Chapter 7: End-to-End Performance Management

According to a recent survey, 24 percent of executives intend to use outsourcing to achieve significant changes in their organization, but they also hold a healthy skepticism about whether it will work.^[1] Excellent strategy and business-model design must be matched with superb execution for a company to achieve its objectives. Chapter 6 offered a case study of how one company did just that. In this chapter, I talk about three important components of great end-to-end execution: metrics and incentives, strategic governance, and communications processes for sustaining a high-commitment relationship.

High-Stakes Outsourcing Introduces Performance Management Problems

An old business adage states that good managers match accountability with control. To get good performance, at least according to this old saw, managers just identify clear goals, establish consequences for good and bad performance, then follow up systematically. With conventional out-sourcing, this works just fine. It does not represent the whole management picture, but it covers a good part of the terrain. An experienced company can easily establish a performance baseline, clearly articulate the cost savings and service levels they want, and anticipate the journey in between. Since the vendor oversees a discrete activity, accountability and control are neatly matched.

But transformational outsourcing relationships aren’t so simple. As executives target complex, mission-critical process change through outsourcing, they face a host of new execution challenges (see Exhibit 7.1). First, they don’t have mastery over the outsourced process at the start. Some companies have only a tenuous grasp on the functions and processes they intend to outsource, as these sprawl across departments, units, and geographies. Simply establishing a baseline can take months.

Exhibit 7.1: Transformational outsourcing requires a more sophisticated relationship.

Business-process dependencies complicate matters. In more invasive outsourcing relationships, the vendor’s domain isn’t a discrete and independent component of the organization. The outsourced operation links to other business processes in rich and interdependent ways. For example, a large UK equipment manufacturer outsourced both its IT function and some business-process improvements in two separate contracts. When the business-process improvement team recommended changes to the engineering work flow, it affected the IT outsourcer’s CAD operation as well as the company’s product developers. As one provider succeeded at its mission, it caused the performance of the other one to slip.

The need for flexibility also interferes with simple performance- management approaches. Holding a provider accountable for meeting operational-level service agreements, for example, might get a company the transactional performance it asks for. But the right performance goals will help focus the outsourcing provider on doing what the company needs. This means that partners must have a way to change the targets when that is what the business calls for.

After defining a viable joint business model, executives must develop end-to-end performance management that supports capable execution. This framework of metrics, incentives, governance, and communication must help them keep their strategic purpose in the center of the cross- hairs. It must incorporate the ability to shift gears when necessary. And it must tap the wellsprings of commitment that any organization needs to drive real, lasting change.

In this chapter, I discuss the overall performance-management framework for transformational outsourcing. Chapters 8, 9, and 10 address the management of transitions for people, leveraging capabilities, and endings and renewals, respectively. Again, I will focus on issues that are particularly important for transformation.

^[1]Unpublished Accenture survey, January 2003.