By Yuval Boger, CEO, Oblicore, Inc. (Published September 20, 2004)

Major organizations all over the globe are increasingly using outsourcing as a competitive maneuver. Whether their goal is to reduce costs or to focus on core competencies by shedding non-strategic operations, there is no doubt that the outsourcing trend is gaining momentum.

When companies are negotiating a large outsourcing contract, they expend a huge amount of effort to determine operational changes, organizational dynamics and financial impact. When the contract is signed, there is a collective sigh of relief and a natural tendency to relax and think that the hard work is done. Companies enter a honeymoon phase of the relationship where the service recipient believes it is predominantly the role of the outsourcing vendor to perform the "heavy lifting." Yet experience has shown that if the service recipient wants its outsourcing operation to succeed, the hard work is just beginning. This is because they are not just relinquishing control of critical operations, but are losing visibility of the performance and quality of those functions.

One reason that outsourcing projects run into trouble is the misalignment of expectations regarding service levels. The negotiation of a major outsourcing contract is a long, drawn-out process because there is a lot at stake on both sides. Like any major negotiation, there is much give-and-take, and gamesmanship, much of it related to service levels and cost. To gain sought-after cost reductions, companies may not fully disclose or even understand the true extent of the service levels that they need, or what is involved in delivering them. On the flip side, service providers, in their desire to win business, often undercut rival pricing and plan to lose money during the first few years of a multi-year contract, while expecting to make money later on, usually due to projected operational efficiency or incremental revenue from add-on services. This is where the problems arise. The client expects high levels of service that may not be well articulated during contract negotiation, while the vendor is motivated to provide the minimum level of service required, at the lowest possible cost.

Complicating the picture is that the service provider sometimes acts as a primary supplier and then subcontracts downstream services to other providers. Downstream suppliers are an extra step removed from the ultimate customer, creating additional communication issues and management overhead.

To ensure that an outsourcing project goes well, here are five tips and techniques that companies should employ with respect to their outsourcing contracts (also referred to as service level agreements [SLAs] by some companies).

1. Ensure the outsourcing contract is structured properly, focused on business goals rather than IT metrics and can be measured with objective data. Companies are now using contracts that separate required service levels in an appendix (e.g. in a statement of work) rather than the contract body. This provides proper focus on service levels and allows them to be easily adjusted to meet the changing needs of the business.

A big mistake that companies commonly make is to focus on technical rather than business objectives. For example, rather than require that a network be available 99 percent of the time, it is more important to specify that e-commerce customers be able to complete all transactions within Y seconds during peak buying hours and that any service interruptions be corrected within Z minutes. By specifying objectives that support business goals, both the service recipient and provider can better focus on what is really important.environment.

Business objectives in a contract should also be easily measured. If there is not an automated or easy way to collect the underlying performance data, the cost of measuring a goal may outweigh the benefit, and an alternative objective should be specified.

2. Do not outsource everything to one provider. While this may be justified in some cases, many companies have learned the hard way that just as it is important not to depend on one supplier of goods, the same is true for services. The golden rule of business is that it is highly disadvantageous and risky to put all of your eggs in one basket with one supplier, as they gain unwelcome leverage over you. Savvy companies outsource operations to two or more companies. Although there is more overhead in managing multiple vendors, the benefits are that they can play providers off each other to ensure performance and cost competitiveness.

3. As the service recipient, make sure that you have access to the service provider's raw performance data. This may be the biggest omission that companies make when negotiating an outsourcing contract or SLA. Instead, they rely on reports from their outsourcing vendor, and they do not require access to the raw data of the provider's internal systems (or those of their downstream providers). Although some companies believe that it is the service provider's duty to comply with the SLA and provide good service, as with any good business practice, it is the service recipient's job to use sound management and control safeguards.

Although this is a simple concept in practice, service provider delivery performance is often not a black-and-white situation; there are shades of gray as to whether the provider met the targets. Forward thinking companies have checks and balances to proactively spot possible violations of service and to verify performance levels. The moral is, as a service recipient, when you are negotiating an outsourcing contract, to make sure your company has access to the same performance data that the service provider uses to manage their internal systems. If they are unwilling to provide this data, it may mean that they do not have good internal monitoring and reporting systems, or they may have something to hide.

4. Build in performance and quality incentives as well as correction and escalation procedures. Some companies believe that if there are any problems, the service provider will just fix it as quickly as possible. Although companies are well intentioned, there will always be issues. Savvy companies use a carrot-and-stick approach of providing incentives for good performance and penalties for non-performance. To enforce these, it is important to measure the service provider's actual performance in an objective fashion (such as data access), as well as to use indisputable penalty or incentive calculations. Although this may sound easy in principle, in reality, these calculations can be highly complex because they require gathering and correlating disparate performance data from multiple systems over extended periods of time.

5. Continuously monitor and review performance. Companies report the top benefits of frequent reporting are increased customer satisfaction, enhanced operational efficiency and improved performance visibility. To gain this visibility, rather than use manual spreadsheets and labor-intensive and error-prone reporting, companies should use an automated system that objectively and independently calculates and reports on performance, penalties and compliance, again, not from a technical perspective but from the point of view of the business goals. Industry analysts report that companies should spend a few percentage points of the value of an outsourcing contract to ensure success.

In conclusion, outsourcing is a major trend that is reshaping the landscape of many companies. By focusing on business objectives, gaining access to performance data, and automating the process of monitoring, managing and reporting on performance, organizations can significantly improve the success of their outsourced operations.

Yuval Boger is CEO of Oblicore Inc., a leading provider of enterprise applications that automate the monitoring, management and reporting of service level agreements and outsourcing contracts. Contact yuval@oblicore.com.

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