Outsourcing – The Deal

The art of outsourcing flows from the structure and suitability of the deal to the enterprise customer’s needs. “The deal” is central to the success of the parties.

Key Issues in The Deal
In getting to completion of the contract, the parties need to decide upon key issues in the process of contracting:

  • in sole-source procurement, what parameters and measures will be used to ensure that the benefits will be mutual and will be close to the outcome of a competitive procurement;
  • in competitive procurement, the criteria and process for selecting the service provider and the terms of the contract that represent the best offer in the marketplace at the time of contract signature.

The best deal is one that meets not only the enterprise customer’s identified needs, but also presents a solution that is competitive and will enable the enterprise customer to remain competitive within its own industry.

Pricing
Pricing is only one measure of success. A high base price for a large volume of services might be cheaper than a low base price with a modest volume of services. Thus, in pricing, projections of the type and quantities of services plays an important role in selecting the provider and in managing costs.

Performance Metrics
Virtually every services agreement (including internal services commitments between a shared services organization and its internal enterprise “customers”) contains detailed performance metrics. Such metrics serve several purposes:

  • quality assurance;
  • assurance of continuity and adequacy of the services;
  • pricing adjustments in case of failures to achieve minimum levels of service within the agreed timeliness;
  • predictability of operations so that enterprise customers may, in their negotiations with customers and others, rely upon a minimum level of service;
  • continuous process improvement;
  • definition and allocation of responsibility and accountability for performing the process;
  • alignment of operating mandates with overall business goals; and
  • audit, accounting and reporting requirements.

Accounting
Accounting measures outcomes in financial terms. Performance measurement measures outcomes in terms of physical resource inputs and levels of effort. Both outcomes wind up being reported in financial statements. Performance metrics facilitate the role of auditors in determining whether the enterprise paid the proper amount for the outsourced services.

Human Resources
The practice of performance measurement for human activities has roots in the early 1900’s. Today, virtually all human resource tasks are measured for productivity as well. Performance measurement may result in reallocation of resources to lower wage workers, or to automation, or to simplification of the process. In any event, measurement remains a constant force in business success.