Key Performance Indicators as a tool to add value in Outsourcing and Shared Services Relationships
It is universally acknowledged that effective services management requires a well-defined, properly scoped and thoroughly understood set of Performance Indicators. Those key indicators, KPI’s, will form the bedrock of the contractual relationship and the Service Level Agreements (SLAs) that are typically an integral part of the design of Shared Service processes and of the framework for the on-going supplier/client relationship for both Shared Services and Outsourcing. It is also true that too frequently those KPI’s are less then well defined, scoped or understood by the client or the Service provider. KPI’s are undervalued and the attention required to define them well is not always given. Done well KPI’s have the potential to bring real additional value to the relationship. But too often KPI’s do not get the time and effort required to realise their full potential.
At a minimum KPIs are seen as a tool to enable service users and stakeholders to validate that performance meets requirements and for service providers to be able to check they have met their contractual obligations. Those are essential functions however, if, additionally, KPI’s can be used to insure Service Delivery; to validate Benefits realization through Outsourcing or aggregating enterprise activities into a Shared Service Centre (SSC); to highlight the path to performance that exceeds expectations; to drive continuous improvement and innovation; or simply to bring greater value to Providers and Clients; then their importance will be properly appreciated.
It is worth highlighting at this point that the work required to define KPI’s well, set the appropriate measures, benchmarks and volumetrics is significant. It takes knowledgeable and experienced people; that means senior resources who understand the direction of the business and the strategic imperative behind the Program to Outsource or develop a SSC and who are capable of setting big goals and long term objectives in Service Delivery. Frequently this is tasked to less experienced or junior individuals and, if so, rarely achieves the best outcome. It should also be a collaborative exercise, the Service Consumer and Service Provider\SSC need to make an equal investment in the process, if it is not a collaborative process they cannot be equally invested in the outcome. The essential purpose of the KPI is to provide an objective body of data to support business Direction, Decision Making, Relationship Management, Governance Structures. That data is the evidence the Service Provider and Service Consumer rely on to drive the relationship forward. Bias and interpretation have no role here, just consistent, objective evidence.
The business drivers behind a decision to Outsource of focus specific activities for the enterprise into a centre of excellence and accountability are varied. They may be cost reduction, efficiency, scalability, capability, business focus or other. KPI’s offer a mechanism for validating that the expectations associated with those drivers are in fact being met.
How then, should KPI’s be used and what is the scope for added value that KPI’s can bring to the Enterprise and the relationship between Service Provider and Service Consumer, whether Outsourced or SSC.
The greatest challenge in using KPI’s and the evidence produced through them is to avoid the ‘steady state’ trap. That is where Service Provider and Consumer will have worked diligently together to define the appropriate measures of performance, cost, risk and etc. set values which represent the expectation of the Enterprise on Service Delivery and the benchmarks the Service Provider knows they must meet to maintain customer satisfaction and meet their contractual obligations. And they jointly then declare that the work is done, those indicators and measures stay fixed in time, possibly forever and there is no focus on change or thoughts about a path to some future desired outcome. However the greatest value that KPI’s offer is, in addition to ensuring baseline expectations are met, that they can move the relationship down a path of constant improvement, innovation and enhanced value.
Therefore:
If KPI’s are used to measure strengths and weaknesses in performance then they can be used to highlights areas for improvement, to make weak areas strong and strong areas stronger.
If KPI’s are used to measure risks to the provision of services, they can also be used to measure the impact of mitigation steps taken in relation to those risks.
If KPI’s are used to track cost drivers in service delivery they can be used to measure the impact of process changes on cost and validate the realization of benefits.
There are traditionally three main areas of application for KPI’s
- Governance and management of the relationship between service provider and service user.
- Reporting to Senior management
- Management of Service Delivery
In each of these applications it is possible to utilize KPI’s in a proactive, forward focused, value enhancing manner, as well as serving the record of performance over time function.
Governance
Those involved in Shared Service and Outsourcing projects will have plenty of horror stories of the disputes and conflicts (in both directions) between Shared Service Centres and the distributed business units that use their services. Too often those disputes are driven by hearsay, subjective reaction, emotion not objective data. KPIs that provide the evidence for factual arbitration of the “service is getting worse” – v- “service is getting better” arguments are useful. Better utilised they can provide the insight and intelligence to drive decision making and keep the focus of Governance on improvement, value, benefit.
Reporting
The appetite for reviewing Performance data by Senior management is low. They are naturally focused on longer term things: strategic direction, competitive threats, enterprise value. It is essential that the reporting function of KPI’s be implemented in a precise, focused and easy to consume manner. Performance Issues, Risks and resolution or mitigation plans should be presented clearly and simply and related to the purpose of the Outsourcing or SSC implementation. Greater focus should be placed on those indicators that are predictors of future value, benefits, cost reduction then in reporting that today’s measures are meeting expectations.
Service Management
KPI’s are essential for Outsourcing or SSC leaders to maximise the effectiveness and efficiency of Operations. They provide the data to assess if delivery, quality, cost and efficiency objectives are met and the consequences if they are not, actioning service penalties for example. If thoroughly planned from the onset of any Outsourced or SSC program, KPIs can reflect the drivers within the original Business case monitor the added value of the program and most importantly, provide a tool for management that indicates areas for improvement and records achievement against that goal.
In Service provision predictable, consistent delivery is an absolute requirement. The right measures of performance allied with the appropriate metrics offer the ideal tool for ensuring that requirement is met. Bringing a focus on innovation, enhanced benefits and continuous improvement into the mix and using KPI’s to measure, validate and provide the objective evidence on progress against those objectives, enhances the value KPI’s add greatly.
Bringing that focus into an established Governance and Reporting process is operationally efficient and the individuals with responsibilities within that process are consciously contributing at a higher level.
There are challenges in implementing this as an approach. Having identified the potential of the role of KPIs in Governance, Reporting and Service Management the big question when specifying KPIs and the data collection necessary to support them is “what shall we measure?”. The answer may come through the process of drafting the SLA, rather than from a focus on business value and strategic imperatives. The risk is that only KPI’s establishing that performance meets basic requirements get defined rather than ones which maximising potential value or benefits. And again that input must be collaborative, improving service delivery e.g. quality versus cost reduction objectives can be balanced and decisions made about focus and priorities.
The KPI’s whether measuring against basic delivery requirements and those focused on future value propositions should all refer clearly back to the business case behind the decision to Outsource or establish a SSC.
As a final comment on the applicability of KPI’s it is worth looking at the question of Quality. Setting objective measures and values around quality can be difficult, subjective and not easy to agree. Quality simply means meeting customer expectations. But those expectations do tend to reflect a subjective position. It is possible to set KPI’s around that more subjective recording of customer satisfaction and record change and improvement over time.
KPI’s offer a rich and under-valued approach to driving enhanced value to enterprises in Services Relationships.
It is perhaps obvious to note that KPI’s function within the general context of a properly implemented Governance process with the right roles and responsibilities defined and a Tool set to support that process.