Outsourcing services present a great opportunity for enterprises to take advantage of talent, knowledge and skills available worldwide, regardless of time-zone and location. Companies are increasingly turning to outsourcing for a number of different reasons, such as, supporting their strategy, gaining competitive advantages, strengthening their core competencies, reducing costs, alleviating skills or talent gaps, or even gaining access to new markets. As a result, we are witnessing a rapid growth of the number of available outsourcing services, as well as a gradual expansion of their scope.
Assessing your Outsourcing Services: The Need
The availability of many outsourcing firms provides increased flexibility and better opportunities for selecting cost-efficient and higher quality services. However, it also makes the vendor and service selection process quite extensive and challenging. Furthermore, it creates a need for evaluating the current outsourcing partners which becomes a vital input for any future vendor selection processes and also helps in assessing their value for money.
Despite the proclaimed benefits of outsourcing, several managers and C-level executives perceive it as risk and associate it with various negative effects. In particular, managers are skeptical of the capabilities of outsourcing vendors to deliver exactly what is needed. Moreover, Outsourcing is often blamed for loss of in-house knowledge, as well as for lack of total accountability. Another risk, often highlighted, is the possibility of conflict within multiple outsourcing partners, and ultimately a high likelihood for poor cost-effectiveness especially when results fall short.
For all these reasons, it is important to assess outsourced services in terms of their quality, cost and other parameters. The assessment should take place regularly and based on appropriate metrics that are representative of the services’ performance. Such metrics are usually the best way for convincing senior managers and C-level executives about the merit and need of outsourcing.
Metrics of Outsourcing Performance
The assessment of outsourcing services is a multi-facet process, which should cover the quantity, quality, timeliness and cost-effectiveness of the offered services. In order to cover all these aspects different metrics have to be tracked, including:
- Service Quality Metrics: These metrics focus on the overall satisfaction from the outsourced services. They include parameters such as timeliness in the provision of the service (e.g., whether deadlines were met and at what extent), the accuracy of the service (if applicable), the number or percentage of legal requirements fulfilled, as well as the perceived satisfaction from the service.
- Vendor Assessment Metrics: Vendor assessment metrics prioritize the assessment of the vendor, based on parameters about its reputation, it responsiveness to requests during the outsourcing processes, as well as its compliance to standards and regulations. While the quality metrics outlined above focus on the quality of the provided services, vendor assessment metrics focus on the vendor as a whole rather than on a specific service that it provides.
- Cost Reduction Metrics: Regardless of the quality of the vendor and its services, the cost of the outsourced services can be a significant parameter of the assessment process. Cost reduction indicators are usually calculated based on the comparison of the personnel and other costs that would be incurred in case the service was not outsourced. This requires the calculation of the in-house costs that would be associated with the outsourced activity. The calculation must be performed based on reasonable and pragmatic assumptions.
- Losses and Consequences: Relevant metrics attempt to quantify the negative effects of the outsourcing process, such as loss of in-house expertise, problems with attraction of competent personnel, reduced retention rates for skilled employees, as well as reduction of the company’s innovation capital.
- Benefits on Employment: In several cases, the outsourcing involves hiring personnel for executing a certain task. For such cases metrics associated with the productivity of the outsourced employees, their ability to become integrated in a team, the effectiveness of their collaboration with the employees of the enterprise should be calculated and tracked.
- Intangible Benefits from Outsourcing: These metrics attempt to document intangible benefits from the outsourcing process such as better utilization of personnel, reallocation of personnel to more productive tasks, time savings and improved branding of the company.
Beyond Simple Metrics: ROI Calculation and Scoring
The documentation and calculation of the above-listed metrics provide a very good overview of the effectiveness of the outsourced services, while at the same time enabling comparisons of different vendors and services. Relevant information could be integrated and visualized on appropriate dashboards in order to boost managerial decision. Nevertheless, in several cases the comparison of different metrics will not lead to a direct winner and in such cases, companies can combine multiple metrics to form composite metrics that could aid the comparison process and provide invaluable and more comprehensive insights. This combination can take different forms, including:
- Return-on-Investment (ROI) Calculation: This involves calculation of financial indicators based on the quantification of the benefits and the costs of the outsourcing. In general, an outsourcing service is expected to lead to a positive ROI. Relevant calculations could be also based on indicators like IRR (Internal Rate of Return) as we indicated in one of the earlier posts of this blog.
- Scoring Formulas and Scorecards for Comparing Outsourcing Offering: Another way to combine multiple metrics concerns the development of a scorecard, which considers a weighted sum of multiple metrics. This sum could be used to compare different outsourcing offerings. Furthermore, the tuning of the weights, along with the selection of the metrics to be used, provides flexibility in building scorecards that prioritize the offerings in-line with the actual needs of the enterprise.
ROI calculators and scorecards can support managers in taking educated decisions about their outsourcing services. The assessment process is not a one-time activity as outsourcing providers and services need to be assessed regularly whilst the criteria is updated dynamically in-line with the evolving business needs. As part of the assessment process, scorecards and quantifiable indicators, must be complemented with critical feedback from relevant stakeholders. In particular, the opinions of HR (Human Resources) managers, the CFO (Chief Financial Officer) and the people that use the outsourcing resources are very important for the overall assessment of vendors and services. In addition to using the above metrics, it is always important to establish a proper evaluation process, which combines quantitative calculations with feedback from key stakeholders. Such an evaluation process helps in the proper assessment and selection of the right outsourcing partners and also for evaluating the current partners and taking corrective actions. Make the most of outsourcing by quantifying and then qualifying.