Measuring Outsourcing Success!

The decision to outsource ICT-functions has become more popular in the last three decades, due to the fact that organizations need diverse and high-quality information services to survive and excel in the rapidly changing external environment. The traditional concept of firm, in which the different value chains activities are carried out internally are replaced by idea of an organization should only focus on its core activities where it can add most value at.

IT-outsourcing has experienced a considerable growth in recent years as companies in many industries don’t see IT-services as their core business capabilities. However, can we say that these outsourcing arrangement were successful? Where does IT-outsourcing success lie? How can we define and measure the performance of an IT-outsourcing arrangement? In this publication, I will try to answer this question, based on my insights from academic publications and practical experiences. Here, I am taking the perspective of the client’s side and NOT from the vendor’s point of view.

Frequently, outsourcing is thought to be successful when such financial-economic expectations as the achievement of a cash infusion, cost reduction, production and transaction cost economies, financial slack or even tax advantages are covered.

Despite the fact that many consider outsourcing success in these terms, the success of an outsourcing must also defined by other factors. These factors set the general impression that stakeholders have about a particular services of a vendor. I like to categorize the determinants of the performance of an IT outsourcing arrangement in 3 types; 1) User Perspective, 2) Business Perspective and 3) Overall Satisfaction. These three categories can be used as three dimensions to measure the extent of outsourcing performance.

User Perspective

One way to measure vendor’s performance is from user’s point of view. Thus, it is about to what extent end-users are satisfied with the outsourced service. The indicators related to User perspective could be:

• Control & Monitoring
• High Partnership quality
• Knowledge Management
• Overcome Complexities & Implementation Success
• Service Innovation
• Service Quality

Control and Monitoring is about being in control of the outsourced service. It's about the day-to-day operations. Are processes like Incident, Problem and change management properly implemented and in use? Does the client have a fully control of the outsourced service? This doesn't mean micromanagement. The client must focus on the output and be in control of that.

High Partner Quality is about the relationship with the outsourced Supplier(s). The informal contacts are very important to solve operations faster and in more efficient manner. Informal contacts are important.

The knowledge of the vendor about the client’s processes/services is very essential for controlling and delivering high quality services/products. Hence, obtaining the knowledge and using in it for organization’s competitive advantage is a factor which makes a significant contribution to the success of an outsourcing arrangement.

Overcome Complexities and Implementation Success is about how the transformation and transition in the project for implementation of the new situation (outsourcing) took place. Success in that project is one of the determinants for success of the rest of outsourcing arrangement. That is at least in the short term. Maybe in a while the effect of this indicator will decrease, as people after some years might forget the events around the implementation project.

Many consider Service Innovation as an important indicator for measuring outsourcing performance. However, it can only be achieved when knowledge sharing process and partnership quality are in their ultimate quality state. Both client and vendor must make investments on realizing innovations. The service innovations can give the organizations their competitive advantage.

The Service Quality aspect is the most important factor for the outsourcing success from user perspective. In most cases participants expect quality improvement from outsourcing the service. The least what they expect that vendor provides the same level of service quality as it was done internally. But two things are making this difficult. First, after a change (transformation) project, the service levels will temporarily decrease, because of the new way of working. If this period of decreased service quality takes too long, it can cause dissatisfactions from the users. Second, usually service quality improvement is not the only objective for outsourcing the service. Cost reduction is the most important reason to outsource a service. However, cost reduction is usually contradictory to service quality improvement. The organizations have to find a balance on how much they push for the cost reduction. It can have disastrous consequences for the service quality, as it is experienced by the users.

Business Perspective

Another area of expectations is on a strategic level. The organization and in specific the

policy makers of the organizations have their expectation on the outsourcing deal. They expect that their organization must extract strategic benefits from an outsourcing arrangement. Business Perspective is about to what extent these expectations are met by the arrangement. The indicators related to Business perspective could be:

• Economic Benefits (Cost Reduction)
• Customer Satisfaction
• Short Benefits versus Long benefits
• Strategic Benefits
• Shared Vision
• Technical Benefits

One of the most important drivers for outsourcing success is the Economic Benefits. In most cases the services are outsourced, because the supplier can do it more efficient and cheaper. Hence, cost reduction is one of important indicator for measuring outsourcing success from the business perspective.

Customer satisfaction is the extent of how satisfied are the customers of the client organization about the IT-services related to the outsourcing arrangement. The managers of the outsourced service must always have the needs of their customers in mind.

It is important that other Short term benefits be visible immediately after implementation of outsourced service and the Long term benefits must be felt in years after that. The short-term benefits have to be seen immediately within a couple of months after implementation of the outsourcing success. These two aspects, which interplay with each other, are valuable indicators for measuring of the outsourcing success.

Realizing Strategic Goals is another indicator for measuring outsourcing performance. Whatever the strategic goals of the organization are and how it is related to the outsourcing arrangement, it is a major satisfier.

Shared Vision can also be considered as one of the indicators for measuring of the outsourcing success. Was Senior Management able to establish a clear vision about the outsourcing initiative and did they communicate this well throughout the whole organization? Each user and employee involved must know the organization’s objectives related to this outsourcing project. This will set their expectations for the outsourcing deal, hence determining their satisfaction level.

The last indicator for measuring success from the Business Perspective is Technical benefits. Organizations can outsource their IT-services because the vendors are more capable in delivering the technology. It is sometimes about the maturity of an organization on the IT-standards. Very often, Organizations outsource an IT-service, because their IT-landscape is complex. Managing of this complex landscape take much time and effort. That can be a reason to outsource it. When organization outsource for these technical benefits, this aspect becomes an important indicator for measuring vendor’s performance.

Overall Satisfaction

The last dimension by which outsourcing performance can be measured is the overall satisfaction. This dimension is very different than the other two (User and Business Perspective). The other two were definable in very objective indicators. That is not possible for Overall Satisfaction. When you bring the overall satisfaction to an individual level, it is different per individual. Overall Satisfaction is always a combination of success in indicators of User and Business Perspective. However, each indicator can have different weight for each individual. For example, an individual emphasizes the importance of service quality, while other individual finds innovations more important.

One general thing that can be said about this matter is that everyone expect that with the outsourcing arrangement things must get better. The service quality must be improved, Costs must decrease, Technology innovations must be introduced, or/and customer satisfaction must increase, etc…

Overall Satisfaction is basically about meeting the expectation of each individual. Each individual has its expectation about the outsourcing arrangement at forehand. Therefore, I can explain the Overall Satisfaction as an entity by its self. It is a combination of different factors and pending on the weight of each aspect. To conclude, I can suggest that you can measure Overall Satisfaction only by measuring the general satisfaction (surveys).

Measuring Outsourcing Performance

As discussed above, the performance of an IT-outsourcing arrangement can be evaluated by three types of indicators; User perspective, Business Perspective and Overall Satisfaction.
By measuring the levels on each of the mentioned indicator, an organization can get a good sense of the performance of their outsourced IT-services. Some of the indicators like economic benefits and service qualities are easy to measure. However, for other indicators both parties (Client and vendor) should agree on how to measure those aspects. This should be thought of in advance; during set-up of the contracts. To measure the progress, there must be a baseline measurement and a number of measurements during the outsourcing deal. In that way you can compare the levels of before and after outsourcing.

At the end, I do not argue that this approach is all comprehensive or the only way, because the context of every outsourcing arrangement is different. However, it can give you (as the outsourcing-client) an idea how to approach the evaluation of the performance of your outsourcing deal.

This publication is based on the result from my research on IT-outsourcing in 2010, presented in my Master These at University of Amsterdam (Nominated for the Master These of the year in Information Management studies).