“It’s odd that you can get so anesthetized by your own pain or your own problem that you don’t quite fully share the hell of someone close to you.” — Lady Bird Johnson
If a pound of carrots doesn’t drive outsourcing vendor performance, maybe a little pain will? Read on to learn how to structure service level credits to incent vendor performance.
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 Read the rest of this entry »
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.
With increasingly complex vendor management programs and more interest in developing outsourcing and services relationships, it is no surprise that measuring vendor performance is an increasingly important topic on vendor management executives’ agendas. We previously wrote a very popular article on Outsourcing Vendor Metrics. Our readers have provided plenty of positive feedback via email. Overwhelmingly, vendor managers have asked for more detail and examples of each category of metric to improve their service level agreements. In this article, which is part one of several upcoming articles, we delve deeper into detailed operational service level metrics outsourcing executives can use to manage their projects effectively
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.
Read the rest of this entry »
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?
Read the rest of this entry »
Vendor managers often are overwhelmed with metrics, but these metrics do not always give a complete picture of the outsourcing vendor’s operations. We’ve mentioned a variety of metrics to date, and today we’re focusing on the major categories of metrics vendor management teams should focus on.
In short, there are operational service level metrics, key performance indicators, and transformational metrics.
Read the rest of this entry »
Here are our top ten considerations for authors and managers of service level agreements (SLAs):
We want to hear your comments! Let us know what you’re thinking by commenting below.
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.
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!
