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

Taking a Performance-Based Services Approach to Improve the Effectiveness of Outsourcing

Alan McSweeney

April 10, 2012 2

Performance-Based Services Contracting (PBSC)

• Concerned with the structured of the results and measurable outcomes to be achieved rather than the manner by which the work is to be performed

• Performance-Based Services Contracting approach is about defining what the required results of a service will rather than how the contractor will perform the tasks

• Supplier becomes responsible for how service is accomplished

April 10, 2012 3

Service Becomes “Black Box”

ServiceRequirementsResults/

Outcomes

Data

Measures

Expected vs. Actual

April 10, 2012 4

Types of Outsourcing Arrangement

Efficiency/Utility

(Make It Cheaper)

Focuses primarily on cost control and, over time, cost reduction, with the

goal of maintaining consistency in the

delivery of services

Business Enhancement

(Make it Better)

Improve business productivity resulting in

movement toward defined business goals

Transformational

(Make me Money)

Partnership between the service provider and

service recipient that is focused on innovation

and new business

Complexity of Outsourcing Arrangement

April 10, 2012 5

Why Use Performance-Based Services Contract Approach?

• Can be used to achieve innovation within an outsourcing arrangement

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

• Should increase customer satisfaction because results are improved

• Promotes frequent communication between the customer and the supplier

• Demands good contract management to ensure results are achieved

• Shifts the risk to the supplier

• Can improve supplier performance

April 10, 2012 6

Concerns With Performance-Based Services Contract Approach

• Requires regular and frequent communication between the customer and the supplier

• Requires good contract management by of the customer to ensure results 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 is being outsourced

• Outsourcing ≠ Fire and Forget

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 maintaining consistency in the

delivery of services

Business Enhancement

(Make it Better)

Improve business productivity resulting in

movement toward defined business goals

Transformational

(Make me Money)

Partnership between the service provider and

service recipient that is focused on innovation

and new business

Complexity of Outsourcing Arrangement

April 10, 2012 8

Key Components of Performance-Based Services Contract

Performance Work Statement

(PWS)

Measurable Performance

Standards

Performance Incentives

(Where Appropriate), Overall Cost

Model

Performance-Based Services Arrangement

April 10, 2012 9

Overall Outsourcing Service Framework

Statement of Objectives (SOO)

Performance Work Statement

(PWS)

Quality Assurance

Surveillance Plan (QASP)

Performance Assessment

Report (PAR)

Service Contract and Cost/Payment Model

SOO Expanded

Into Detailed PWS

Delivery of PWS

Measures by QASP

QASP Reported on

in PARs

Contract Governs Overall Service Delivery

Requirements PWS Contains Detailed

Requirements

Requirements Feed Into QASP

Requirements Feed Into Contract

PARs Affect Payments

April 10, 2012 10

Performance Work Statement (PWS)

• Statement of work for performance-based services that describes the required results in clear, specific and objective terms withdefined 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 against measurable performance standards

• Defines a measurement framework

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

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?

April 10, 2012 12

Statement of Objectives (SOO)

• Statement of the overall performance and other objectives for the service

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

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

April 10, 2012 13

Performance Objectives

• Performance Objectives define the performance level required to meet the service delivery and operation requirements

• Performance Objectives need to be measurable and structured to permit an assessment of the supplier’s performance of service delivery and operation

April 10, 2012 14


• Based on Quality Assurance Surveillance Plan (QASP)

• QASP follows-on from requirements listed in the performance work statement (PWS)

• Defines the procedures to ensure the required performance standards and levels of services are provided by the supplier

April 10, 2012 15

Quality Assurance Surveillance Plan (QASP)

• QASP enables you to evaluate if the supplier is meeting the performance standards/quality levels identified in the PWS − Measures the supplier’s 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 both the customer and supplier focus on what is most important

April 10, 2012 16

Performance Assessment Report (PAR)

• Evaluation of the services supplied

• Frequency of PARs production defined in overall service contract

• 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

April 10, 2012 17


• Measures and metrics inform the supplier how the requirements are being met

• High and low thresholds defined – exceed/not meet requirements

• Need to define measurement intervals to identify supplier non-performance

• Define interval within which corrections can be made

• Customer needs to create Quality Assurance team to regularly and frequently verify supplier compliance with defined Performance Objectives

April 10, 2012 18

Performance Measurement Framework

Customer

Supplier

Analyses and

Requests Actions

Takes Actions

Monitors Compliance

Provides Performance Assessment

Reports (PARs)

Review and

Respond

Respond to

Feedback

Collects and

Supplies Data

Defines Metrics

• Requires regular and frequent communication between the customer and the supplier

• Requires good contract management on the part of the customer to ensure results are achieved

April 10, 2012 19

Performance Assessment Reporting Framework

• Define tiered performance reporting framework – operational and strategic - and adhere to it

Month 1

Month 2

Month 3

Month 4

Month 5

Month 6

Month 7

Month 8

Month 9

Month 10

Month 11

Month 12

Quarter 1 Quarter 2 Quarter 3 Quarter 4

Annual

April 10, 2012 20

Performance Metrics

• Need to define set of metrics that capture what is important to the service 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 undesirable consequences

• Define tiered metrics to match tiered reporting: operational andstrategic

• Define measurement framework that measures performance and interactions across service landscape

• Measure what is important and what has an impact

• Measure outcomes – the what rather than the how

April 10, 2012 21

Define Measures Linked to Key Service Elements and Processes

Metric 3Metric 2

Metric 11Metric 10 Metric 13

Metric 4

Metric 12

Metric 8

Metric 9

Metric 1

Metric 5

Metric 6

Metric 7

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 measures outcomes for individual service components, collections of service components and overall service

April 10, 2012 23

Metrics Hierarchy

KPI

Process Metrics

Results MetricsOperational Metrics

Process Metrics – Roll-up of Operational Metrics

High-Level Metrics Which Measure Progress Toward

Strategic Service Objectives

Align Metrics to Allow Roll-

up

April 10, 2012 24

Outsourcing Contract Types

• Different types of contract (payment) structures available to customer

• Many contract types available

• Need to consider contract type and associated payment structures that will motivate suppliers to increase efficiency and maximise service performance

• Need to select a contract type and price (or estimated cost and payment structure) that will result in reasonable supplier risk and provide the supplier with the greatest incentive for efficient and economical performance

• Contract type and price negotiation are linked

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 with Economic Price

Adjustment

Fixed-Price Incentive

Fixed-Price with Prospective Price Redetermination

Firm-Fixed-Price, Level-of-Effort

Term

Cost-Only

Cost-Plus-Incentive-Fee

Cost-plus-Award-Fee

Cost-Plus-Fixed-Fee

Time-and-Materials,

Labour-Hour

Letter

Basic

Basic Ordering

April 10, 2012 26

Outsourcing Model High-Level Approach and Steps

1. Form the Sourcing Team

2. Review Current Sourcing

Strategy

3. Perform Market Research

4. Define Requirements

5. Define Sourcing Strategy

6. Execute Sourcing Strategy

7. Manage Performance

Build the Sourcing Team With Executive Sponsorship and Support

Conduct Analysis of Previous Sourcing Arrangements Define Stakeholder and Customer needs

Analyse the Market and Identify Potential Suppliers

Define Requirements

Define Sourcing Approach and Create Sourcing Strategy – Strategic or Tactical

Select the Most Appropriate Supplier and Implement Sourcing Strategy

Build Supplier RelationshipMonitor and Manage Performance

April 10, 2012 27

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 rather than specifying how the work should be done

• Each requirement needs to have an associated measurement methodology

• Requirements may have cost reduction for non-achievement or incentive for exceeding defined performance

• Requirements must be unambiguous and easily understood

April 10, 2012 28

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 it important, why is it needed, why business

outcome/objective is achieved?

April 10, 2012 29

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 in the 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

April 10, 2012 30

Requirements Structure

Business Outcome

Objective 1 … Objective N

Performance Inspection/ Validation Incentive/ Penalty

Performance Objective

Standard(s) and Measure(s)

Minimum Acceptable Quality Level

Data Source(s)

Frequency

Measure

April 10, 2012 31

Performance

• Performance standards define what level of performance must 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 deviation from the standard

− Example: 95% of requests to be satisfied within standard

− You will almost never achieve 100% of performance 100% of the time without incurring significant cost

−AQL specifies the allowable tolerance

−What AQL is acceptable and appropriate and why?

April 10, 2012 32

Inspection/Validation

• Inspection is needed to know if the standard is being met

• Customer needs to perform inspection/verification

• Inspection/verification requires−Definition of information needed

− Sources of information

− Frequency of collection

−Method of collection

−Metrics generated/derived from data

• Inspection/verification itself needs to be inspected and validated

• Inspection process requires resources – essential part of contract management

April 10, 2012 33

Incentives/Penalties

• What are the impacts of meeting or not meeting the standards of the objectives?

• Should penalties be specified for not meeting standards for a defined interval?

• Should incentives be specified for meeting or exceeding standards 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

April 10, 2012 34

Prioritisation of Requirements

• Determine which performance objectives are the most important and weight accordingly

• Assign a higher penalty/weight to these

• When evaluating suppliers assign greater importance/score to meeting these factors

• Form part of overall service contract

April 10, 2012 35


Objective

Performance Inspection/ Validation Incentive/ Penalty

Performance Objective

Standard(s) and Measure(s)

Minimum Acceptable Quality Level

Data Source(s)

Frequency

Measure

April 10, 2012 36


• Objectives need to be specified in terms of− Performance

• Which specifies− Performance Objective

• 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

April 10, 2012 37

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 in outsourcing arrangement

• PBSC does impose overheads in service definition and supplier selection 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 of what is being outsourced

• Outsourcing ≠ Fire and Forget

April 10, 2012 38

More Information

Alan McSweeney

[email protected]