Outsourcing has experienced a substantial growth in recent years since companies have realized its benefits to a great extent.
You have also done the calculations and selected outsourcing, rather than an in-house team. The next step is choosing the right partner. It goes without saying that you should choose the best one in order to achieve optimum results. Keeping the various factors in mind, you selected a vendor and went ahead with your outsourcing arrangement.
After a year or two has passed, how can we say that an outsourcing arrangement was successful? How can we define and measure the performance of an outsourcing contract? Don’t worry, we have listed down a few metrics which will be helpful in measuring the performance of an outsourcing agreement.
1. Service level agreement (SLA)
A service level agreement (SLA) defines the level of service you expect from a vendor, laying out the metrics by which a service is measured, along with penalties if service levels are not be achieved. It is a critical component of any vendor contract.
One should develop metrics to measure if the services provided by the vendor are as per norms and quantity/volume defined at the time of the agreement. Examples of service level metricsincludea number of services areas, weekly working hours, number of calls handled, etc.
2. Service quality
Simply providing services and meeting the SLAs are not enough. Quality of the services should also be at or above acceptable levels. It is important to monitor the quality of services provided by the vendor. Examples of quality of service measures include customer satisfaction with the answers provided, customer satisfaction with the manner of answers provided, the average and maximum response time required to answer a call, average accuracy or error rate, etc.
3. Vendor management
It is important to assess whether the vendor is difficult to “do business with” or not. Have they been non-responsive to change requests? This information can be used to improve vendor relationship or as bargaining tools in the next contract negotiation.Examples of vendor management metrics includeresponsiveness of vendor to problems and change requests, honesty andethics of the vendor, etc.
4. Relationship with the vendor
Clients must also assess the relationship with their outsourced supplier. Informal contacts are very important to solve operations faster and more efficiently.
5. Knowledge of the vendor
Knowledge of a vendor about the client’s processes/services is essential for controlling and delivering high-quality services/products. Therefore, it should definitely be assessed by the client.
6. Total cost reduction
One of the main goals of outsourcing is to significantly reduce costs. Metrics in this area should be designed to assess whether the overall expenditures have actually gone down or not. It is essential to provide measurements in this area because it is quite possible that the time and effort required for contract negotiation and vendor management can add significantly to the overall costs of outsourcing.
7. Better use of resources
One of the primary goals of outsourcing is to free up internal resources so that they can be directed to areas with a higher strategic impact. Therefore, it is important to have metrics that assess whether the business has increased its strategic impact as a result of the outsourcing.
8. Control and monitoring
Control and monitoring are about day-to-day service operations. The clientshould have full control of the outsourced service. This doesn’t mean micromanagement. However, a client must focus on the result and be in control of that.
9. Service innovation
Service innovation is an important factor for measuring outsourcing performance. It can only be achieved when knowledge and quality have reached their ultimate quality state. The vendor must make investments inservice innovations. It can give the organizations their competitive advantage.
10. Customer satisfaction
An organization must measure the extent of customer satisfaction after outsourcing. Customer satisfaction should always be in the minds of the outsourcing service providers since it is the key to success of any business.
11. Strategic goals
Realising strategic goals is also an important indicator for measuring outsourcing performance. Strategic goals which were set at the time of agreement should be met or exceed expectations.
12. Technical benefits
Organisations often outsource, since the outsourcing service providers are more technically proficient with expertise in their field. It happens mostly in case of IT services. The client should also assess whether the technical benefits received from outsourcing are satisfactory or not.
13. Unintended consequences
In addition to the traditional costs of outsourcing, you must also assess any additional costs or benefits that might result from the outsourcing arrangement. This is because outsourcing some functions occasionally show negative impacts which, increase the relative costs of outsourcing.
The challenges of outsourcing:
Outsourcing is difficult to implement with high failure rates. The core of this problem is the inherent conflict of interest in any outsourcing arrangement. Clients expect the best services at low costs. The vendor, however, wants to make a profit. That pressure must be managed carefully to ensure a successful outcome for both the client and the vendor.
Another cause of outsourcing failure is the rush by organizations to outsource without a detailed analysis of whether outsourcing is really needed or not. Outsourcing is often perceived as a “quick fix” cost-cutting measure rather than an investment designed to enhance capabilities, expand globally, increase profitability.
Whatever the type of outsourcing it is, the relationship will succeed only if both the vendor and the client achieve expected benefits.
Conclusion
Performing outsourcing health check-ups on a regular basis should always be encouraged, as part of a continuous improvement plan. It provides a quantifiable way to document results, deviations, disagreements, and feedback. If done regularly, it can be very useful for tracking progress. Not just SLAs but several other factors mentioned above should be tracked. There will always be room for improvement.
Even if the ROI is low or negative, that does not mean that you should drop your outsourcing effort. You could also use the metric data to refine and continually improve the outsourcing initiative or look out options for selecting another vendor.
