Complement your Service Level Agreements by using a strategic sourcing scorecard.

by Kalpana Ramakrishnan, Theodore Frangulescu

Most organizations monitor compliance of a sourcing arrangement with service-level agreements (SLAs), but beyond that, they have a limited view of what constitutes success or failure of such a business approach.

In a recent KPMG survey on Global Sourcing, 70 percent of respondents reported having no formal criteria for determining outsourcing success, and 44 percent reported having no formal process to review the benefits of sourcing. Yet, despite these figures, most respondents reported that their outsourcing arrangements were generally successful. What is driving this perception? Are organizations extrapolating good SLAs to denote overall success, or are they basing their positive impressions on undefined, undocumented factors? Either way, this gap calls for a structured approach to measuring success beyond the SLA.

Outsourcing success should be defined in broader terms than operational performance. SLAs may be effective at measuring day-to-day performance levels, but they are not designed to measure strategic impacts and benefits of outsourcing. By strategic, we refer to elements such as alignment with corporate goals and business strategy, impact on organizational flexibility and scalability, functional and technological innovation, impact on competitiveness and market positioning, and cultural alignment.

When companies focus too much on the operational aspects of outsourcing, they neglect both potential benefits and significant risks. It is not uncommon for strategic misalignment between client and provider to jeopardize an entire outsourcing arrangement, even though operational performance is high. For example, in the finance and accounting area, where processes are often transactional, the abundance of quantitative performance metrics can overshadow strategic and qualitative elements.

Just as success is defined in more than operational terms, results should be measured using more than operational tools. Effective measurement can be achieved by a strategic sourcing scorecard that’s developed prior to executing an outsourcing agreement and appraised periodically using a formal review process. Let’s consider the criteria organizations should consider as part of a scorecard and a process for measuring performance and gauging success.

Where SLAs Fall Short
SLAs typically measure quantitative, transactional aspects of an outsourcing arrangement and are effective for this. But there is more to the success of an outsourcing arrangement than meeting performance metrics. Outsourcing success depends on establishing and maintaining a mutually beneficial relationship and, as with most relationships, getting things right, which is not easily reduced to quantitative terms. Further, they must ultimately achieve the strategic goals that began the search for the outsourcing arrangement in the first place. This is where SLAs fall short. Specifically, SLAs present limitations in four areas.

• SLAs are not linked to corporate strategy or objectives. They measure transactional performance, painting a partial picture of success or failure. The foundation for an outsourcing arrangement begins with setting clear objectives and linking these with corporate strategy. For instance, does the organization want to create operational flexibility and scalability to support acquisitions and expansion, or is it focused on cost reduction? Defining objectives sets the direction for other decisions involved in establishing an outsourcing arrangement. Yet when it comes time to measure how well the arrangement is performing against objectives, most organizations employ no tool or system other than an SLA. This is based on the false premise that operational performance must roll up to strategic success.

• SLAs are not good at measuring qualitative factors like innovation and cultural fit. Many organizations try to reduce everything to a measurable quantity to embed them into an SLA, but this misses the point. Cultural factors cannot and should not be reduced to transactional metrics. Accounting and other back-office functions are prone to falling into this trap because those services have become such a commodity.

• SLAs draw too much attention to statistics at the expense of holistic success factors. They create a myth of objectivity that leads people to believe that, because something can be measured in quantitative terms, it must be an accurate reflection of performance. This is not always the case. Statistics are always at risk of manipulation. The scenario of SLAs showing everything “in the green,” while the client knows there are outstanding issues, is common.

• SLAs often grow to take on such importance, mainly because they have a direct impact on fees and service credits. Often, the SLA is the only interface between client and service provider. So much time and attention go into their preparation and review on a regular basis, there is little time or desire left over to address the issues that risk toppling the entire arrangement. Part of this stems from a desire to avoid conflict. It’s easier to discuss operational shortfalls, supported by metrics, than to address people-related issues. Unfortunately, the latter often have a greater impact.

Organizations can complement SLAs with a scorecard that captures critical elements that need monitoring, such as the following:

• Strategic Alignment: How well does the outsourcing arrangement help achieve strategic goals?
• Customer Satisfaction: What is the impact on internal and external customers?
• Cultural Fit: How well do the provider’s organization and people fit with yours?
• Impact on Employees: What effect is the arrangement having on employees?

Strategic Scorecard
A sample scorecard (right) comprises the categories described above, along with specific considerations to be monitored. The key to developing an effective scorecard is not to define elements that can be reduced to quantitative metrics. This is not an exercise in identifying more things to heap onto an SLA. The aim is to define things that can be linked to, and articulated in terms of, overall organizational performance.

Consider measuring the outsourcing arrangement qualitatively, rather than purely quantitatively. Some elements lend themselves to quantitative measurement (e.g., quarterly satisfaction survey), while others, such as cultural fit, are better captured in terms of specific issues and experiences. One company we worked with administers a customer satisfaction survey to gauge the performance of its outsourced call center and other customer-care processes. The insights it gains go deeper into the quality of its service provider’s work than the SLA. The company uses survey results, both in aggregate and with respect to specific incidents, in its quarterly reviews with the service provider. The company reports that this information encourages a much more useful dialogue when it’s time to discuss performance than poring over monthly statistics.

Once a scorecard is defined, companies may use it to govern the sourcing arrangement. Remember, this is not about adding metrics to the SLA to justify service credits or penalties. It’s about expanding the basis on which the arrangement and relationship with the service provider can be assessed and improved over the long term. In this vein, managing the scorecard demands a parallel governance process (see Figure 2).

In addition to the monthly performance tracking and SLA review process, organizations should review the scorecard with providers and develop an action plan to resolve issues. Governance should include defining a scorecard team of representatives to track, compile, and report information related to their categories.

This process should take a different approach than the regular SLA review process. The agenda should address issues that require resolution and avoid discussion around specific metrics or service credits. Building the agenda is a triage process of deciding which issues could benefit from escalation to the scorecard discussion.

The review discussion should be attended not just by operational staff, but also by each side’s relationship and contract managers, so the appropriate representatives can make key decisions. The outcome of the review must include an action plan with tasks, responsibilities, and deadlines. Success is measured through continuous improvement and by preventing the same issues from arising repeatedly.

Kalpana Ramakrishnan leads KPMG’s Sourcing Advisory Services practice in the Americas and can be reached at 714.850.4355 or kramakrishnan@kpmg.com. Theodore Frangu-lescu is a manager in KPMG’s Sourcing Advisory Services practice and can be reached at 985.807.5362 or sfrangulescu@kpmg.com.