Preparing for an outsourcing engagement
takes a great deal of time and effort, and a commitment to doing things
right. These preparatory activities will culminate in a set of contracts
and documents that memorialize the understanding of the parties and the
terms of their agreement. These materials will govern the relationship of
the parties for years to come, and will be used to manage and measure the
outsourcing project. The success of the relationship hinges in many ways
on the quality of the underlying documents created by the parties. Despite
the importance of these documents, companies often skimp on the up-front
preparations necessary to create them.
This Executive Report stresses the
importance of making the necessary investments to produce high-quality
outsourcing agreements. Most outsourcing efforts are quite complex,
covering many functions, assets, resources and work products. It takes
substantial effort to research, negotiate and write the service documents
for the engagement. Most companies are inclined to cut corners and rely on
assumptions and generalities to save time and compensate for inadequate
information. But cutting corners will inevitably lead to future problems.
The accompanying Executive Report offers
a practical approach to create a meaningful set of working documents
within real world constraints. It maintains that the cornerstone of a
successful outsourcing engagement is the ability to set realistic,
appropriate performance expectations, and to manage the project to meet
those expectations. When expectations become misaligned, the outsourcing
project is headed for trouble. An outsourcer may meet or exceed its
performance targets, yet the client may be dissatisfied with performance
because it was expecting something different. Or the outsourcer may be
striving to meet performance commitments that are clearly not attainable,
but which the client perceives are necessary.
Squelching misaligned expectations is
possible, but requires vigilance. The parties must focus on reality, and
not on perceptions. Rather than guessing about the levels of service
needed, concentrate on collecting and analyzing actual performance
information. Rather than glossing over the scope and requirements of the
project, decompose the target applications and functions to determine
appropriate boundaries, hand-offs and procedures. The best defense to
misaligned expectations is a sensible and strong outsourcing agreement
that unambiguously states how the parties can achieve success.
The Structure of an Outsourcing Agreement
The structure of an outsourcing agreement
can vary, but one successful approach is to separate the definition of the
work requirements from the contract itself. That way, work requirements
can be adjusted easily without amending the contract. Aside from the
master contract, the service documents will include:
- Statement of Work (SOW) -- A SOW
defines the scope of the project by specifying the assets and/or
functions supported, the types of work performed, inputs required,
deliverables created and roles of each party. Outsourcing agreements
may have a single SOW covering the whole effort or a set of SOWs
describing discrete portions. SOWs can be static, staying in place
throughout the engagement, or dynamic, arising and terminating with
different projects.
- Service Level Agreements (SLA) -- Each
SOW has a corresponding SLA that defines the parameters by which each
major task or work product will be performed and measured. The SLA
specifies service level criteria that includes performance baselines,
performance targets, tolerances and penalties and rewards.
- Metrics Definitions -- A metrics
definition document will contain the metrics referred to in the SLAs.
A definition includes the name of the metric, its description,
objectives, measurement method, rules for initialization and
responsibility for collection and interpretation.
- Operating Principles -- Operating
principles define how the outsourcer and the client are going to work
together on a daily basis for the life of the contract. They cover
logistics, reporting relationships and governance procedures and
processes.
Scoping the Engagement
To prepare these documents, it is
essential to first scope the outsourcing project. Scoping involves
determining which tasks, staff members and assets will be transferred to
the outsourcer's control, and which will remain with the client. A
recommended method for scoping the project is the building block approach.
This approach focuses on simplifying and minimizing the areas of
interaction between the company and outsourcer, since these areas are
typically the source of problems and friction.
Selecting and Using Metrics
After ascertaining the work products and
deliverables that are within the scope of the outsourcing project, the
parties are ready to define appropriate service levels and metrics. There
are many metrics from which to choose, so companies should concentrate on:
- Choosing metrics that promote the
desired behavior
- Choosing metrics that reflect factors
within the party's control
- Choosing metrics that are readily
collected
- Striving for a manageable amount of
information
- Establishing an appropriate baseline
Metrics generally fall into a number of
discrete categories. Often, a single deliverable will have multiple
associated metrics to provide a complete view of the desired level of
service. There are four primary metrics categories that cover: volume of
work, quality of work, responsiveness and efficiency. Other long-term
measures may also be desirable including benchmarking services, the
Capability Maturity Model, as well as alternatives from various vendors.
The purpose of metrics is to gauge the
outsourcer's performance, and there are ways to organize them to aid in
that pursuit. It is often tempting to judge performance on a
metric-by-metric basis, but this practice is flawed. Individual metrics do
not behave in isolation, and are not all equal. One metric may improve,
while others degrade. A "big picture" view that encompasses a
number of related metrics and balances their respective priorities is most
suitable for assessing the situation properly. One way to obtain a big
picture view is to create a balanced scorecard of weighted metrics. This
scorecard combines several individual metrics along with their weighting
factors to produce a final score that reflects performance to the client's
overall objectives.
Operating Principles
Along with the project scope and service
level metrics, operating principles are needed to explain how the client
and outsourcer will interact, and how the client's user community will
request and receive services from the outsourcer. Operating principles
define procedures to follow, roles, responsibilities and the timing of
various matters. The goal is to develop a mutually agreeable framework for
the operation and maintenance of the outsourcing relationship. Operating
principles typically cover governance issues, project change procedures,
problem escalation procedures, hand-off procedures and performance
procedures such as grace periods, reporting, dispute resolution,
penalty/reward structures and a re-negotiation schedule.
In summary, the quality of the
specifications embodied in these service documents will drive the quality
of the entire outsourcing project. Devoting the proper attention and level
of resources to documents before beginning an engagement greatly enhances
the likelihood of success. The cost of the effort needed to construct a
high quality agreement is miniscule compared to the long-term cost of the
engagement. Given the high after-the-fact cost of remedying outsourcing
issues in terms of management attention and legal costs, investing in a
quality agreement is cheap insurance.
