Outcome-Based Sourcing: A No Go

Measuring outsourcing deals on their business outcomes (such as profits or customer satisfaction) sounds much cooler than measuring it on gritty details like server uptime. But is this highfalutin’ business alignment more trouble than it’s worth?

Everest Group Research Director Chirajeet Sengupta says buyers, and service providers, are sometimes better off keeping deals simple. For the buyer, getting to the business outcome of outsourcing “is difficult, and it’s a lot of work,” he says. On the service provider side, it also “requires a certain level of sophistication” to commit to business outcomes, “and not all service providers have that. Those that do, command a premium for it. There’s a price for that alignment (between an outsourcer’s effort and your bottom line) and in reality you might not be willing to pay that price.”

He cites Tata Consulting Services as a provider that “has done really well” steering clear not only of outcome-based pricing, “but very complex deals where it’s hard to understand what you’re contracting for.” TCS tends to do deals structured around measurable goals, he says – “Here’s what we will deliver, and here’s what will happen should we not reach those goals.” For proof it works, he points to TCS’ most recent results with revenue up 31% and profit up 27% year over year.

Such skepticism aside, at least one executive at an outsourcing provider got a long discussion going on LinkedIn by noting that he’s seeing a growing demand for performance indicators that go beyond “agreed upon service levels” and asked “Are service levels becoming outdated?” One respondent, Jerry Durant, argued that SLAs aren’t outdated, but are just “a base for operational agreement,” used not only to direct and control delivery, but to adjust to changing circumstances.

Ronnie Jones took a harder line, saying “service levels have shown to contribute little to satisfaction…customers contact companies for resolution, not the speed of response.” He also said that BPO providers will focus on measures like how quickly their employees answer the phone because it’s an easy metric to hit, especially if the vendor has to beef up headcount (and their revenue) to meet the goal.

Kenny Markford called SLAs “one piece of the supplier performance management puzzle” that will not go away, but will get less attention over time. “To make a difference the SLA’s must be relevant for your business” – but just how to ensure that happens is still the unanswered question. . If they are, they can help ensure a quality service is delivered.

I’ve argued that many customers are ill-equipped to measure an outsourcer by business value because they lack a clear view of how their internal processes – much less what they outsource – affects the bottom line. Is Sengupta right, and is the work involved trying to tie your outsourcing to business outcomes just too much work?

Bob Scheier, a former writer with Computerworld, is editor of Global Delivery Report. This column first appeared in GDR.