outsourcing has a unique distinction among other professional services: although a mature industry, sufficient tension exists between clients and providers so that industry analysts proclaim many outsourcing deals to be failures. Industry publications, including those from Alsbridge, have for years cited the complex factors that may negatively affect an otherwise sustainable outsourced relationship. And those who see outsourcing practices up close will agree I expect, that ‘natural business change’ without mechanisms for clarity and flexibility is at the root of our discontent.

Natural forces of business change that render portions of an outsourcing contract irrelevant, or at worst – contentious, are underway well before the deal is signed. These forces, mostly from indirect (and uncontrollable) sources, cause clients to need more or less of a particular service; or raise or lower quality expectations, with correspondingly altered expectations about price. For example, a client’s sense of gratitude regarding a provider’s early results that, say, lowered a client’s legacy cost, has grown stale against dynamic expectations. Further, a provider offering Service Level Agreements (SLA) with initially well-designed Key Performance Indicators (KPI) will struggle in later contract stages with incessant client dissatisfaction. Why do these situations occur? To get at the root issue, we need to acknowledge that change always happens, albeit slowly. That is, the slow creep of contract ambiguity and irrelevance occurs within perhaps the first 12 to 18 after contract signature.

How can the inevitable creep of contract ambiguity and irrelevance be managed in a practical way over multiple years and usually in terms that include a fixed price? First, there is no substitute for engaged leadership from both parties operating within a sound governance structure. But even good leadership needs support from multiple contract mechanisms to assure mutual sustainability. One of these mechanisms is the Resource Baseline.

A Resource Baseline is unambiguous by its very nature – in other words, you can see it, touch it, and count how many ‘units’ there are – with little room for misinterpretation. A resource baseline is a set of defined assets and/or activity metrics that represent what the client is to receive in exchange for paying the provider’s invoice. From the client’s viewpoint, the resource baseline answers the fundamental question: ‘What are we getting for our money?” From a provider’s viewpoint, a resource baseline is the set of intrinsic ‘price drivers’ that justify a billable service from provider to client.

As shown in the Chart 1 below, a typical resource baseline is comprised of two parts. The ‘Unit Description’ defines in clear operational terms the tangible deliverable unit. The ‘Unit Quantity’ illustrates a numeric count of each ‘unit description.’ While some Information Technology examples are shown, the resource baseline can support nearly any process where tangible results are measurable.

Chart 1

In the real world, the client and provider agree to define the tangible results occurring from each work process. Notice that a unit of output is not ‘an hour of effort’ or a ‘Full Time Equivalent’ (FTE) assignment of provider resources. Clients must be steadfast in their efforts to define expected outputs that achieve business objectives and not settle for units of supplier ‘inputs.’

Further, work processes that produce a different tangible output require their own unique baseline. However, be careful not to over-do this concept. The Resource Baseline should be limited to only those units that truly drive the client’s perception of quality and the provider’s perception of ‘cost drivers.’ In practice, we see about two but not more than five Resource Baseline units per tower of work.

Subsequently, the client specifies the quantity of units to be produced per period of time for the selected work processes. The provider offers a price for delivering these results, typically in the context of service level expectations and other risk factors. For added flexibility, the client should consider using ‘prices by unit’ tables to manage variations in units delivered over time.

Chart 2

The resource baseline contributes to contract clarity and flexibility when used in concert with other contract mechanisms. As illustrated above in Chart 2, the statement of scope is linked to the Resource Baseline; and these are further linked to the service level agreements, the risk allocation scheme, and the price structure.

One can see that together these mechanisms form a clear agreement regarding: 1) the work process to be done by the provider, 2) the quantity of deliverables expected by the client for each work process; 3) the service levels expected for the baseline of deliverables expected; 4) the allocation of risk between provider and client; and 5) the price structure that quantifies total value. The price structure also contains other discrete mechanisms to allow certain variations in unit output, service levels, and/or risk to calculate variations in price. Such price mechanisms are best defined up-front and placed in the contract – avoiding the need to renegotiate after a series of changes in client expectations.

Thus, the Resource Baseline, working in concert with other contract mechanisms, belongs at the heart of the deal structure. Appropriate application by thoughtful clients and straight-forward providers will contribute to the clarity and flexibility needed to sustain long-term outsourced relationships.