taking a performance-based services approach to improve the effectiveness of outsourcing

8/2/2019 Taking a Performance-Based Services Approach to Improve the Effectiveness of Outsourcing

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Taking a Performance-BasedServices Approach to Improvethe Effectiveness ofOutsourcing

Alan McSweeney


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April 10, 2012 2

Performance-Based Services Contracting (PBSC)

Concerned with the structured of the results andmeasurable outcomes to be achieved rather than themanner by which the work is to be performed

Performance-Based Services Contracting approach is aboutdefining what the required results of a service will ratherthan how the contractor will perform the tasks

Supplier becomes responsible for how service isaccomplished


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Service Becomes Black Box

ServiceRequirements Results/Outcomes

Data

Measures

Expected vs.Actual


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Types of Outsourcing Arrangement

Efficiency/Utility

(Make It Cheaper)

Focuses primarily on cost

control and, over time,cost reduction, with the

goal of maintainingconsistency in the

delivery of services

BusinessEnhancement

(Make it Better)

Improve businessproductivity resulting in

movement towarddefined business goals

Transformational

(Make me Money)

Partnership between theservice provider and

service recipient that isfocused on innovation

and new business

Complexity of Outsourcing Arrangement


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April 10, 2012 5

Why Use Performance-Based Services Contract

Approach?

Can be used to achieve innovation within an outsourcingarrangement

Useful where supplier is taking over an unstructured/undefinedservice/state with a mandate to change and improve

Should increase customer satisfaction because results are improved

Promotes frequent communication between the customer and thesupplier

Demands good contract management to ensure results are achieved

Shifts the risk to the supplier

Can improve supplier performance


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April 10, 2012 6

Concerns With Performance-Based Services Contract

Approach

Requires regular and frequent communication between thecustomer and the supplier

Requires good contract management by of the customer to ensureresults are being achieved

Requires an understanding of what the objectives of the proposedoutsourcing arrangement are and the problem you are trying to

solve Requires commitment and resources to get outsourcing definition

right

You can outsource anything except the management of what isbeing outsourced

Outsourcing Fire and Forget


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April 10, 2012 7

Performance Based Service Contracts

Types of Outsourcing Arrangement and Use of

Performance Based Service Contracts

Efficiency/Utility

(Make It Cheaper)

Focuses primarily on cost

control and, over time,cost reduction, with the

goal of maintainingconsistency in the

delivery of services

BusinessEnhancement

(Make it Better)

Improve businessproductivity resulting in

movement towarddefined business goals

Transformational

(Make me Money)

Partnership between theservice provider and

service recipient that isfocused on innovation

and new business

Complexity of Outsourcing Arrangement


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April 10, 2012 8

Key Components of Performance-Based Services

Contract

PerformanceWork Statement

(PWS)

MeasurablePerformance

Standards

PerformanceIncentives

(Where

Appropriate),Overall CostModel

Performance-Based Services Arrangement


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April 10, 2012 9

Overall Outsourcing Service Framework

Statement ofObjectives (SOO)

PerformanceWork Statement

(PWS)

QualityAssurance

Surveillance Plan

(QASP)

PerformanceAssessment

Report (PAR)

Service Contract andCost/Payment Model

SOOExpanded

Into DetailedPWS Delivery ofPWS

Measures byQASP

QASPReported on

in PARs

Contract Governs Overall Service Delivery

Requirements PWS ContainsDetailed

RequirementsRequirements Feed Into QASP

RequirementsFeed IntoContract

PARs AffectPayments


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April 10, 2012 10

Performance Work Statement (PWS)

Statement of work for performance-based services that describesthe required results in clear, specific and objective terms with

defined and measurable outcomes

Focuses on what the results of performance will be

Describes the work in terms of the required results

Enable assessment of service delivery performance againstmeasurable performance standards

Defines a measurement framework

Defines measurable performance standards and financial incentivesto ensure suppliers develop and implement innovative and cost-effective methods of performing the services


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April 10, 2012 11

Performance Work Statement (PWS)

Questions to consider when developing a PWS

Why do we need the service performed?

What kinds of results quality/time - do we want from it?


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April 10, 2012 12

Statement of Objectives (SOO)

Statement of the overall performance and other objectivesfor the service

Defines what is required in terms of the results of theservices to be performed

Designed to enable the maximum flexibility to a supplier topropose an innovative approach to service delivery


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April 10, 2012 13

Performance Objectives

Performance Objectives define the performance levelrequired to meet the service delivery and operationrequirements

Performance Objectives need to be measurable andstructured to permit an assessment of the suppliers

performance of service delivery and operation


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April 10, 2012 14

Performance Assessment

Based on Quality Assurance Surveillance Plan (QASP)

QASP follows-on from requirements listed in theperformance work statement (PWS)

Defines the procedures to ensure the required

performance standards and levels of services are providedby the supplier


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April 10, 2012 15

Quality Assurance Surveillance Plan (QASP)

QASP enables you to evaluate if the supplier is meeting the performancestandards/quality levels identified in the PWS Measures the suppliers performance against the agreed and defined performance

standards

Ensures you pay only for the level of service provided

Defines the systematic methods and processes used to monitor performance Surveillance techniques/methods

Assess and assure contract compliance

Measure against defined Acceptable Quality Level (AQL)

Reporting

Reviews and Resolution

Identify the required documentation

Detail the resources to be employed, roles and responsibilities

When shared with the supplier, the QASP is a communication tool that allow boththe customer and supplier focus on what is most important


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April 10, 2012 16

Performance Assessment Report (PAR)

Evaluation of the services supplied

Frequency of PARs production defined in overall servicecontract

Contains

What the supplier was required to do

What measurements were defined

How the supplier is performing

What actions are being taken based on performance


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April 10, 2012 17

Performance Assessment

Measures and metrics inform the supplier how therequirements are being met

High and low thresholds defined exceed/not meetrequirements

Need to define measurement intervals to identify suppliernon-performance

Define interval within which corrections can be made

Customer needs to create Quality Assurance team toregularly and frequently verify supplier compliance withdefined Performance Objectives


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April 10, 2012 18

Performance Measurement Framework

Customer

Supplier

Analysesand

RequestsActions

TakesActions

MonitorsCompliance

ProvidesPerformanceAssessment

Reports (PARs)

Reviewand

Respond

Respondto

Feedback

Collectsand

SuppliesData

DefinesMetrics

Requires regular and frequent communication between the customer and thesupplier

Requires good contract management on the part of the customer to ensureresults are achieved


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April 10, 2012 19

Performance Assessment Reporting Framework

Define tiered performance reporting framework operational andstrategic - and adhere to it

Month1

Month2

Month3

Month4

Month5

Month6

Month7

Month8

Month9

Month10

Month11

Month12

Quarter 1 Quarter 2 Quarter 3 Quarter 4

Annual


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April 10, 2012 20

Performance Metrics

Need to define set of metrics that capture what is important to theservice delivery

Balance between too few and too many Metrics need to tell you when the performance standards have been

met

Need to assess that the definition of metrics will cause supplier to

take actions to optimise their value which may lead to undesirableconsequences

Define tiered metrics to match tiered reporting: operational andstrategic

Define measurement framework that measures performance andinteractions across service landscape

Measure what is important and what has an impact

Measure outcomes the what rather than the how


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April 10, 2012 21

Define Measures Linked to Key Service Elements and

ProcessesMetric 3Metric 2

Metric 11Metric 10 Metric 13

Metric 4

Metric 12

Metric 8

Metric 9

Metric 1

Metric 5

Metric 6

Metric 7


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April 10, 2012 22

Define Measures Linked to Key Service Elements and

Processes

Create service landscape/architecture with cross-functional processes

Define hierarchical metric framework that measuresoutcomes for individual service components, collections ofservice components and overall service


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Metrics Hierarchy

KPI

Process Metrics

Results MetricsOperational Metrics

Process Metrics Roll-upof Operational Metrics

High-Level Metrics WhichMeasure Progress TowardStrategic Service Objectives

Align Metricsto Allow Roll-

up


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April 10, 2012 24

Outsourcing Contract Types

Different types of contract (payment) structures availableto customer

Many contract types available

Need to consider contract type and associated payment

structures that will motivate suppliers to increaseefficiency and maximise service performance

Need to select a contract type and price (or estimated costand payment structure) that will result in reasonablesupplier risk and provide the supplier with the greatestincentive for efficient and economical performance

Contract type and price negotiation are linked


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April 10, 2012 25

Outsourcing Contract Types

Contract Types

Fixed-PriceCost-

ReimbursementIndefinite-Delivery

Time-and-Materials, Labour-

Hour, and Letter

Agreement

Firm-Fixed-Price

Fixed-Price withEconomic PriceAdjustment

Fixed-PriceIncentive

Fixed-Price withProspective PriceRedetermination

Firm-Fixed-Price,

Level-of-EffortTerm

Cost-Only

Cost-Plus-Incentive-Fee

Cost-plus-Award-Fee

Cost-Plus-Fixed-Fee

Time-and-Materials,

Labour-Hour

Letter

Basic

Basic Ordering


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April 10, 2012 26

Outsourcing Model High-Level Approach and Steps

1. Form theSourcing Team

2. ReviewCurrent Sourcing

Strategy

3. PerformMarket Research

4. DefineRequirements

5. DefineSourcingStrategy

6. ExecuteSourcingStrategy

7. ManagePerformance

Build the Sourcing Team With ExecutiveSponsorship and Support

Conduct Analysis of Previous Sourcing ArrangementsDefine Stakeholder and Customer needs

Analyse the Market and IdentifyPotential Suppliers

Define Requirements

Define Sourcing Approach and CreateSourcing Strategy Strategic or Tactical

Select the Most Appropriate Supplierand Implement Sourcing Strategy

Build Supplier RelationshipMonitor and Manage Performance


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Requirements

Defining requirements is crucial to the entire sourcing process

Requirements need to be well-defined, realistic, achievable and

measurable Requirements need to have an associated quality level and schedule

Requirements provide the basis for the PWS

Requirements need to be defined in terms of desired results ratherthan specifying how the work should be done

Each requirement needs to have an associated measurementmethodology

Requirements may have cost reduction for non-achievement orincentive for exceeding defined performance

Requirements must be unambiguous and easily understood


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Requirements

Requirements measured against performance

Performance must be linked to a performance objective Must be able to know what performance level is needed

by the business in order to define the requirement

Must know why the performance is required

Why are you asking for this requirement, why is itimportant, why is it needed, why business

outcome/objective is achieved?


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SOO MoSCoW Prioritisation of Requirements

MoSCoW

Must Have

Requirements that are fundamental to the operation of the service

Without them the service will be unusable and useless

Must Haves define the minimum subset services

Should Have

Important requirements which are not necessary for service operation inthe short-term but which will contribute

Could Have

Requirements that can be omitted but which are part of the long-term

service and will be beneficial to the service being provided

Want to Have

Requirements that are effectively optional


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Requirements Structure

Business Outcome

Objective 1 Objective N

Performance Inspection/ Validation Incentive/ Penalty

Performance Objective

Standard(s) andMeasure(s)

Minimum AcceptableQuality Level

Data Source(s)

Frequency

Measure


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Performance

Performance standards define what level of performancemust be met to satisfy the performance objective

Objectives must be objectively measurable

Data to create measures must be available and collected

AQL (Acceptable Quality Level) is an acceptable deviationfrom the standard

Example: 95% of requests to be satisfied within standard

You will almost never achieve 100% of performance 100% of thetime without incurring significant cost

AQL specifies the allowable tolerance

What AQL is acceptable and appropriate and why?


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Inspection/Validation

Inspection is needed to know if the standard is being met

Customer needs to perform inspection/verification

Inspection/verification requiresDefinition of information needed

Sources of information

Frequency of collection

Method of collection

Metrics generated/derived from data

Inspection/verification itself needs to be inspected andvalidated

Inspection process requires resources essential part ofcontract management


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Incentives/Penalties

What are the impacts of meeting or not meeting thestandards of the objectives?

Should penalties be specified for not meeting standardsfor a defined interval?

Should incentives be specified for meeting or exceedingstandards for a defined interval?

Penalties/incentives need to be linked to:

Realistic cost of not achieving/benefit of achieving

Encouragement of good behaviour

Change does not occur based on positive incentives alone


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Prioritisation of Requirements

Determine which performance objectives are the mostimportant and weight accordingly

Assign a higher penalty/weight to these

When evaluating suppliers assign greaterimportance/score to meeting these factors

Form part of overall service contract


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Objective

Performance Inspection/ Validation Incentive/ Penalty


Standard(s) and

Measure(s)

Minimum AcceptableQuality Level

Data Source(s)

Frequency

Measure


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Objectives need to be specified in terms of Performance

Which specifies


Subject to Standard(s) and Measure(s)

With defined Minimum Acceptable Quality Level

Which are measured by Inspection/Validation

Which specifies Data Source(s)

From which performance information is collected with a defined Frequency

That is then used to generate a defined Measure

And subject to Incentive/Penalty


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Summary

Getting outsourcing right is not easy

PBSC provides a potential approach for maximising results

PBSC is good where what is being outsourced is not stable and issubject to change

PBSC provides a means for embedding flexibility and innovation inoutsourcing arrangement

PBSC does impose overheads in service definition and supplierselection and in subsequent supplier management that you need tobe aware of and accept

Not easy but is worth getting right

Remember: You can outsource anything except the management ofwhat is being outsourced

Outsourcing Fire and Forget


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More Information

Alan McSweeney

[email protected]

taking a performance-based services approach to improve the effectiveness of outsourcing

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