Making OutSourcing happen with Balanced ScoreCard

A Unification Approach Paper.

Anil Kumar

Beta Version 1.0 (April 2002)

Last updated: 01st Jan 2003

Comments Welcome

Please send comments to:

anilk@in.ibm.com

________________________________________________________________________
Note: I will like to convey my affection for my wife Rashmi and my wonderful kids Raj and Raashi, who made
me realize that life is beautiful. I do acknowledge without them being with me I would be nothing.

Need of a Solution
In today's cutthroat competitive environment, we need a tool, which incorporates the
Scalable Strategic perspective or in other words quantification of being of an
organization. Today we have convergence of a number of forces that have changed our
business environment. These would include: 1) the competitive pressures of global economy,
2) fast changing technologies and niche competitors that can change industries overnight, and
3) institutional investors who demand a focused management that delivers bottom line results,
adding to shareholder value. Also, the information available to shareholders and their ability
to analyze and measure performance has advanced dramatically. These and other forces have
awakened management.
Moreover purely on financial perspective, any value-additive model should work on a strategy
of cost reduction for all Fixed cost, Variable Cost and Human cost. Human Cost at first
glance will look like overlapping cost between fixed and variable cost, for how it is a different
cost all together, please read the block.
The Human Cost can be defined as The opportunistic cost incurred or saved when
employee does a activity, which he might not be directly involved in, as per his specified
functional role. Usually, in very few companies do we find a cross-functional culture being
promoted? In IT services offering companies, a consultant or software person is outsource for
his technical or domain acumen and are encouraged to pursue this vigorously. He accrues
some cost for this, but consider if the same person does R&D on his own initiative, with his
creative and out-of-the-box thinking. This lifts the image of the company, at the same time
reducing money for his training in advanced concepts. Hence all the Fortune 500 companies
have a parameter, which is again not acknowledged officially anywhere, but which is quoted
quite often like Number of Patents/Annum. Each and every company strives to maximize
this, as this compensates a part of the cost incurred on the employee on technology
awareness /knowledge accumulated/marketing image. NEC tries to create a brand image and
hence value enhancement with the parameter Number of patents it files every year. It
maintains a web site www.researchindex.org, which is one of the most beautiful web sites for
the Research community.
These can be Gained/Lost in a business setup,
a) Cost incurred in providing ergonomic designs and safety at work place
b) Time taken by an employee to provide certain level of Value in Services to client in
return paradigm.
c) Cost incurred in training and then employees delivering innovative solutions to customers.
d) Outside R&D cost, which company incurs in the form of Outsourcing or Purchase of the
shelf Products, in order to deliver certain kind of solution.
e) Cost incurred in giving employee the benefits so that breakthrough R&D efforts can be
pursued.
f) Opportunity Cost lost if very experienced technical people do not climb into Management
functional roles and rather pursue the role in Technical areas only.

The model proposed by us works towards reducing all the three costs. But this model has the
flexibility that corporations can build their own combative and competitive strategy for, which
individual costs need to be trimmed and by how much .The strategic impact/advantage of a
particular cost is very intrinsic to a particular company.
Our experience has revealed there is a suicidal phenomenon associated with Companies
Costing Paradigm observable in case of a highly competitive market with free information
flow. For instances we can see with invent of standardization across the industries, there is a
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marketable change in the competitive offering. Stable and established frameworks being used
for various activities in a business Scenario, like impact of G3 (Generation Third) in Mobile
computing is based on the standard framework for Telecommunication Manufacturers and
Service Providers both is self-evident.
Here is a general tabulation of the standards prevalent across manufacturing segment and IT
segment, this is clear from this table, that standards and frameworks have spread across the
board, irrespective of the process and segment in any industry segment.
___________________________________________________________________________
Process
Manufacturing
ISO 9000, ISO 14000 or Euro Emission Norms for Vehicles.
Information Technology
SEI CMM 1-5 levels.
Process or System Quality
Manufacturing
Information Technology

TQM, Six Sigma, Beldridge,

Balanced Scorecards, COCOMO model etc.

Accepted Frameworks
Manufacturing
JIT, CPM/ PERT, Finite Element Analysis.
Information Technology
XML, Networking Protocols like TCP/IP or UDP, Internet
Architecture, BSD etc.
___________________________________________________________________________
Hence Game Theory when applied to such a situation reveals an interesting phenomenon that,
in these situations, the competitors are reducing the marginal cost of the product or services
offering, themselves, for some future gains.
What lesson CEOs and Executive of a corporation drive form this, differential advantage
on the basis of process and system is becoming difficult to leverage.
So in this scenario an effective competitive advantage a company can look for is Outsourcing.
Philosophy of Outsourcing
Outsourcing is a generic philosophy which delivers cost effective utilization of the process,
resources and corporate functions, in any way, for any activities in the life cycle of business
and economics. However, it does encourages implementors to ensure executing checks and
filters, when and where needed, with enforced accountability and responsibility.
Outsourcingonce considered an arcane business practicehas reached the boardroom and
beyond...Harvard Business Review has called outsourcing one of the most important
management ideas of the past 75 years. InfoServer magazine, December, 1998.
IT outsourcing continues to play a leading role in the overall IT revolution. Spending on IT
outsourcing reached $56 billion in 2000 and is expected to top $100 billion by 2005,
according to IDC, a Framingham, Massachusetts-based market research firm. When
Outsourcing institute asked correspondents for the reason why they should go for outsourcing,
Nearly half of the respondents did cite cost control as a reason to outsourcebut that was
followed closely by goals such as improving company focus and resources not available
internally. The wide range of buyers goals was also reflected in what they look for in a
vendor in addition to price, commitment to quality and scope of resources also ranked
high. Those findings are echoed by IDC, which recently reported that although the traditional
drivers of outsourcing to reduce operation costs, improve IS flexibility, focus on core
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competencies, and increase operational efficiencystill stand, [there is] mounting evidence
that companies have turned to outsourcing for more strategic reasons, including keeping up
with cutting-edge technology, building partnerships, creating value for the organization and
its customers, and broadening infrastructure and operations reach. The growing interest in
broader goals seems to be a reflection of the fact that companies continue to see e-business
and IT as critical resources for the future. Indeed, a recent survey conducted by the Stamford,
Connecticut-based Gartner research firm found that 56% of respondents are increasing their
IT budgets over last year, despite the economic slowdown. So what they look in a outsourcing
partner, Agree on the scope of the contract, State at the outset what constitutes success,
Devise a contract that identifies the measurements, to gauge performance, Maintain a flexible
contract so each party, can easily adapt to change without major confrontation, Build a
partnership that allows for negotiation and communication, Share goals, risks and rewards.

Philosophy of Balance Scorecard

The 75th anniversary edition of the Harvard Business Review listed balanced score carding as
one of the 15 most important management concepts ever introduced by the magazine.
Additionally, a 1998 study by the Gartner Group found that at least 40% of Fortune 1000
companies will implement a new management philosophy the Balanced Scorecardby the
year 2000. But the latest figures gives overwhelming 75% of the fortune 1000 companies
uses BalanceScoreCard in some or other way in their organization.
Drs. David Norton and Robert Kaplanthe Balanced Scorecard (BSC) model, developed the
model chosen. Which was first published in Harvard Business Review. So how can we utilize
this resource and turn it to the nuique competitive advantage to the companies?
The Balanced ScoreCard presented in this paper is a practical framework for translating an
Outsourcings vision into a set of performance indicators distributed among four
perspectives: Financial, Customer, Internal Business Processes, and Learning & Growth.
Some indicators are maintained to measure an organizations progress toward achieving its
vision; other indicators are maintained to measure the long-term drivers of success. Through
the balanced scorecard, an organization monitors both its current performances (finance,
customer satisfaction, and business process results, as shown in the Fig. Down) and its efforts
to improve processes, motivate and educate employees, and enhance information systemsits
ability to learn and improve.
Four Perspectives in Balance ScoreCard
Financial: In the Corporate arena, financial objectives generally represent clear long-range targets for profitseeking organizations, operating in a purely commercial environment. Financial considerations always
emphasize cost efficiency, i.e., the ability to deliver maximum value to the customer.
Customer: This perspective captures the ability of the organization to provide quality goods and services, the
effectiveness of their delivery, and overall customer service and satisfaction.
Internal Business Processes: This perspective focuses on the internal business results that lead to financial
success and satisfied customers. To meet organizational objectives and customers expectations, organizations
must identify the key business processes at which they must excel. Key processes are monitored to ensure that
outcomes will be satisfactory. Internal business processes are the mechanisms through which performance
expectations are achieved.
Learning and Growth: This perspective looks at the ability of employees, the quality of information systems, and
the effects of organizational alignment in supporting accomplishment of organizational goals. Processes will
only succeed if adequately skilled and motivated employees, supplied with accurate and timely information, are
driving them. This perspective takes on increased importance in organizations, like those of the PEA members
that are undergoing radical change. In order to meet changing requirements and customer expectations,
employees may be asked to take on dramatically new responsibilities, and may require skills, capabilities,
technologies, and organizational designs that were not available before.

Win-Win Solution?
How can we leverage the combined forces of two frameworks for the corporate advantage? Is
there any win-win preposition achievable with this? In a Conversation with Robert Kaplan
and David Norton, they aired following views
e-companies that are continually evolving their
strategies need a system for rapid strategy implementation even more than stable
companies. These companies' strategies are still based on differentiated value propositions
with underlying strategic hypotheses. The companies must communicate their strategies and
value propositions to employees, test and learn about the strategies in real time, and quickly
adapt the strategies. Rapid and effective strategy implementation is exactly the task that the
Balanced Scorecard management system has been designed to do. Managers can use the
scorecard to communicate the stable, long-run success measures as well as the new tactics
in the value proposition and in the internal business processes that reposition the
organization in its competitive environment. If, as we believe, success comes from aligning
all employees, decentralized units, and initiatives to the strategy, fast-cycle companies
should find the Balanced Scorecard an ideal management tool for quickly realigning the
organization to a new strategy. (Source: HBS).

As clearly a Outsourcing contract based on BSC model will ensure following, Focus on core
business competencies, Enhance information technology (IT), effectiveness, Supplement IT
staff/resources, Align IT strategy and business goals, Gain technical expertise and knowledge
Build world-class processes, Migrate to new technology platforms, Improve overall
competitiveness, Gain access to industry or process knowledge, Reduce IT costs and head
count, Improve shareholder value and Share/mitigate risk but most importantly it will give
client a transparent tool, with which they can always be in control.
Outsourcing Balanced Scorecard Matrix
Lets integrate four perspectives of the Balanced Scorecard with the parameters defined in
the Matrix of Outsourcing. As defined in the Outsourcing Matrix. Now we have specified
the Priorities and critical parameters, which we have based on the respondent replies and own
experience in the Matrix. For the feedback and timely control of the model, we have assigned
created two segments Proposed and Achieved.
The priorities are standards in the Industry and have been seen to deliver the most accurate
data, but this is not rigid and can be customized as per situation and scenario available to the
executives. There might seem measuring models, which might be doing duplication in datacollection, or not so distinctive reporting nature. But this has been a universal acknowledge
truth and experience that one model does not give true picture, so we need to employ a mix of
multiple model. How many times a project manager has faced a situation of committing
clients on the basis of the faulty project estimations? Hence we relied upon the philosophy of
Backups and recursive crosscheck. And hence all the measures will and should contribute
to the whole picture, rather then relying on only one model or parameter or priority and hence
will extract not so faulty Interpretations.

Fig: Dependency Diagram

Note that there are not only One-One dependencies between Objective, Measure, Target or
Initiative. On the Macro Level, All of them try to give the best result for the Perspective. For
example Perspective Innovation&Learning is encompasses in it all the four parameters.
While the Objective, here To achieve our vision, how will we sustain our ability to change
and improve. Will encapsulate in them the solution to the above vision. Now the measure,
target and Intiative will try to give a model, mode and approach how to acheive the particulr
abjectives.
Moreover, for each and every activity we will have clear defined owner, these can be
departments or Individuals. Like top executives usually will be everywhere as the Initiative
owners for the Customer perspectives. These owner-ship titles will ensure the transparency
to the customers and accountability can be ensured. Before starting an outsourcing contract,
this sheet should be filled. Customer also should be represented in it.
OWNERSHIP TITLE SHEET

OWNER
O
W
N
E
R

Innovation and
Learning
Perspective

Customer
Perspective

.
Financial
Perspective

Internal Business
Perspective

Objective
Measure
Target
Initiative

Innovation and Learning Perspective:

Objective

Measure

To achieve our vision,

how will we sustain our
ability to change and
improve.

Proposed
a)
Improve
operating
performance
b) Increase
commitment
and energy in
non-core
areas
c) Give
employees a
stronger career
path
d) Improve
credibility and
image by
associating
with superior
providers
e) Receive
innovative
ideas for
improving the
business,
products,
services, etc.
f)
Improve
management
and control

g) Improve
risk
management
h) Obtain
expertise,
skills and
technologies,
which would
not otherwise
be available
I) Others

Achieved

Target

Initiative

( These needs to be based

on Industry Benchmarks )

Proposed

Achieved

Proposed

Achieved

Proposed

Achieved

% subcontractor
labour
Labour
Competitive
ness
Skills
availability
Job
satisfaction

Planned
resource
Variance

Planned
Retention
rate,
Planned
Attrition
Rate

Others

Customer Perspective:

Objective

Measure

To achieve our vision,

how should we appear to
our customers.

Proposed
a) C customer
should feel in
Control all the
time.
b) Customer
participates in
the whole
process
actively.
c) Customer
owns the
responsibility
of the Process
and is to
acknowledge
delays.
d) Service
levels are
defined in the
beginning.
e) Customer
dictates the
changes not
the provider of
outsourcing
services
f) Clear
quantitative
figures
accrued from
Outsourcing
Contracts
g) others

Achieved

Target

Initiative

( These needs to be based

on Industry Benchmarks )

Proposed

Achieved

Proposed

Achieved

Proposed

Achieved

Customer
Satisfaction
Index.
Functional
Quality.

Activity
Chart.

Service
Levels.
Change
Version
control
systems.
Proposed
and
calibrated
Market
Share
figures.
Others

Financial Perspective:

Objective

Measure

To satisfy our
shareholders and
customers, what business
process must we excel in

Proposed
a)
Reduce
investments in
assets freeing
up
these
resources for
other purposes

b)
Generate
cash
by
transferring
assets to the
provider

Achieved

Target

Initiative

( These needs to be based

on Industry Benchmarks )

Proposed

Achieved

Proposed

Achieved

Proposed

Achieved

Project cost
Variance,
Cost per
Function
Point
Developed,
Cost per
Function
Point
Maintained
Project
Schedule
Variance

c) Gain market
access
and
business
opportunities
through
the
provider's
network
d)
Expand
sales
and
production
capacity
during periods
when
such
expansion
could not be
financed
e)
Reduce
costs through
superior
provider
performance
and
the
provider's
lower
cost
structure

Market value

f) Accelerate
expansion by
tapping
into
the provider's
developed
capacity,
processes and
systems
g)
Commercially
exploit
the
existing skills.
h) Turn fixed
costs
into
variable costs
e) Others

Others

Internal Business Perspective:

Objective

Measure

To succeed financially,
how should we appear to
our Stakeholders.

Proposed
a)
Enhance
effectiveness
by focusing on
what you do
best
b) Increase
product/servic
e, customer
satisfaction
and
shareholder
value
c) Transform
the
organization
d) Increase
flexibility to
meet changing
business
conditions,
demand for
products/servi
ces, and
technologies
e) Others

Achieved

Target

Initiative

( These needs to be based

on Industry Benchmarks )

Proposed

Achieved

Proposed

Achieved

Proposed

Achieved

Process
Capability
Models.
Maturity
Models.

Effective
Change
Coefficient
Analysis.

Others

Pitfalls in a Outsourcing Software Contract (Retailing Sector).

The Users at the shop-floor at most acclaimed retail chain company in Europe, were facing
lots of problem to use the software at the Point Of Sales (POS). The company has created a
name for the affordability and best value of preposition of their offerings. This top
management acknowledged and attributed, partly due to efficient utilization of IT, as a
support function. But when the top management talked with people and POS software users,
they were conveyed that the present system is not user friendly and hence the very complex
system for a sales person, who wanted IT only as Support Role for his POS activity, not as a
main function. In next Board Meeting The company IT Director defined problem as ,
The high complexity and non-userfriendlness of the software used by sales person at POS
points, is creating un-optimized calculation-time and inefficient utilization of resources and
people and resulting in loss of money and unsatisfied customers, as they have to stand longer
at the lines and hence spent time more on some activity is not value-additive to them.
IT Director demanded more resources from the board, The present IT setup, was to be
enhanced with more IT skilled People and proposed that all the software development was to
be done in-house. For this he requested for some specific amount of budget. The Board
expressed their inability to be give that money and reaffirmed that their core business is
Retailing and not IT development and they will like to stick on to the core-competency of
theirs. They advised Director to explore other opportunity towards providing solution to the
problem in hand, till next board meeting.
IT Director was in dilemma, he wanted his setup to grow but at the same time understood also
that IT departments role is more on support, not the main function in the organisation setup.
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In the next meeting he told his Board about a cost effective solution Software Project
Outsourcing, and told that he has examine various proposal and how a renounced and
reputed company, XYZ in Information technology Proposal of Intent (POI) sounds great. The
board was pretty exited about the effective saving and gave the IT Director free hand.
XYZ senior people met with the senior people at the Retail chain. They had intensive
discussion with senior people across the board, and tired in conjugation of Requirement
gathering and wrote this wonderful Detailed Analysis Report and Project estimation
document. Unfortunately they made most obvious error. As as a typical technologically
oriented company, firstly they never analysed whether the offering is in consonance with the
Vision of the Retail Company, and how does the solution they were offering support and
enhances it. Secondly they did not wanted to give most time to analysis and requirement
gathering but to the software development and Quality testing part. Thirdly they forget to
talk to people who were most effected, the sales-people sitting at POS points. Fourthly they
were thinking from the technology point of view, which products or technology to be used, at
such early start point, not from the process and problem definition angle.
Still the documents were accepted by the Retail chain top management, and the XYZ
company started IT development. Deliverables decided upon and periodic reviews to be held
by the client company. Again there were slips and delays, as the employee turnover was very
high for the IT company, because of the poor growth and learning opportunity offered by
them, so there was huge changes in manpower, effectively after six months, the whole team
from the original team was changed, incurring both the companies huge cost in retraining and
project delays. Moreover this ensured that there was no owner definition, so everything was
done on adhoc bases. Only if the retail company could have asked IT Company for their
Annual employee turnover rates.
But Still the project was continuing and after a delay of seven month, the project was finally
over and there was need of the Maintenance and Support activity contract, again for this the
Outsourcing company provided a beautiful document Maintenance and support Document.
And they were awarded contacts also, but once the system at one of the Retail chain, at the
POS point, the credit card validation machine stopped working suddenly in conjugation with
this new software, lots of customer were stranded with purchases. The retail manager rand up
the support centre and was told support will be there in four hours, now can you imagine such
situation in practical economic situation. The only pitfall here was Retail chain never knew
about service levels and hence there again was everything in adhoc arrangement. In the end
management for the time being decided to shift back to the old system. SO and so for the
Outsourcing. But all these could have been avoided if the Retail client company could have
sued some standard model, like BSC (Balance Score Card) for the overall contract evaluation.

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Final Words.
If we see the number of Outsourcing contract becoming void and the functional problems
companies are facing in getting these contracts executed then we can clearly see that the
companies should base their outsourcing judgement on some rational parameters and also the
company which is making outsourcing activities happen should have following factors in
place, as defined in the matrix.
Outsourcing Matrix:
Top Strategic Benefits envisaged

Top Outsourcing Selection criterions

Improve company focus

Gain access to world-class capabilities
Free internal resources for other purposes
Resources are not available internally
Accelerate reengineering benefits
Function difficult to manage/out of control
Make capital funds available
Share risks
Cash infusion
Rapid Innovation
Collaborative Development
Improve service levels
Other

Commitment to quality
Price
References/reputation
Flexible contract terms
Scope of resources
Additional value-added capability
Cultural match
Existing relationship
Location
Other

Top Factors for Successful Outsourcing

Top Drivers for Outsourcing Decisions

Understanding company goals and objectives

A strategic vision and plan
Selecting the right vendor
Ongoing management of the relationships
A properly structured contract
Open communication with affected individual
/groups
Senior executive support and involvement
Careful attention to personnel issues
Near term financial justification
Use of outside expertise
Other

Accelerate reengineering benefits

Access to world class capabilities
Cash infusion
Free resources for other purposes
Function difficult to manage or out of control
Improve company focus
Make capital funds available
Reduce operating costs
Reduce risk
Resources not available internally
Urge to contribute.
Other
(Source: www.Outsourcing.com)

As external constituencies base their assessment of a company's value on expectations about

the quality of the company's future decisions--and how those decisions affect such things as
new product pipelines, recruitment channels, the quality of the management, and the quality
of the strategy. The above model provides a practical standard means of communicating such
information to outside audiences. It "does for strategic management what income statements
and balance sheets do for financial management."
So companies can adopt religiously the model proposed and gives all the control back, where
it should have been alwaysWith Customers.
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References
01) Software Engineering Economics (1981) - Barry Boehm
02) Strategy-Focused Organization, Robert Kaplan and David Norton, HBS Press, 2000
03) http://www.hbsp.harvard.edu/ideasatwork/kaplan_norton_conv.html.
04) http://www.jsc.nasa.gov/bu2/COCOMO.html#COCOMO.
05) http://www.outsourcing.com/index.asp.
06) http://ibm.com/index.html.
07) The Economic Times, India Apr 5 2002.
08) The Balanced Scorecard Measures that Drive Performance", Robert Kaplan and David
Norton, Harvard Business Review, Jan-Feb 1992.
09) Dr. James Brian Quinn, Author of Innovation Explosion.

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