in Outsourcing: Outcomes vs. Tasks
No one who outsources IT
really cares about servers
or switches or man-hours.
They want business results.
Outcome-based outsourcing
promises to deliver those results,
but moving from input-based pricing
to outcome-based contracts
is easier said than done.
— CIO —
Outcome-based outsourcing is
the holy grail of IT services.
Both customers and providers
agree that if they can figure out
a way to tie sourcing strategy
to business results everyone
will be happier in the end.
The problem with many traditional
outsourcing arrangements is that
they focus on input rather
than output.
Just as U.S. health care reform
advocates criticize a system
that incents doctors to
perform tests and procedures
with few rewards for the
ultimate goal—a healthy patient,
some outsourcing reformers
say too many IT services deals
are myopically focused on
tasks or man-hours rather
than business results.
Outcome-based contracts—at
least, in theory—can
change that. "Paying for outcomes
is the idea of paying for
success toward a desired
result instead of paying for
individual items like servers
or programming hours,"
says Adam Strichman,
an independent outsourcing
consultant based in
Mechanicsville, Va.
"Nobody really wants servers,
or switches or a mainframe.
They generally want
a business outcome, such as
faster access to information
or an automated delivery system."
[ For more stories on
outsourcing pricing models,
Introducing a New, Hybrid Pricing Model. ]
But devising outcome-based
outsourcing deals that satisfy
both the customer and the
vendor has proven difficult.
Time-and-materials contracts
remain the most common
outsourcing model in the industry,
particularly offshore, says
Sandeep Karoor, managing
director of outsourcing
consultancy Neo Advisory.
Fixed-price contracts run
a distant second.
Outcome-based contracts
account for, at most,
15 percent of new deals,
says Strichman, and they may
only apply to part of
the outsourced work.
Who's Outcome Is It Anyway?
Part of the problem with this
new paradigm, whereby
contracts are based on results
rather than resource consumption,
is in defining outcomes.
Every stakeholder has
a different desired end
state—or two or three.
The CEO wants happy customers
and shareholders or to be
the industry leader.
The CFO wants an increase
in profitability. The business
unit leader may desire
best-of-breed systems.
And the CIO?
He's got a whole list—lower costs,
better service levels,
increased customer satisfaction.
What may be the biggest
problem of all is that
the IT service provider has
very little control over
or connection to any
of those outcomes.
Outsourcing: Pros and Cons
- More cohesion of work being delivered
- Freedom from interviewing
- and monitoring individual staff members
- Ability to incent more
- innovative behavior from provider
- Potential for higher eventual
- savings as labor arbitrage
- is replaced by productivity
- and synergies between
- tasks as key savings drivers
- Lack of transparency into
- how work is being performed
- Little insight into costs
- of service (unless visibility
- into resource consumption
- is maintained)
- Additional administrative
- burdens associated with
- root cause analysis (if service
- is not being delivered
- as promised) and evaluation
- of service delivery from
- outcome-based perspective
--Source: Forrester Research
"The measure of success—or
outcome—has to be directly
related to the success or
failure of the
underlying services,"
says Strichman. "It sounds simple,
but it can be hard when
you start talking about
business outcomes.
The supplier cannot influence
things beyond the
supplier's realm of responsibility."
For example, the CFO may
want to tie the outsourced
application development of
a new product to the profitability
of that new product, but that
may be impossible.
The application development
provider could design
the world's best system
two weeks ahead of schedule
and a million dollars under
budget, but it has little
control over other
factors—such as marketing,
economic conditions,
bad management,
inept delivery managers,
bad press—that affect
the profit outcome.
"There are all types of
outcome-based pricing,"
says Strichman. "Sometimes
these models have
moderate success.
Often they have no
success whatsoever."
The most common business
outcome tied to IT services
deals to date is increased
customer satisfaction,
says Strichman, but that
may encourage the vendor
to construct customer
surveys that will deliver
the desired result.
"The belief is that by
tying metrics and pricing
to the success of the business,
both parties now have
their goals in alignment,"
says Strichman. "But the
reality is, alignment is not
enough; the vendor must be
able to influence a significant
portion of the costs which
influence the outcome
being measured. And
the metrics must make
sense related to the service.
Customer satisfaction may
have nothing to do
with the vendor."
Contracts focused on
desired outcomes at
the CIO level have a
concrete record of success.
With these types of deals,
a vendor takes responsibility
for "end-to-end" IT
service levels. "The vendor is
responsible to create
an entire system—design,
infrastructure, network,
programming, maintenance
and customer support/help,"
says Strichman. "These contracts
are not uncommon
and can work. But even
that is really, really hard to do."
Resistance on Both Sides
Beyond the ability to identify
and connect business
outcomes to IT services delivery,
another roadblock on
the journey to outcome-based
outsourcing is
cultural resistance—from both
the client and the vendor.
Customers often are not
comfortable ceding the level
of day-to-day control necessary
to enable the vendor
to focus on outcome,
rather than service delivery.
"Considerable change
management is required
in the client's mindset
during the initial
delivery phases," says Karoor.
Handing over the reins
requires that the client has
enough self-knowledge
to be able to create realistic
outcome-focused SLAs,
not to mention a deep level
of trust in its vendor.
While Gartner has noted
that providers are moving
toward output-based pricing
models where services
support a process with
measurable outcomes,
buyers for the most part
still seek out the safety
of traditional outsourcing models.
Only more mature clients
are beginning to link
outsourcing outcomes to
business objectives,
says Gartner, which "typically
involves an evolved pricing
model developed after
relationships and trust
have been established."
Providers may resist
business-outcome focused
contracts because of
the risk they represent.
Although moving away
from input-based
pricing enables vendors
to deliver IT services as
they see fit, "the vendor assumes
much more risk for the
relative freedom of
choice [it gets] regarding
the means for implementation,"
says Strichman. Indeed,
the higher up the outcome
on the business value chain,
the more risk the provider assumes.
One Vendor's Approach
Symphony Services,
a Palo Alto, Calif.-based
provider of offshore IT services
in India and China has been
touting its "outcome certainty"
pricing model for software
engineering. "It commits us
to meeting mutually
agreed-upon goals," says
Neil Fox, Symphony
Services' vice president
of strategic consulting.
"If we don't meet them,
clients pay reduced costs
for our services."
The trick to outcome-based
outsourcing, says Fox,
is "linking contractually
guaranteed work by the vendor
to measurable client business
outcomes, such as improving
product line revenue,
raising customer satisfaction,
increasing product innovations
or reducing time to market."
For customers who want to
align vendor goals with
business goals, outcome-based
pricing can be the differentiator,
says Fox. But not everyone
is into the idea. "Some clients
opt out of our outcome
certainty-based contracts
because they want the most
simplified approach to managing
their outsourcing partner,"
says Fox. Those customers
sign more traditional
fixed-cost or time-and-
materials contracts.
Some customers shied away
from the strategically focused
outcome-based approach to
sourcing during the recession
when all eyes were on
cost-cutting, according to
Forrester Research principal
analyst Bill Martorelli.
Just 24 percent of outsourcing
customers said increasing
their use of output-based
pricing was a high or
critical priority, according to
a Forrester survey conducted
during the second quarter
of this year. Nearly one-fourth
(24 percent) said it was a
low priority, while 37 percent
reported that it was not on
the agenda. But Martorelli predicts
outsourcing customers' interest
in outcome-based outsourcing
will increase as
the economy stabilizes.
© 2009 CXO Media Inc.
Link here
--
J-L K
Sent from Kigali, Rwanda
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