New Metrics for Transformational Outsourcing


Although a recent survey conducted by the Economist Intelligence Unit reveals that an astounding 82 percent of the respondents do not measure their outsourcing provider’s performance regularly, effective outsourcers recognize the importance of setting targets and measuring progress against them. For the high-stakes game of transformation, this practice is even more critical.

When the goal is business transformation, the ultimate metric is how much value is created. To capture their strategic aspirations, organizations measure enterprise-level outcomes. For example, Archer Financial Group (not its real name), a global financial services company, set its sights on doubling its operating margins and stock price through transformational outsourcing. The Spanish bank that changed from a small mortgage lender to a full-service bank counted assets under management. Family Christian Stores went after revenue growth. Thomas Cook tracked profitability.

Leaders focus on outcome metrics where possible (see Exhibit 7.3). Outcome metrics show up on the bottom line. They make up the externally relevant results that drive transformation in the first place, such as market share, profitability compared to others in the industry, stock price, and so forth.

However, it can take months or years for good performance to show up in outcome measures. In this case, output metrics make good proxies.

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Exhibit 7.3: Examples of different types of metrics.

Instead of counting how many hours it took to complete each order, a photographic company asked its outsourcer to count how many orders it completed each hour. This small change in the way they kept score helped focus the vendor on speeding up throughput. Similarly, Family Christian Stores stopped tracking the uptime of store computer systems, and instead looked at whether or not its provider delivered the weekly replenishment orders to stores by 8 a.m. every Monday morning.

When executives move from outcomes to outputs, however, they must explicitly lay out their assumptions. There is no room for faulty logic here. The story of a poorly performing financial services company will illustrate. If you ask this company what drives good performance, executives will tell you it is having the right people and the right culture. (This is actually an input measure, but the point is still valid.) They go on to explain the ways they attract good people and create a culture that enables good performance. But if you look at their results, it turns out that this company underperforms others in its industry (see Exhibit 7.4).[2] In other words, their logic about what creates good performance doesn’t work. Since they haven’t tested their assumptions, they don’t even know where the flaws are. So executives that use input or output measures as proxies for outcomes should take the additional step of validating their performance logic.

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Exhibit 7.4: Financial services firm underperforms its competition.

In some circumstances, however, even outputs may defy clear measurement. In these cases, executives evaluate critical inputs. For example, the success of Thomas Cook’s transition from dispersed financial outposts to a compact, streamlined shared service center depended utterly on the operational leadership and competence of the individual its provider placed in charge of the initiative. The Thomas Cook team looked very carefully at this person’s credentials and prior track record—input qualifications—before agreeing to proceed. On an ongoing basis, they carefully review their provider’s personnel decisions for pivotal positions in the center. If there were a hiring or promotion error in one of these slots, it would eventually show up in output and outcome measures, and it would be remedied. By evaluating key people up front, however, Thomas Cook prevents these problems rather than taking the time to solve them later.

In addition to enterprise outcomes, these organizations track metrics that reflect progress on the essential process of deep organizational change. Executives recognize that successful transformation hinges on building and sustaining forward momentum. To keep this factor front and center, they measure speed. For example, the Thomas Cook team keeps a close watch on whether the provider’s projects are meeting milestone dates. Slippage endangers the benefits flow, but more important, it calls the credibility of the entire transformation program into question. In Thomas Cook’s case, the parent organization had concerns about the wisdom of cosourcing in the first place, and the affected employees were reluctant to move from an organization with which they identified strongly. If executives had allowed the momentum of the transformation to flag, the countervailing forces would have gathered strength.

Tom Boardman, the CIO of San Diego County, California, during its late 1990s stem-to-stern overhaul, reiterates the importance of managing momentum. ‘‘Time is the enemy,’’ he states. ‘‘You want to go fast. If you go slowly, the people against you have more time to get organized. It took us less than a year from RFP to contract, then we gave our provider only three months to get operations settled down.’’

The San Diego County case also brings us back to the stakeholder analysis we reviewed in Chapter 5. Using that analysis, we have a good idea what our critical stakeholders want from the transformational initiative. Executives should establish metrics that provide evidence of visible progress to each important group. This approach keeps all the important constituencies on the supportive side of the ledger. Boardman cites this as an issue in the San Diego County story. Their initiative included outsourcing all information-technology infrastructure, including mainframe, mid-range, and desktop computers; help desk and break/fix services; telephones and networks; Web hosting; and core applications like e-mail and back-office systems. By reducing the cost and improving the reliability of its IT foundations, the county government reasoned it could begin allocating resources to appealing new Web-based services under the compelling banners ‘‘On Line, Not in Line’’ and ‘‘No Wrong Door.’’ These spelled out the intention to have constituents doing everyday business with the government over the Internet instead of standing in line and to have every government office act as an entry point to the entire portfolio of county services.

Although the IT infrastructure outsourcing hit a few bumps, it delivered the intended cost and reliability benefits by the end of the first year of the contract. Boardman reflects that this accomplishment was substantial, yet did not help them create all the momentum they needed. At the end of that high-intensity year, he stated: ‘‘We deliberately decided to fix the infrastructure and the back-office systems first to get the savings. But, at this instant, we don’t look good because there’s nothing but infrastructure to show for our efforts. The citizens can’t see anything. It takes more energy and more air cover than it should to keep going.’’

Use Metrics to Counteract the ‘‘Miracles Syndrome’’

Metrics help communicate executives’ objectives and expectations. If the outsourcing partners have any lingering misunderstandings about what they are trying to accomplish, this process dispels them. And it also helps set clear expectations for the initiative broadly throughout the organization. This helps executives counteract what I call the ‘‘miracles syndrome.’’ An organization that could not manage an initiative on its own expects miracles when it pays another company to do it. This syndrome infects many outsourcing relationships, but it is more prevalent and more malicious in high-intensity activities. Why? Because the company lacks the expertise even to appreciate, let alone to surmount, the management challenges their initiative requires. And since they are paying for the service—and they feel entitled to expect performance—they naturally find themselves in the world of unrealistic expectations.

In order to overcome this debilitating syndrome, executives take the time to understand their partner’s task plans, staffing levels, and deadlines in excruciating detail as a precursor to setting performance metrics. The purpose is not for the company to manage outsourced activities at a task level, but to gain an intimate grasp of the work. That way, they will be able to use interim performance results interactively to diagnose issues with their partner, rather than as a blunt instrument for reward and punishment.

Use Detailed Metrics to Build Trust, Then Simplify for Focus

For complex operations, executives start off with detailed metrics, then simplify measurement as they build trust. By working out detailed service-level agreements at the outset, they tee up critical discussions about roles, responsibilities, process interfaces, and expectations. Then they narrow the number of discrete metrics they track over time and move toward measures with broader impact in order to minimize administrative demands and raise their focus. The first to go are metrics that proved too difficult and time-consuming to measure. After several attempts, the senior vice-president of procurement at a UK transportation equipment company removed engineering efficiency from his outsourcer’s list of target metrics for business-process improvement. It simply proved impossible to quantify the result.

As Thomas Cook gained traction with its shared-services center, it shifted from measuring a cornucopia of service elements in the finance process to a few overarching factors. According to Neil Hammond, Thomas Cook’s director of strategic sourcing and IT efficiency, ‘‘Working out our service-level agreement for the finance and accounting process became the mechanism for defining the responsibilities. We ended up with too much detail at first, but that was a necessary part of the evolutionary process.’’ As the operation was changing hands and being consolidated, the detail was important. It provided a structure for the two organizations to talk through the issues about who had responsibility and where the handoffs would take place. After watching the detailed metrics together for four months, the partners developed a solid understanding of the enacted process.

After the detail did its job, the obvious next step was to simplify. The two organizations identified and focused on six to ten key outputs. These included producing accurate and timely monthly financial statements, paying suppliers on time, and managing accounts receivable. ‘‘There is a great deal of activity underneath an outcome like getting the balance sheet right,’’ Hammond continued. ‘‘For that to happen, a whole chain of events and processes has to work.’’ Thomas Cook would never have gotten to the right level of understanding and effectiveness by aiming for the high- level targets at the outset. At that point, the measures were too abstract. First, both sides had to get comfortable that the details were under control.

Use Metrics to Take a Reality Check

Transformational outsourcing leaders, then, use new metrics to track enterprise outcomes and to sustain momentum for the people carrying out the initiative and the critical outside stakeholders. They also use new metrics to manage the boundaries of the transformation.[3] In other words, at least once a year they take a step back from what they are doing to take a reality check. They ask themselves the painful question, ‘‘Is this difficult thing we’re doing still a good idea?’’

For example, after years of outsourcing to cut costs, a global telecommunications service company we’ll call GiantTel launched a bold new agenda. It partnered with a large telecom equipment company to transform its entire business. In a $1.4 billion, ten-year initiative, GiantTel outsourced its world-class, circuit-switched voice operations to InfraCom (not its real name) and additionally signed up the telecommunications equipment company to build the infrastructure powering GiantTel’s new strategy: It sought a wholesale migration to Internet Protocol (IP) transmission services. GiantTel recognized that managing a transformational agenda required a deep, committed relationship—and the metrics and incentives to support it. The partners rolled up their sleeves and spent months envisioning their future and the potential paths to success. They developed an aggressive plan and a set of metrics to gauge their progress toward the ultimate goal: generating wholly new revenue streams from IP offerings. In addition, they set up an annual ‘‘early warning system’’ to take a cold-eyed look at the market and the competition. This approach enabled GiantTel to adjust direction if the assumptions underpinning its strategy came unwound.

Enterprise-level targets, indicators of momentum, and reality checks are important new measures of transformational outsourcing success. Leaders of these initiatives also use more traditional, lower-level metrics. However, they use these not to hit threshold goals, as conventional outsourcers do, but to communicate expectations, build trust, and drive continuing progress.

[2]Jane Linder and Brian McCarthy, ‘‘When Good Management Shows: Creating Value in an Uncertain Economy,’’ Accenture Institute for Strategic Change research report, September 2002.

[3]Robert Simons, ‘‘Strategic Orientation and Top Management Attention to Control Systems,’’ Strategic Management Journal 12 (1991), pp. 49–62.




Outsourcing for Radical Change(c) A Bold Approach to Enterprise Transformation
Outsourcing for Radical Change: A Bold Approach to Enterprise Transformation
ISBN: 0814472184
EAN: 2147483647
Year: 2006
Pages: 135

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