Measuring the Effectiveness of Outsourcing

What Exactly Is A Metric?

Metrics are measures of output or results.  While some managers use “words” to describe results, metrics require the use of numbers to more accurately “describe” output or performance. When they are correctly developed, metrics take away all doubt about what was and was not accomplished and whether the program actually met its goals.  The types of metrics that I am recommending have an added feature in that they also provide a standard, against which you can compare your performance.  And as a result, you can more clearly see how you are doing because the metric includes a “benchmark standard number” which allows you to easily compare your results to a standard.  Metrics generally cover five assessment areas including quantity, quality, time, money and satisfaction.

The Benefits of Using Metrics During Outsourcing

Metrics help you manage outsourcing better by telling you what to do “more of and less of”. Metrics allow you to focus your limited resources on tools and strategies that have the most significant business impact. Some of the other benefits of using metrics include:

“What you measure and reward takes away all doubt about what is important”

1. Metrics can help to demonstrate your impact to the CFO – using metrics (especially ones pre-approved by the CFO) sends a clear message that your outsourcing approach is “business-like”. By measuring results you are demonstrating to top management that you are results oriented. Reports that are full of numbers and metrics will make the CFO happy because they make your results more easily comparable to what others are doing
2. Metrics eliminate vendor confusion – because vendors have a different culture and they are physically separated from your firm, it is likely that the numerous communications and instructions between the corporation and the vendor will often be misinterpreted.  Metrics clearly send a message to them about what results are expected both before and during the time period where the actual work is being completed. Without having to give a speech, metrics help focus everyone’s attention on the important issues.
3. Metrics allow both you and the vendor to focus on the highest priority issues – Metrics tell everyone what is a high priority and where they should focus their efforts. Because the different program measures or metrics can be given a different weight, based on their importance, metrics help cut through the clutter.  They define what is important and they need element tell the vendor’s employees and managers precisely what level of performance is expected.  If in addition, if what you measure is also closely tied to your vendors rewards, you are on your way to ensuring that everyone is focused on the most important areas. Quantifying and comparing the success of every program element highlights to both the vendor and to HR managers where resources should be cut or increased
4. Metrics help push continuous improvement – metrics tell you about your results during a particular time period but comparing metrics between different time periods allows you to tell how fast you are improving. By studying the change in your metrics, you can learn where to focus your attention and which program elements need improving.  Collecting and reporting metrics on a regular basis also makes it difficult to keep a “problem” program element hidden
5. Metrics help you ensure that you are meeting your outsourcing goals and customer needs – it is easy to assume that your internal customers are happy with your outsourcing efforts but it is better to find out for sure. Customer satisfaction metrics allow HR managers to know who is happy and who is not with the services being offered. In addition, if you provide senior management at year-end with a report that lists your yearly goals and the metrics to prove that they have been met each, you send a quick but clear message that you did what you promised

“Remember…Without data, it’s just an opinion”

Develop Metrics Before You Begin the Vendor Selection Process

Many HR managers believe that metrics are something that you develop after a vendor is selected.  Unfortunately, waiting too long can permanently damage any outsourcing effort.  There are two basic reasons why you should develop your metrics prior to selecting a vendor. . 

1. The first reason is that the process of developing metrics forces you to not just to determine your program goals but also to prioritize them (this is because there must be a metric for each individual outsourcing goal and objective). By prioritizing your goals early in the process you help to ensure that the rest of the outsourcing effort stays focused on those goals
2. Because program metrics are so important outsourcing success, it is important to include in the selection criteria the vendor’s ability to provide the appropriate measures and metrics. Of course, before you can assess as a vendor’s metric ability, you must first determine what are the essential elements of an effective program measurement process and what program output metrics you will use to assess whether your program is successful. These metric criteria can be included in the criteria you put in the RFP that you send a vendors

What Metrics Should Be Used?

The first step in determining what metrics you need is to make a list of your outsourcing goals and to develop a separate metric (or series of metrics) to measure whether each goal is met. The goals of most HR outsource efforts, and their related metrics, can generally be categorized into these six areas.  They include:

1. Service level — determining whether the types of services that were contracted for are actually being provided and at least the minimum quantity level that is required

2. Service quality — determining whether the quality of the service is up to contracted levels

3. Vendor management issues – has the process of managing and doing business with the outsource vendor met expectations

4. Total cost reduction — have the total amount of HR expenditures actually decreased as a result of outsourcing (assuming that is an outsourcing goal)

5. Unintended consequences — have any other positive or negative impacts resulted from the outsourcing and have those consequences added to the costs or the benefits

6. Better use of HR resources — have the “freed up” HR resources (as a result of the outsourcing) actually been put to better or more strategic use within HR

Each of the six measurement areas will be covered in greater detail in the next section. 

The Six Areas Where You Need Metrics

In order to ensure that your outsourcing initiative is effective, you need to develop metrics in each of these six primary areas. . Many vendor contracts include an all-encompassing service level agreement which specifies both the services that will be provided and the acceptable “level of performance” for each of the first three of these six measurement areas.

Because metrics vary with the type of HR program you are outsourcing, space limitations do not allow me to give specific metrics examples for more than a single HR program.  As a result, the metrics examples provided in this section relate to a typical area of outsourcing, moving all employee benefits questions to a vendor’s call center

I) Service Level Metrics

It is important to develop metrics that measure whether the types of services that were contracted for are actually being provided by the vendor. Service level metrics generally measure whether each of the contracted services are being provided and at the volume or quantity level specified

Examples of typical service level metrics:

1.      the number of services areas where employee benefits questions were one then answered

2.      the hours of the week that calls were answered

3.      the number of calls handled

4.      the cost per call (in the cases where the costs are not fixed in advance)

II) Measuring Service Quality

Merely providing services is insufficient if the quality of the service is below acceptable levels.  As a result is important to monitor the quality of the service provided by the vendor. 

Examples of typical quality of service measures include:

1.      user satisfaction with the answers provided

2.      user satisfaction with the way that the answers or provided

3.      the average and maximum response time required to answer a call

4.      the average accuracy of the answers provided (error rate)

5.      vendor services met all legal requirements

III) Vendor Management Issues

Even though the quantity and quality of services provided meet the acceptable standards, it been is also important to assess the relationship between the HR function and the vendor.  As a result, it is important to assess whether the vendor has been difficult to “do business with” or they have been non-responsive to change requests.  This information can be used to improve relationship with the vendor or as bargaining tools in the next contract negotiation.

Examples of vendor management metrics include:

1.      vendor responsiveness to problems and change requests

2.      were vendor representatives honest and forthcoming

3.      were the vendor’s activities always ethical

The following three metrics areas cover areas outside the vendor’s control

IV) Total Cost Reduction

One of the primary goals of most outsourcing is obviously to reduce the costs of providing HR services. Metrics in this area are designed to assess whether the overall expenditures (that are either directly or indirectly related to outsourcing) have actually gone down as a result of the outsourcing initiative.  It is necessary to provide measurements in this area because it is quite possible for the time and effort required for contract negotiation and vendor management to add significantly to the overall costs of outsourcing.  In fact, in some cases, those overall costs can increase to the point where the net savings as a result of outsourcing are negative.

The formula for assessing the total cost reduction is:

• start with the baseline costs that were incurred by running the HR process in house prior to outsourcing

From the above baseline costs

• subtract the total cost of the vendor contract payments

• next subtract the internal costs of vendor management (for example, the salary of your internal vendor manager, related travel costs, the cost of communicating the shift to a vendor, the costs related to the RFP, accounting costs related to vendor transactions and any software or equipment that was required to make the outsourcing arrangement possible)

• then subtract any actual HR employee headcount reduction (converted to salary dollars) as a result of the outsourcing. (Note, some CFO’s do not consider it to be an actual cost-savings if the displaced HR people are just assigned to different HR responsibilities)

Assuming that the quality and amount of service provided by the vendor is equal to or greater than the baseline services offered by internal HR, you can then compare the before and after costs of providing these services. If there is a net gain, then the next step is to determine if there are any unintended consequences as a result of the outsourcing initiative.

V) Unintended Consequences

In addition to the traditional costs associated with outsourcing, you must also assess any additional costs or benefits that might result from the initiative.  This is because outsourcing traditional HR functions occasionally has some negative impacts which, in effect, increase the relative costs of outsourcing.  Some of the possible unintended impact areas that should be tracked and measured include:

1. reduced employee and manager “trust” with HR (for example,  in this benefits outsourcing case, because HR no longer directly answers the employees benefit questions, trust levels can go down as a result of the decrease in interaction between HR and employees )

2. reduced attraction and retention (for example, benefits might have less of any positive impact on employees and applicants because of low service levels and any poor customer service provided by the vendor.  In some cases, the mere fact that the service is being outsourced might leave employees to believe it is less valued by the company)

3. reduced use of benefits (for example, employees could actually reduce their usage of benefits or reduce or stop asking questions related to benefits because of the low knowledge or service level that the vendor provides)

VI) Better Use of HR Resources

One of the primary goals of most outsourcing is to free up internal HR resources so that they can be redirected to areas where they are likely to have a higher strategic impact. In order to ensure that those resources are actually been put to better use, it is important to have metrics that assess whether HR has increased its strategic impact as a result of the outsourcing initiative.

1. manager’s rating of HR’s s increased strategic contribution (using a survey of your manager’s satisfaction levels with HR’s strategic contribution to gather data, you can then compare this year’s satisfaction levels with those prior to the outsourcing)
2. increase in the percentage of HR strategic goals that are met (comparing this year’s strategic goal attainment with the levels prior to outsourcing)
3. HR’s self-assessment of its strategic contribution (using a survey to assess HR’s own opinion of its increased strategic impact)
4. the impact of any strategic HR programs developed with the “saved” money as a result of the outsourcing initiative

The Final Step — Calculating the ROI of Outsourcing

After the calculations have been completed in items IV through VI it is then possible to assess the overall return on investment of the outsourcing initiative.  However, is important to note that even if the ROI is low or even negative, that does not automatically mean that you should drop the outsourcing effort. This is because the “start cost” of returning to internally based HR process might be so high as to outweigh the benefits of dropping the outsourcing vendor.  Other options might include selecting another vendor or using the metric data to is refined and continually improve the outsourcing initiative.

Conclusion

When it comes to assessing its effectiveness, outsourcing should be treated no differently than any other business function.  It is essential that every effort be made to calculate the programs ROI and to periodically measure whether outsourcing is meeting its stated goals.  Rather than considering metrics as they important add on, instead HR should consider them as the foundation of any outsourcing effort. By insisting on a comprehensive measurement and metric system as part of the vendor agreement, you can actually help to improve the probability that the vendor will provide the same or higher levels of service that your employees have come to demand.  This is because well executed metrics help contribute to outsourcing success.  A high success rate is important not just for building HR pride but also because employees and managers will still blame HR (outsourcing does not relieve responsibility) if the level of service falls below expectations.  CFO’s will be equally as unhappy if the total cost of outsourcing exceeds the initial baseline costs that existed before the service was outsource.

The lesson to be learned is that metrics are no longer optional within HR.  Whether it be outsourcing or any other program, metrics not only help in program designed but they also increase the probability of initial program success and of continuous improvement over time.

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