Taking a Performance-Based Services Approach to Improve the Effectiveness of Outsourcing

Alan McSweeney

Performance-Based Services Contracting (PBSC)

Concerned with the structured of the results and measurable outcomes to be achieved rather than the manner by which the work is to be performed Performance-Based Services Contracting approach is about defining what the required results of a service will rather than how the contractor will perform the tasks Supplier becomes responsible for how service is

accomplished

April 10, 2012

Service Becomes Black Box

Requirements

Service

Results/ Outcomes

Measures Data

Expected vs. Actual

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Types of Outsourcing Arrangement

Complexity of Outsourcing Arrangement

Efficiency/Utility (Make It Cheaper)

Business Enhancement (Make it Better)

Transformational (Make me Money)

Focuses primarily on cost control and, over time, cost reduction, with the goal of maintaining consistency in the delivery of services

Improve business productivity resulting in movement toward defined business goals

Partnership between the service provider and service recipient that is focused on innovation and new business

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Why Use Performance-Based Services Contract Approach?

Can be used to achieve innovation within an outsourcing arrangement Useful where supplier is taking over an unstructured/undefined service/state with a mandate to change and improve Should increase customer satisfaction because results are improved Promotes frequent communication between the customer and the supplier Demands good contract management to ensure results are achieved Shifts the risk to the supplier Can improve supplier performance

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Concerns With Performance-Based Services Contract Approach

Requires regular and frequent communication between the customer and the supplier Requires good contract management by of the customer to ensure results are being achieved Requires an understanding of what the objectives of the proposed outsourcing arrangement are and the problem you are trying to solve Requires commitment and resources to get outsourcing definition right You can outsource anything except the management of what is being outsourced

Outsourcing

Fire and Forget

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April 10, 2012

Types of Outsourcing Arrangement and Use of Performance Based Service Contracts

Complexity of Outsourcing Arrangement

Efficiency/Utility (Make It Cheaper)

Business Enhancement (Make it Better)

Transformational (Make me Money)

Performance Based Service Contracts

Focuses primarily on cost control and, over time, cost reduction, with the goal of maintaining consistency in the delivery of services Improve business productivity resulting in movement toward defined business goals Partnership between the service provider and service recipient that is focused on innovation and new business

April 10, 2012

Key Components of Performance-Based Services Contract

Performance-Based Services Arrangement

Performance Work Statement (PWS)

Measurable Performance Standards

Performance Incentives (Where Appropriate), Overall Cost Model

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Overall Outsourcing Service Framework

Requirements Feed Into Contract Service Contract and Cost/Payment Model Contract Governs Overall Service Delivery PARs Affect Payments

Statement of Objectives (SOO)

SOO Expanded Into Detailed PWS

Performance Work Statement (PWS)

Delivery of PWS Measures by QASP

Quality Assurance Surveillance Plan (QASP) QASP Reported on in PARs Performance Assessment Report (PAR)

Requirements

PWS Contains Detailed Requirements Requirements Feed Into QASP

April 10, 2012

Performance Work Statement (PWS)

Statement of work for performance-based services that describes the required results in clear, specific and objective terms with defined and measurable outcomes Focuses on what the results of performance will be Describes the work in terms of the required results Enable assessment of service delivery performance against measurable performance standards Defines a measurement framework Defines measurable performance standards and financial incentives to ensure suppliers develop and implement innovative and costeffective methods of performing the services

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Performance Work Statement (PWS)

Questions to consider when developing a PWS

Why do we need the service performed? What kinds of results quality/time - do we want from it?

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Statement of Objectives (SOO)

Statement of the overall performance and other objectives for the service Defines what is required in terms of the results of the services to be performed Designed to enable the maximum flexibility to a supplier to propose an innovative approach to service delivery

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Performance Objectives

Performance Objectives define the performance level required to meet the service delivery and operation requirements Performance Objectives need to be measurable and structured to permit an assessment of the suppliers performance of service delivery and operation

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Performance Assessment

Based on Quality Assurance Surveillance Plan (QASP) QASP follows-on from requirements listed in the performance work statement (PWS) Defines the procedures to ensure the required performance standards and levels of services are provided by the supplier

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Quality Assurance Surveillance Plan (QASP)

QASP enables you to evaluate if the supplier is meeting the performance standards/quality levels identified in the PWS
Measures the suppliers performance against the agreed and defined performance standards

Ensures you pay only for the level of service provided Defines the systematic methods and processes used to monitor performance
Surveillance techniques/methods Assess and assure contract compliance Measure against defined Acceptable Quality Level (AQL) Reporting Reviews and Resolution

Identify the required documentation Detail the resources to be employed, roles and responsibilities When shared with the supplier, the QASP is a communication tool that allow both the customer and supplier focus on what is most important

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Performance Assessment Report (PAR)

Evaluation of the services supplied Frequency of PARs production defined in overall service contract Contains
What the supplier was required to do What measurements were defined How the supplier is performing What actions are being taken based on performance

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Performance Assessment

Measures and metrics inform the supplier how the requirements are being met High and low thresholds defined exceed/not meet requirements Need to define measurement intervals to identify supplier non-performance Define interval within which corrections can be made Customer needs to create Quality Assurance team to regularly and frequently verify supplier compliance with defined Performance Objectives
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Performance Measurement Framework

Customer

Defines Metrics

Collects and Supplies Data

Monitors Compliance

Analyses and Requests Actions

Takes Actions

Provides Performance Assessment Reports (PARs)

Review and Respond

Respond to Feedback

Supplier

Requires regular and frequent communication between the customer and the supplier Requires good contract management on the part of the customer to ensure results are achieved
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Performance Assessment Reporting Framework

Month Month Month Month Month Month Month Month Month Month Month Month 1 2 3 4 5 6 7 8 9 10 11 12

Quarter 1

Quarter 2

Quarter 3

Quarter 4

Annual

Define tiered performance reporting framework operational and strategic - and adhere to it
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Performance Metrics

Need to define set of metrics that capture what is important to the service delivery Balance between too few and too many Metrics need to tell you when the performance standards have been met Need to assess that the definition of metrics will cause supplier to take actions to optimise their value which may lead to undesirable consequences Define tiered metrics to match tiered reporting: operational and strategic Define measurement framework that measures performance and interactions across service landscape Measure what is important and what has an impact Measure outcomes the what rather than the how
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Define Measures Linked to Key Service Elements and Processes

Metric 1 Metric 2 Metric 3 Metric 4

Metric 5

Metric 8

Metric 6

Metric 9

Metric 7

Metric 10
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Metric 11

Metric 12

Metric 13
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Define Measures Linked to Key Service Elements and Processes

Create service landscape/architecture with crossfunctional processes Define hierarchical metric framework that measures outcomes for individual service components, collections of service components and overall service

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Metrics Hierarchy

KPI

High-Level Metrics Which Measure Progress Toward Strategic Service Objectives Align Metrics to Allow Rollup

Process Metrics

Process Metrics Roll-up of Operational Metrics

Results Metrics

Operational Metrics

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Outsourcing Contract Types

Different types of contract (payment) structures available to customer Many contract types available Need to consider contract type and associated payment structures that will motivate suppliers to increase efficiency and maximise service performance Need to select a contract type and price (or estimated cost and payment structure) that will result in reasonable supplier risk and provide the supplier with the greatest incentive for efficient and economical performance Contract type and price negotiation are linked
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Outsourcing Contract Types

Contract Types Time-andMaterials, LabourHour, and Letter

Fixed-Price

CostReimbursement

Indefinite-Delivery

Agreement

Firm-Fixed-Price

Cost-Only

Time-andMaterials,

Basic

Fixed-Price with Economic Price Adjustment

Cost-PlusIncentive-Fee

Labour-Hour

Basic Ordering

Fixed-Price Incentive

Cost-plus-AwardFee

Letter

Fixed-Price with Prospective Price Redetermination Firm-Fixed-Price, Level-of-Effort Term

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Cost-Plus-FixedFee

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Outsourcing Model High-Level Approach and Steps

1. Form the Sourcing Team 2. Review Current Sourcing Strategy 3. Perform Market Research

Build the Sourcing Team With Executive Sponsorship and Support Conduct Analysis of Previous Sourcing Arrangements Define Stakeholder and Customer needs

Analyse the Market and Identify Potential Suppliers

Define Requirements
4. Define Requirements 5. Define Sourcing Strategy 6. Execute Sourcing Strategy 7. Manage Performance
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Define Sourcing Approach and Create Sourcing Strategy Strategic or Tactical

Select the Most Appropriate Supplier and Implement Sourcing Strategy

Build Supplier Relationship Monitor and Manage Performance

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Requirements

Defining requirements is crucial to the entire sourcing process Requirements need to be well-defined, realistic, achievable and measurable Requirements need to have an associated quality level and schedule Requirements provide the basis for the PWS Requirements need to be defined in terms of desired results rather than specifying how the work should be done Each requirement needs to have an associated measurement methodology Requirements may have cost reduction for non-achievement or incentive for exceeding defined performance Requirements must be unambiguous and easily understood
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Requirements

Requirements measured against performance Performance must be linked to a performance objective Must be able to know what performance level is needed by the business in order to define the requirement Must know why the performance is required

Why are you asking for this requirement, why is it important, why is it needed, why business outcome/objective is achieved?

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SOO MoSCoW Prioritisation of Requirements

MoSCoW
Must Have
Requirements that are fundamental to the operation of the service Without them the service will be unusable and useless Must Haves define the minimum subset services

Should Have
Important requirements which are not necessary for service operation in the short-term but which will contribute

Could Have
Requirements that can be omitted but which are part of the long-term service and will be beneficial to the service being provided

Want to Have
Requirements that are effectively optional

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Requirements Structure
Business Outcome

Objective 1

Objective N

Performance

Inspection/ Validation

Incentive/ Penalty

Performance Objective

Data Source(s)

Standard(s) and Measure(s)

Frequency

Minimum Acceptable Quality Level

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Measure
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Performance

Performance standards define what level of performance must be met to satisfy the performance objective Objectives must be objectively measurable Data to create measures must be available and collected AQL (Acceptable Quality Level) is an acceptable deviation from the standard
Example: 95% of requests to be satisfied within standard You will almost never achieve 100% of performance 100% of the time without incurring significant cost AQL specifies the allowable tolerance What AQL is acceptable and appropriate and why?
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Inspection/Validation
Inspection is needed to know if the standard is being met Customer needs to perform inspection/verification Inspection/verification requires

Definition of information needed Sources of information Frequency of collection Method of collection Metrics generated/derived from data

Inspection/verification itself needs to be inspected and validated Inspection process requires resources essential part of contract management

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Incentives/Penalties

What are the impacts of meeting or not meeting the standards of the objectives? Should penalties be specified for not meeting standards for a defined interval? Should incentives be specified for meeting or exceeding standards for a defined interval? Penalties/incentives need to be linked to:
Realistic cost of not achieving/benefit of achieving Encouragement of good behaviour Change does not occur based on positive incentives alone
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Prioritisation of Requirements

Determine which performance objectives are the most important and weight accordingly Assign a higher penalty/weight to these When evaluating suppliers assign greater importance/score to meeting these factors Form part of overall service contract

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Requirements Structure
Objective

Performance

Inspection/ Validation

Incentive/ Penalty

Performance Objective

Data Source(s)

Standard(s) and Measure(s)

Frequency

Minimum Acceptable Quality Level

April 10, 2012

Measure
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Requirements Structure

Objectives need to be specified in terms of

Performance
Which specifies Performance Objective Subject to Standard(s) and Measure(s) With defined Minimum Acceptable Quality Level Which are measured by

Inspection/Validation
Which specifies Data Source(s) From which performance information is collected with a defined Frequency That is then used to generate a defined Measure

And subject to

Incentive/Penalty

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Summary

Getting outsourcing right is not easy PBSC provides a potential approach for maximising results PBSC is good where what is being outsourced is not stable and is subject to change PBSC provides a means for embedding flexibility and innovation in outsourcing arrangement PBSC does impose overheads in service definition and supplier selection and in subsequent supplier management that you need to be aware of and accept Not easy but is worth getting right Remember: You can outsource anything except the management of what is being outsourced

Outsourcing

Fire and Forget

37

April 10, 2012

More Information
Alan McSweeney alan@alanmcsweeney.com

April 10, 2012

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