Good outsourcing contracts contain service level agreements, which define performance parameters of the services companies procure from their vendors. In previous popular articles, we addressed the general structure of Outsourcing Vendor Metrics and provided more detailed information on Operational Service Levels and Metrics. However, operations are data rich environments with a multitude of metrics that an experienced vendor manager could use to manage the vendor. While typically 4-7 different metrics will be memorialized in the contract as formal service level agreements that trigger penalties and incentives, these alone are insufficient to effectively manage the vendor.
The rationale is quite simple. Believe it or not, but outsourcing vendors have tremendous pricing discipline. They analyze Net Present Value and Internal Rate of Return on their investment in the client contract. All factors are included, such as labor, facilities, technology, telecommunications, etc. More importantly, savvy vendors develop probability models of anticipated performance against service level agreements (which is what they do with your internal performance metric data - if you give it to them). They use SOX-driven corporate guidelines when developing these models which force them to assume some degree of failure. This failure is then built into the price - essentially allowing the vendor to obtain desired financial performance even when performance fails to meet client expectations. This dramatic difference in rewards and incentives between clients and their vendors should encourage clients to drop “partnership” and “partner” from their lexicon, except for the fact that overcoming this financial gap requires true relationship building.
In a nutshell, service level penalties are insufficiently severe to drive vendor performance. That means successful vendor managers must use other levers to compel vendors to perform. One of those levers is a comprehensive key performance indicator program.
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Most good outsourcing contracts require the customer to fulfill only two primary obligations: protect the vendor’s intellectual property and to pay for services in a timely manner. While most buyers have little challenge with upholding it’s confidentiality obligation, vendors universally will point to timely payment as the number one problem they experience with their customers after implementation. As an executive managing an outsourcing vendor, mundane invoice processing unfortunately gets second billing. The process of paying vendors actually is more strategic than you think - and it is the subject of this article. Read on to learn how to manage this important vendor management process more effectively.
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Performance management is a fundamental aspect of managerial effectiveness. Establishing clear goals with your boss, peers, and employees is essential. With vendors, you have contractual service level agreements.
At certain points in the year, good managers check-in with their team members to provide feedback on progress to goals. At the end of the year, employees get final reviews - complete with bonuses and merit increases. With vendors, you have the quarterly review - one of the most important tools in a successful vendor manager’s tool belt.
In this article, we review the essential aspects of quarterly reviews.
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Outsourcing vendor management is not any easy discipline to learn. In fact, as compared to project management, vendor management is terribly difficult to understand and learn. Immature certifying bodies, generally limited outsourcing experience, dissimilar outsourced operations, internal personalities, and the social politics of outsourcing all create an environment ripe for limited vendor management standardization. What should you expect when you are climbing the steep learning curve?
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We recently completed an analysis of the value a series of outsourcing programs had created for a very large company. That company had never truly baselined and tracked value outsourcing programs had created. So, the exercise was similar to a paleontology event trying to find the old bones. The client had created value through offshore labor arbitrage, but because senior executives didn’t enforce a “take it to the bottom-line” approach to outsourcing, which is what they had desired, day-to-day operations leaders years later continued to expand outsourcing relationships - with absolutely no savings. Instead, continued expansion was driven by limited investment in automation and process improvement. If the client had invested in technology and process improvements, there would be no need to keep some resources - regardless of where they were located.
Human resources outsourcing has a similar problem…and today we’ll look at the value Human Resources Outsourcing provides. Rather, what it fails to provide.
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We’ve provided another week of valuable advice to vendor managers everywhere. Clearly, managing outsourcing vendors is a difficult task made more difficult when vendor managers don’t “get into the weeds” and ensure vendors are effectively managing daily activities and planning future activities accurately. So, our topics of the week addressed just these types of issues:
- Inventory Metrics - We discussed the importance of managing vendor quality, timeliness, and the often forgotten inventory and backlogs.
- Requirements Defects - How do effective outsourcing executives manage requirements accuracy and completeness?
- Forecasting - While most call center operations focus on forecasting accuracy, many backoffice outsourced operations completely ignore this fundamental component of vendor management.
- Scheduling - Often left to the outsourcing vendor, where it may or may not be done well, reviewing scheduling accuracy is a key component of monthly and daily vendor management responsibilities.
We definitely appreciate the feedback we’ve received and we’ll be sure to address your ideas in upcoming articles! Until then, please keep the ideas flowing and we’ll be sure to provide you perspectives on effective vendor management!
If you manage a call center, you know what calibration is. Otherwise, you may not be leveraging the most important tool you have to manage agent-level quality. In an outsourcing relationship, failure to calibrate quality expectations can result in poor vendor performance.
Calibration is the process by which both the vendor and the client review a sample of real-life transactions, score the transactions independently, and compare the results to each other. The best companies have several types of calibration sessions.
The first is the standard monthly calibration session, where the client’s internal audit team compares results with the vendor’s quality team. The purpose of this meeting is to ensure that the vendor provides feedback to their agents based on the exactly the client’s expectations. Normal attendees include auditors, trainers, quality management, and day-to-day operations managers. The team tracks calibration variance*, on-time completion of monthly sessions, importance issues - and the issue’s corresponding action plans. Results are reported to vendor management and account management teams. The trick behind this meeting is to make sure that the vendor truly understands the client’s expectations - simply marking items correct or incorrect is insufficient. The teams need to spend the time to ensure that everyone has a shared understanding of the rationale behind the scoring in an environment that is NOT confrontational.
From our experience, teams start using calibration sessions with the right intentions, but later hold the sessions less frequently than they should (every month folks, every month!) or parties begin to use an accusatory tone in the meetings, making it a vendor vs. client meeting. Effective managers avoid this and carefully facilitate the meeting to get the desired results. The other issue we frequently see is that the sample sizes shrink as other tasks take priority. It’s important that the right sample size be crafted for every calibration session - and that the samples be pulled at random.
The second type of meeting rarely occurs, but, in our opinion, should occur far, far often. Executives and key stakeholders rarely spend the time to get close to nitty-gritty details of transaction quality. However, it’s precisely due the infrequency of looking at the low-level details and the frequency of informal “stories” (regardless of the stories’ completeness or accuracy) that executives begin to make decisions regarding a program based on inaccurate information. Every quarter, executives should spend 1-2 hours reviewing transaction quality by having calibration teams make a joint presentation of program quality issues, achievements, and plans. You might want to include key customers, key internal stakeholders, and other influencers.
Programs that calibrate frequently, accurately, and with a tone of continuous improvement have a far greater likelihood of success than those that don’t. SLA results will be contested less and the agents handling the transactions will receive the feedback they need to improve individual and team performance. It doesn’t make a difference if your program is a call center, back office transaction, or IT program…CALIBRATE!
* Calibration variance, a metric that identifies the difference between client and vendor quality scoring, is calculated as (VendorQualityResult - ClientQualityResult) / ClientQualityResult.
For the vendor managers and vendor account managers out there, here’s our list of the top 10 reasons why your program doesn’t have a governance model:
10. Governance?! BINGO!9. Managing a vendor is a one-person job.8. Your vendor performs it’s own “independent” monthly SLA audits.7. Vendor invoices are accurate and clients pay on-time.6. Your client provides regular, accurate forecasts.5. Your client doesn’t require change control procedures.4. The consultants left at the end of the project.3. You calibrated you quality audit scoring when the project launched.2. Your contract has dispute resolution language already.1. Governance doesn’t have a positive ROI.
The challenges facing corporate operation units are daunting. Driven by Wall Street expectations, CFO-led budget tightening activities never understand seasonal operational demands, backlogs caused by technology or marketing SNAFUs, or the competitive job marketplace causing 40% (or more) annual attrition. Deeper, broader budget cuts just exacerbate operational problems and somewhere, deep in the bowels of your operation units, something is likely amiss.
Sure, there are little things, such as unknown caches of paperwork that haven’t been processed (the “secret backlog”) or reports that are less than accurate due to data inaccuracies. However, darker, scarier secrets lurk – skeletons of deal-altering proportions. These are the “mega-material changes” that keep an outsourcing executive up at night…and that can treble vendor charges, limit your vendor’s ability to achieve quality goals, or simply cost you time you don’t have. Here is a real-life story related to me by a colleague that demonstrates how important it is to confidently know what you’re outsourcing…very well.
Long before a 100-seat call center of a Fortune 200 financial services company (which we’ll call Greenfield Financial) was outsourced, a corporate metrics initiative caused the 40 or so different call centers at Greenfield Financial to report average handle time using reporting technology that laid bare to all Greenfield’s executives the operational performance of the call centers. The problem with the initiative, however, was that the common definition of Average Handle Time (AHT) was never enforced. Hence a handful of the call centers excluded After Call Work (ACW) from their reported measures (this is the time after a call during which an agent needs to perform certain offline tasks to complete the call, but during which the agent is unavailable to receive a new call). In fact, the training given to Greenfield’s call center agents asked them to use a phone status commonly used for breaks and lunches when performing after call work, which made it impossible to include ACW in their AHT reports. The result was that this small unit within Greenfield was understating results by 25% - and no one noticed for years.
When Greenfield’s executives decided to outsource this unit, the company’s procurement team and the vendor (which we’ll call Crown Call Center Solutions) agreed to use a cost per call methodology that was calculated based on the program’s AHT, which was contractually defined to include ACW. Greenfield’s procurement team never knew that the AHT they were supplied excluded ACW, and had been repeatedly reassured by their operations unit that the AHT was accurate.
Five months later, once Crown stabilized the operations and struggled mightily to achieve the program’s AHT, it became clear to Crown, who had deep experience its Greenfield’s competitor’s operations because Crown ran those operations, too, something was amiss. However, Greenfield’s operation unit reassured Crown that Greenfield’s internal results were accurate and, in fact, Greenfield remaining call center units were still achieving a similar results. Believing those reassurances, and faced with losing thousands of dollars every month (more than $1 million of lost revenue per year), Crown’s operations team put enormous pressure on their agents to achieve the AHT. Agents failing to achieve the AHT were reprimanded, attrition spiked, and Crown, somewhat predictably, failed to achieve the contractual Service Level goals. Greenfield complained loudly and Crown put more pressure on the “failing” agents – and things quickly got worse.
Crown’s agents discovered that they could hang-up on callers within the first few seconds of a call and as a result lower their AHT – to the detriment of Greenfield’s customers. This is a widely used practice in call centers throughout the world and it went unnoticed for a couple of months because the shorthanded vendor had assigned their internal audit team to the floor to answer calls. However, Greenfield’s astute auditors discovered the actions of the few agents and realized that shorted calls doubled the number of calls…and the Crown’s fees. Greenfield’s operations executives, accusing Crown of fraudulent practices, raised hell. Crown’s operations team retorted that the AHT was unrealistic. Greenfield’s operations executives called Crown’s staff incompetent and stonewalled them by telling Crown, “You already signed the contract.”
The issue quickly escalated, ending up with Crown’s CEO calling the Greenfield’s COO. Lawyers were dispatched and much needless ugliness ensued following many long hours of conference calls and negotiations – and Greenfield lost when the operations units revealed the facts. Rates increased by 25% and Crown was pleased to lift the pressure off their agents. Greenfield rationalized the results by stating they were still pleased, because even with the rate increase, Greenfield was saving over 50%. However, the Greenfield’s customers were the ultimate losers as they suffered from the shorted calls and bad service levels, and many internal hours were lost. I’ve heard that an element of distrust pervades the Greenfield-Crown relationship to this day.
Objectively, this was a fair result as the AHT was in correct. However, the road to get there was needlessly bumpy and is a lesson to all outsourcing experts – thoroughly understand what you’re outsourcing as early as possible.
I was recently asked to escalate a back office program’s dismal performance with a vendor’s executive staff. In preparation for the executive conversation, I asked the client to provide me an overview of the program’s Service Level Performance. Two weeks later, an analyst sent me a MS Excel spreadsheet that contained data for the last three months.
“Where’s the prior 6 months data?” I asked.
“Oh, we didn’t start tracking the metrics until the middle of November,” I was told.
The management team, in fact, hadn’t been tracking any metrics until the problem hit critical levels and government regulators began to hear complaints.
It doesn’t take an expert to understand that this program lacked a disciplined management processes. However, the dirty truth is that many programs lack the discipline to track and review metrics – and you won’t know this until the program implodes. Finger pointing immediately begins and the vendor inevitably takes the fault because “it was their responsibility to deliver services.” The business unit’s lawyers reach for the contract as the business executives look for the opportunity to deflect blame and force the vendor to pay through their noses. This program, in particular, was billing a paltry $1,500 per month and the business wanted me to pass on the regulator’s $500,000 fine to the vendor. Holy indemnification, Batman!
The problem is that most vendor managers and vendor account managers just don’t have the discipline or skills to manage relationships. That’s why the Monthly Close is an essential management process. It’s the one time each month that effective executives review the program’s performance in sufficient detail to identify performance issues, negative trends, and opportunities for improvement. It’s essentially a monthly operational review.
The Monthly Close occurs monthly and is NEVER skipped or integrated into another meeting. It occurs typically one week after the end of the month and lasts two hours. The format is a working session, not a presentation. However, that doesn’t mean the team didn’t prepare in advance. In fact, the core of every meeting should be the analysis generated by the day-to-day vendor management team. The key operational executives should take part in this meeting (typically directors and vice presidents), as well as the vendor’s counterparts. In addition, IT, Quality, and Training representatives should take-part in the meeting.
The first topic of the Monthly should be to review the program’s performance against its contractual Service Level Agreements (SLAs). The last 12 months of data should be included, at minimum. Pat yourself on your back if you achieved every metric and every trend is positive.
However, if a SLA is not achieved or trends indicate future problems (trending is essential), supplemental metrics should be supplied to assist with root cause analysis. For example, if a program fails to achieve a turnaround time SLA, information on transaction volumes, transaction volume forecast accuracy, staffing accuracy, and IT system performance should be provided. Several action items should result and will be reviewed in future Monthly Closes until the root causes are rectified. Each action item should be categorized by Key Performance Indicator.
The next agenda item is to review the program’s non-contractual Key Performance Indicators (KPIs). KPIs are the lower level metrics that are typically leading indicators of a program’s ability to achieve the contractual SLAs. Transaction volumes, forecasting accuracy, and staffing accuracy are examples of metrics that typically drive turnaround time SLAs. Percent of agents trained, percent of agents who passed daily quizzes, frequent error types, and quality calibration variance are examples of metrics that typically determine a program’s ability to achieve Quality SLAs. Don’t forget to review the program’s IT stability, too.
As you review each KPI, open action items related to the KPI are to be discussed, in addition to any new failure to achieve goals or any recent negative trends. New action items should be tracked.
The last topic of discussion is the vendor invoice. Each line item should be reviewed. All charges, including transaction fees, telecommunication/IT fees, incentives and penalties should be substantiated by earlier conversations. The benefits of discussing the invoice now is that the vendor was required to provide invoices on time and that the conversations regarding service level failures, quality results, and measurements are completed.
Following the Monthly Close, executives should provide feedback to the vendor management team regarding the quality of the Monthly Close, and the executive should track both the timeliness of the meeting, as well as the team’s ability to accurately provide numbers. Late meetings and missing or incorrect data are early indications of issues in the metrics’ integrity – and you definitely don’t want to be surprised!
Do you have an effective monthly close? Share your comments with us!
