360° Vendor Management

Transformational Metrics: Governing Outsourcing’s Lure

Note from the Author: Today’s article is part four in a series of articles discussing outsourcing metrics. We encourage your to read our other three articles: An Overview on Outsourcing Metrics, Operational Metrics, and Key Performance Indicators.

Sustainable, successful outsourcing is all about leveraging other companies’ core competencies. Despite the labor arbitrage low cost country sourcing provides or the abundant availability skilled and unskilled labor in foreign countries, outsourcing is a fundamentally the purchase of another company’s superior service, technology, or product. Vertically integrated companies are simply non-existent. Our companies’ suppliers design products, manufacture components and finished goods, manage logistics and inventory, provide customer service, facilitate payments, and provide administrative human resources, finance, and IT support. While each new senior executive’s arrival will reopen the debate of his or her company’s core competencies (witness the CEO changes at Dell and Yahoo!), the simple fact is that no company can do everything, much less everything well.

Outsourcing provides your company the ability to obtain a level of specialization and performance it could otherwise never achieve - and with a shocking degree of immediacy. The challenge for clients who purchase these services is the transformational journey necessary to take advantage of the capabilities their suppliers provide. One of the chief gripes expressed by many vendors is that their clients fail to adopt some of the best practice processes they are capable of delivering. Vendors will offer free consulting assessments, networking and educational events with experts and other clients, and inexpensive pilot projects - almost anything to get clients to bite. As a result, clients leave quality, service and cost on the table - all elements that drive client satisfaction.

The rationale is simple. Companies who outsource typically see the capability as non-core. Others may outsource for cost considerations. Given these narrow perspectives, why would a company contemplate upgrading it’s outsourced operations?

The ramifications, however, are staggering. Just like an internal operation that lacks investment, quality, service, and cost factors plateau and begin to deteriorate. Picture the difference between call centers in 1988 and 2008. Twenty years of investment in technology, operations management, and educational standards has transformed this business process. When a company outsources its call center, the danger is that the capability it purchases today becomes obsolete in the next 4-8 years.

Oddly enough, this is the same length of the average outsourcing contract. Without transformation mandates or innovative clients, vendor operations will simple remain status quo. As the contract term completes, both parties are left with a level of dissatisfaction. Clients question why they pay so much for so little. Vendors question why their clients failed to adopt their innovations and process improvements. Negotiations begin, relationships flounder, and opportunities are lost.

Effective vendor managers manage and measure innovation in order to continuously drive improvement and deepen supplier relationships. These companies use the following key metrics:

Initial Versus Current Performance Objectives - Comparing baseline performance to post-transition performance demonstrates the initial value the vendor’s capability provides. Comparing the initial post-transition performance to current performance demonstrates the continued value the vendor’s capability expertise provides. Good vendor managers track these trends and seek opportunities to improve performance.

Initial Versus Current Return on Relationship Investment - Before a process is outsourced, the client expected a certain financial return on their capabilities’ performance. This could be measured in cost per transaction or net present value. When the process was outsourced, the client had certain financial expectations. However, good vendor managers recognize that this expectation must be constantly compared to the current costs to ensure that transformations are reflected in the financial comparisons. This isn’t to suggest costs shouldn’t go up. However, good vendors managers need to demonstrate that the vendor has continued to drive financial value for your company through transforming the operations after transition. Most importantly, sometimes this additional value may be the result of ancillary services. For example, a call center vendor may offer analytical services that make recommendations on cross-selling opportunities or customers retention strategies. The value created from these recommendations may need to be tracked independently from the initial goals of the program.

Achieved Transformational Milestones - Excellent outsourcing relationships should contain concrete, discrete, and required desired achievements. This may be as simple a detailed list of activities, tasks, or deliverables. This could be as complex as required step improvements in process performance. Regardless, these should be identified in the contract or other governance deliverable. Good vendor managers will track the both the % complete of each milestone and the timeliness of completion. Reviewing this list keeps both parties on track for desired improvements.

Customer Education Opportunities - What may seem like sleazy sales shtick, is actually an opportunity for effective vendor managers to educate themselves and their key stakeholders on opportunities. Great vendors create opportunities for their clients to learn from experts, other clients, and other sources. Vendors should be required to educate their clients as part of their services (not for extra fees), and vendor managers should record the number and types of events, numbers of hours of education, and satisfaction with these events.

Do you have other methods of measuring vendor innovation? Let us know by leaving a comment below or sending us a note.

This entry was posted on Wednesday, March 5th, 2008 at 5:08 am and is filed under Metrics, Outsourcing, Outsourcing SLAs, Outsourcing Vendor Management, Vendor Management. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.