Outsource Operations — Not Responsibility: An Outsourcing Service Model

While some industries have outsourced operations for years, others are still new to it. For example, in the telecommunications sector, outsourcing is in its infancy. In these segments key questions are being asked about what functions should be outsourced, and various criteria are used to inform these decisions: Are these functions core? Are they critical? Whole industry norms are being challenged in the telecom business with big players such as Hutchinson 3G outsourcing IT operations and mobile networks. Vodafone is reported to be in advanced negotiations to outsource its complete IT infrastructure.

Outsourcing in the telecom sector has raised one specific interesting regulatory issue that actually has relevance for any organization that is outsourcing. Licenses governing spectrum allocation in the mobile space usually stipulate that mobile operators must retain “functional control” of their network. The telecom sector is highly regulated; network operators can’t evade this regulatory responsibility — it can’t be shifted to service providers.

Indeed, this issue raises interesting questions for the dominant service providers — no doubt some caution may need to be exercised in the future to ensure that the service providers serving these clients are not perceived to have de facto control of any network.

But more broadly speaking, all companies should retain strategic control over the direction of all outsourced functions. All aspects of your core business will have key dependencies on the functions you have outsourced. This means you need to be in a position to control the outsourced operation at a strategic, governance and operational level (up to and including termination where the outsourcing may no longer be aligned to corporate strategy).

This is a worthy goal, but how do you achieve it?

This control can only be safely maintained through the establishment of a clear and structured service model. In this article I focus on three of the core elements of the outsourcing service model.

  • A strong internal service management team responsible for the day to day management of the service provider. (This is commonly referred to as the internal service management team or the “retained layer.”)
  • A specific and enforceable service level agreement (SLA) between you and your service provider.
  • Ongoing review of the strategic business drivers for outsourcing.

Frequently, companies spend so much time during the analysis, design and implementation phase of an outsourcing project that they neglect to dedicate time to the importance of ongoing management of the deal. It’s only through consistent management of the service provider that the client organisation will retain a high level of understanding and expertise in the outsourced function. (While you’re focusing on the governance, you need to allow the service provider to get on with managing the delivery of the service.)

It’s worth noting some of the high level differences that exist between managing an insourced operation and managing that same function in an outsourcing situation. This table lays out some differences:

Area  Insourced operation  Outsourced operation 
Service management Managing employees to deliver a service through a combination of employee engagement and performance and career management. Managing a supplier to deliver a contracted service through contract management partner engagement and relationship management.
Performance management Performance measurement is based on a combination of internal SLAs on end user satisfaction. Performance measurement is based more on contractual SLAs and less on end user satisfaction. Achievement of SLAs doesn’t mean high levels of end user satisfaction and vice versa.
Stakeholder management Business stakeholders can influence priorities on dynamic basis. Business stakeholders may not be able to influence priorities as quickly.
Service planning  Business stakeholders that do plan tend to do so in an isolated way.  Planning and consolidation at a business level is crucial for maximizing efficiencies and economies.

The Internal Service Management Team

The internal service management team or retained layer consists of the people who own the relationship with the service provider. This team is responsible for ensuring that the service provider delivers the service as contracted and, more importantly, that the service delivered meets the requirements of the end users. The kinds of issues the people on this team deal with include the following.

Performance Management

The team measures the performance of the service provider on an ongoing basis. Service measures should be in place from day one to measure actual performance against promised performance. In addition, the team should also take measures regularly (at least once a year) to benchmark the service levels the organization is receiving against industry best practices.

Supplier Management

Some aspects of service quality can be measured in SLAs or covered in a contract. However, there’s typically a significant amount not covered in contracts or SLAs. The way in which the supplier is managed and the relationship is established and maintained are key to ensuring that the non-contractual aspects of the outsourced service are delivered to a level of quality consistent with the harder contractual measures. This is possibly one of the biggest challenges facing the retained layer.

Management of End User Expectations

In many cases the decision to outsource will necessitate the need to qualify level of service required (if SLAs haven’t already been established within the business). In an outsourced environment the level of service is directly linked to the cost of service. The impact of qualifying the SLAS or changing existing SLAs to reach a negotiated price with the outsourcing provider may be perceived negatively by end users after outsourcing is implemented. So the team must be capable of managing the implementation of the changes as well as any negative perceptions held by end users. End Users will not normally have high visibility of a change in the sourcing model (nor should they) — but they know when they’re experiencing a change in service levels. Good outsourcing arrangements are predicated on a clear understanding by all stakeholders of the level of service that is expected.

Situation: “Our Service Has DeterioratedÉ”
Changes in level of service can cause real confusion when they’re not communicated to users. In one large company where I advised, there was a major outsourcing of all IT functions. The business driver for outsourcing was to reduce cost. This resulted in the client and the service provider agreeing to substantially reduced level of service than the company’s end users were accustomed to. But this reduction in service levels hadn’t been clearly communicated. The outsourcing arrangement was immediately perceived by end users to be inefficient and disorganised. For several years employee satisfaction surveys indicated that poor IT support was a key demotivator. From a corporate perspective the outsourcing arrangement actually delivered the overall objective of cost reduction – but poor end user communication had delivered it at some human cost.

Service Level Agreements

The SLA is a key component of the service model. It’s important to ensure that specific service levels are agreed on between you and your service provider. Service levels should be as precise and business-relevant as possible. Avoid ambiguity and use a small number of significant measures. Where possible, try to ensure the numbers are baselined against accurate data of current and historic service volumes. Service levels must be realistic — there must be confidence within the service provider and the client that the targets will be achieved. Very often service providers are pushed into aggressive yet unrealistic service levels. Avoid this if you want to be confident that you will get what you’re promised.

Situation: “Why Is My Service Provider Always Paying Service Penalties?”
Many outsourcing professionals are familiar with scenarios where service providers are negotiated into agreeing to service levels that they know are completely unrealistic. The short-term satisfaction on the client side in having negotiated such service levels is quickly tempered by the realisation that the service provider has accepted it to “win the deal.” These are commonly referred to as “Salesman KPIs.” The service provider may have accepted that it will pay service penalties from day one and set its pricing in anticipation of that. The client is left with a service that’s incapable of delivering at the expected level. It’s always worth remembering that an effective outsourcing relationship must deliver some benefits to both sides.

Aligning the Service Model to Business Drivers

It’s important that the criteria against which you measure your service and your service provider are aligned to the reasons why you’re outsourcing. These will change over time — so it’s important that you capture this change in your service model. A robust contract and service model will facilitate changes from time to time. In most cases a formal and rigorous process should be used to re-evaluate the reasons why you outsourced, ensure they’re shared across the organisation, and then map them onto clear and discrete performance indicators.

Situation: “Remind Me Why We Outsourced?”
The reasons why a company chooses to outsource initially may not necessarily still apply two or three years into a contract. It’s important that the reasons (“value drivers”) are formalised, agreed and endorsed by stakeholders and reviewed frequently after you’ve outsourced. Both the outsourcing arrangement and the client organisation need to be capable of realigning or fundamentally changing as the commercial landscape changes.

Final Words

Sometimes when I’m discussing service management issues with senior executives, I get a sense that they were hoping outsourcing some “high maintenance” function would actually make it disappear! Outsourcing can certainly take the hassle out of certain activities — it can allow you to focus on core activities. But in order for this to happen, you need to put a framework in place to ensure that you’re still in control, still responsible. That’s where the service model — carefully designed and implemented — comes in. You’ll feel that you’re managing your responsibilities and focusing on your core business!

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