When it comes to outsourcing, a lot of time and effort is spent on building a business case and determining the savings, but what is equally important is to go back and evaluate whether you have achieved your goals.
How can you check if outsourcing is delivering value for money for your company?
Ideally, you should decide in advance what you want to measure and have your requirements included in the written Service Level Agreement (SLA) with your provider. Incorporate your expectations of performance from your vendor in this SLA. It needs to be based on objective and measurable metrics that you can track. Qualitative factors like commitment, innovation or flexibility, can be harder to measure, but they can ultimately determine the success of the outsourcing arrangement.
What to measure?
First, make a list of goals that you set for your outsourcing partnership and then develop a separate metric/metrics to measure whether each goal is met.
The balanced scorecard is perfect for holistic measurement of your vendor's overall performance and value, consisting of tangible and intangible metrics.
From overall outsourcing provider's measurement and value-for-money metrics, a typical balanced scorecard inspects 6 areas: relationship, quality, cost management, delivery, strategy and growth.
Focuses on communication and collaboration metrics:
- How timely, open and neutral is the communication?
- Problem-solving - how responsive is the vendor to problems and change requests?
- Conflict resolution - how do they manage conflict?
The most important measure is overall customer/user satisfaction.
Other metrics in this category include:
- Quality/expertise of staff,
- Staff turnover,
- and security of tasks and documentation.
Metrics associated with this category are:
- On-budget delivery,
- Discounted pricing,
- Change in operating expenses,
- Reduction in costs of infrastructure,
- Total cost of ownership (TCO),
- Increased revenues,
- and most importantly return on investment (ROI).
Delivery (operational efficiency)
Measurements in this category concentrate on operational expertise and include:
- On-time delivery,
- Lead time,
- Response time/rates,
- Agent adaptability,
- and increased productivity.
This category includes metrics reflecting:
- Alignment with goals and vision,
- Competitive advantage,
- and meeting outsourcing objectives.
Metrics associated with growth include:
- Increase in employee efficiency,
- Quality of training and improvement programs,
- and corporate growth spikes.
Every business is unique
As every company is different, the specific metrics will be different too and will depend on organisational priorities.
If you are evaluating an IT service provider, for example, you could measure:
- Performance ranking commitment (trust ratio = promises made by vendor + promises kept by the vendor),
- Flexibility (e.g. willingness or ability to respond to unanticipated demand or changes in products or services),
- Innovation (continuous improvement ratio = ideas implemented by vendor / ideas suggested by vendor)
- and customer satisfaction.
For HR outsourcing needs you will look at a service level, service quality, vendor management issues, total cost reduction, better use of HR resources and any negative consequences, like reduced employee and manager 'trust' or reduced attraction and retention levels.
How to calculate the ROI - the real value of outsourcing
After you complete the balanced scorecard calculations, you can assess the overall return on investment (ROI) of the outsourcing initiative. Qualitative factors can be harder to measure but can be weighted and scored for this purpose.
To calculate the value of the benefits you need to subtract these from the costs. This way you will be able to evaluate the overall value of the arrangement.
Putting regular ROI audit in place
When you have pinned down the expected benefits of your outsourcing project, you need to carry out regular ROI audit to check whether your outsourcing arrangement delivers.
You can use '6-6-60' format for the review, focusing the conversation on the past six months' metrics, as well as the partner's next six months' plans regarding continuous improvement and other relevant issues, all within 60 minutes.
Strategic partnership key to growth
Putting metrics in place and proper evaluation structure will help your company and vendor evaluate the true value of your partnership. Accurate measurement of a provider's performance on outsourcing projects helps to create a strategic partnership.
Develop this relationship to produce tangible results from your outsourcing projects.