Performance Measurement applied To Outsourcing - Introduction
This article is intended for both outsourcing vendors and buyers. However I am exploring it from a vendor’s perspective because that’s what my experience is based on.
Before we start - What is outsourcing?
I believe that outsourcing is a scientific solution for an optimization problem that consists of the optimal trade-off between cost, productivity and quality. Sometimes buyers focus on cost and aim to minimize it compared to their in-house cost; however it's hard to compromise on quality. In other cases buyers focus on quality especially when they lack highly skilled in-house resources or a specific expertise that represents a critical success factor for their businesses.
I have made a brief introduction that really summarizes what I am going to discuss in my post. I have clearly mentioned the problem "an optimization problem that consists of the optimal trade-off between cost, productivity and quality" and I am going to follow a scientific analysis in order to converge to the desired solution.
Observations
Since we're scientifically searching for a solution then our first step would consist of observing and collecting the data we currently have. I am sure many of you have read or heard things like
"What gets measured gets done" or "If you can't measure it, you can't manage it nor improve it" but that does not tell us what and how to measure? It is not possible to find a common answer or a methodology of measurement. It needs to be done on a case by case but should at least follow the same scientific pattern of analysis. In our case, I believe we should measure the cost, the productivity or utilization and the quality ratio, because simply that's what we care about. We should never jump to conclusions while we are collecting/observing data.
Measurements
Capacity utilization is a concept in economics which refers to the extent to which an enterprise or a nation actually uses its installed productive capacity. “ Thus, it refers to the relationship between actual output that 'is' produced with the installed equipment and the potential output which 'could' be produced with it, if capacity was fully used the other day”. A software outsourcing company produces software related services or products. Process management, process control, HR activities (including hiring and interviews), Infrastructure facilities management, etc… are all crucial operational activities in order to support the production; however they are not part of the core output production. Ideally a software outsourcing company has a potential of producing only software related services and products 100% of the time. That leads us to define the real output as the man hours spent ONLY on software related services and products excluding all non-core-output activities. However the capacity utilization should be carefully defined according to the development model of the outsourcing vendor, whether it is a service, product or manufacturing and data processing model.
Quality measurement is not as obvious as capacity utilization. Quality should be measured in respect to the software outsourcing model and the associated activity type. Quality should be always measured relatively to a predefined requirements reference, or in other words, what the client is expecting to have. Number of bugs in itself is not representative of quality. It should be always associated with a reference. i.e: 10 bugs found over 200 tested test cases is not as severe as 10 bugs found over 50 tested test cases.
Cost measurement
The easiest way of cost measurement consists of evaluating the cost of production that simply represents the office expenses including payroll, infrastructure, taxes, etc…In order to standardize the cost measurement and be able to compare, we will have to evaluate the “cost per man. Day” or “cost per man. Month”. However if we take a deep look at cost evaluation we can split it into 4 main categories: cost of hiring, cost due to quality issues, cost of ramp up and cost of infrastructure.
Measurement tools
There are many tools and application, out there on the internet, developed by large enterprises that mainly focus on project management, collaboration and reporting as well. That would be perfect for an outsourcing startup that does not have existing and running processes or even an outsourcing vendor that does not have any process constraint required by their client(s). Some of the outsourcing vendors go through the customization of these tools and spend an important amount of money relatively to their gross income and in most of the cases it costs them even more than developing their own application that only includes features required to control their cost, processes, productivity and quality. I went through that experience and ended up building my own tools with one important characteristic that increased my chances of success: Interoperability. That means my tools do not impose any constraints or requirements on my processes nor the way my team is currently managing the production, nor the way I am currently dealing with my customers and using their bug tracking system or any other third party application required by their business process. Any change in the process is an additional cost on outsourcing vendor, because simply change management is not a short term activity especially if we’re talking about a large scale outsourcing vendor. It would be much more cost and time efficient if money and time are invested in developing Interoperability tools that co-exist with the current processes before implementing the change. We are measuring to know what we should modify in the process and improve our performance; it is not scientific at all to change the process in order to be able to measure. Once we have the measurements then we can easily decide whether investing in a change management is worth it or not.
Scorecards definition and tracking
Once we are now at a stage that allows us to measure our cost, productivity and quality; It is important to start organizing the measurements and tracking the performance. A scorecard is a simple measurement and tracking sheet that allows managers and decision makers to log and track performance of teams and individuals. Whenever we speak about tracking that leads us to set future targets as well and monitor our ability to reach the targets. And this where we introduce the following factors:
An easy way to differentiate between the 2 factors is to compare them to a Rally competition: what do you consider a critical success factors to win a Rally?
It is obviously to be Number #1 (CSF).
How do you measure it?
You can watch your speed, how many cars are behind you, how many cars are in front of you, what is your fastest lap? These are your KPIs.
However if your success consists of safely finishing the rally then your KPIs would be: Watching your RPM, monitoring your engine temperature, monitoring your break censors, monitoring your wheels status, etc…
CSFs are to be defined by company’s directors and define the appropriate KPIs to track them. Once defined, individual and team scorecard should be issued and tracked with a clear target for a specific timeframe.
Reaching your targets – Corporate perspective
Performance measurement directly serves the ultimate vision of every outsourcing company. Performance measurement is not a product, nor a tool, it’s an Environment. Reaching your targets involve different roles in your company. It is not enough to show a chart, what really matters is to teach people how to read it, don’t jump to conclusion, analyze it then decide. People skills and ability to analyze in a scientific approach is the most important factor for this environment otherwise it is impossible to align your vision across all your resources.
It starts with the human factor and spreading a scientific approach within your team to believe that performance measurement is not the target but a mean. Performance measurement should not be presented as a judgment or evaluation tool.
Process Improvements are also another aspect where managers can improve the company’s performance by simply calibrating process or workflow factors accordingly.
Innovation is the most important success factor, specifically all solutions that focus on automation. In most cases automation have a direct positive impact on cost, productivity and quality.
Customer satisfaction
Customers want transparency; they expect outsourcing vendors to be ahead and smarter than them. They want quality and ability to evaluate quality at anytime. They want productivity and ability to evaluate productivity at anytime. Improving your efficiency and performance means that you’re getting to the optimal point of maximum productivity, minimum quality issues and minimum cost. That’s exactly what your clients or potential clients are looking for!
Soon on my blog
How to collect and measure Capacity Utilization?
How to set scorecard targets?
Benchmarking and scorecards
Automation and Interoperability tools
Process improvements and change management
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