Outcomes vs. Tasks ( Outsourcing)

What Matters Most
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.

By Stephanie Overby


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,

see Offshore Outsourcing:

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.

[ Outsourcing Definitions

and Solutions ]

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.

Other stories by Stephanie Overby
© 2009 CXO Media Inc.

Link here
Sent from Kigali, Rwanda

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