The benefits of outsourcing traditionally have been described in financial terms. Reducing the cost of operations and gaining the ability to substitute variable expense for fixed expenses remain compelling arguments with financial management.
With progress, however, cost reduction benefits have become “table stakes” as even more significant advantages are realized from outsourcing partnerships. Leading organizations have discovered that in addition to cost benefits, outsourcing presents an opportunity to improve the level of service.
“Best in class” is becoming a more common yardstick with which to measure outsourced operations. Measurement criteria have to evolve along with the higher standards and expectations from outsourcing. Service levels have historically been created in operational language and focused on efficiency, most commonly in mechanical terms. Too often, the service levels in the written agreements between client and provider are throwbacks to the old outsourcing paradigms based on cost containment and efficiency. While there’s nothing out of order with operational-based service levels, they don’t do a good job of capturing the value-added business benefits that outsourcing can deliver.
If outsourcing is to deliver “best in class” service levels in addition to significant cost benefits, the service provider and the client relationship must evolve beyond a “least cost, lowest bid wins” mentality to something that more closely resembles a true partnership. The problem with a focus on cost of service is the inevitable focus on minimization. Vendors look for the cheapest solution and have no incentive to improve service. If an operational efficiency is created, the vendor has no incentive to share. It’s an environment that doesn’t reward any investment in delivering a better solution, only a cheaper one. However, both parties will be motivated to operate at their best levels when they can share the rewards of superior performance.
Such a partnership arrangement requires a fundamentally different way of looking at contracts, service levels, and cost analysis. First, the service levels should include the basic operational criteria as they typically have in the past. More importantly, the service levels have to capture the real business benefits that are sought and provide rewards accordingly. Clients should be prepared to share the incremental benefits (or value) created by the outsourcing provider. For example, if a mail order client were to measure the provider’s performance based strictly on call-wait and call-duration times, the client might easily miss the opportunity to increase sales revenues created with a well-motivated and professional call center operation. If there is more emphasis (and a financial incentive for the service provider) to focus on customer satisfaction and incremental sales order volume, call-wait and duration times may be less important.
The point is as obvious as it is simple. The more closely a service level measurement reflects the fundamental objectives of the client, the more opportunity there will be for the service provider to add value in a creative and significant way. The real incentive for raising the bar to a higher level comes when the provider is rewarded for innovation and performance in terms of the business objectives. Once the benefit is realized, both organizations can share the rewards.
But only for a while. An incentive is effective only so long as it’s just at the limit of one’s reach. Then the standard must be raised again, and new levels of excellence realized for the next incentive. After all, isn’t that what both parties really want? The opportunity to create more profits, improve efficiency, and reap the benefits. When service levels are based strictly on operational criteria, they tend to stifle innovation and genuine performance enhancement because they focus on process rather than business objectives.
The emerging standard for service levels will be founded on business objectives far more than on performance metrics. The best arrangements are those which reflect the interests and expertise of both parties, then provide clear and attractive incentives for improving not only the process efficiency, but also the value that the operation or system can deliver to achieve the business goals and objectives. By creating a “win-win” partnership, outsourcing is poised to deliver the next wave of process and business performance enhancement.