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Taking a Performance-BasedServices Approach to Improvethe Effectiveness ofOutsourcingAlan McSweeney
Performance-Based Services Contracting (PBSC)•   Concerned with the structured of the results and    measurable outcomes t...
Service Becomes “Black Box”                                       Results/      Requirements      Service       Outcomes  ...
Types of Outsourcing Arrangement                     Complexity of Outsourcing Arrangement                                ...
Why Use Performance-Based Services ContractApproach?•   Can be used to achieve innovation within an outsourcing    arrange...
Concerns With Performance-Based Services ContractApproach•   Requires regular and frequent communication between the    cu...
Types of Outsourcing Arrangement and Use ofPerformance Based Service Contracts                     Complexity of Outsourci...
Key Components of Performance-Based ServicesContract                  Performance-Based Services Arrangement              ...
Overall Outsourcing Service Framework   Requirements                                                             PARs Affe...
Performance Work Statement (PWS)•   Statement of work for performance-based services that describes    the required result...
Performance Work Statement (PWS)•   Questions to consider when developing a PWS      − Why do we need the service performe...
Statement of Objectives (SOO)•   Statement of the overall performance and other objectives    for the service•   Defines w...
Performance Objectives•   Performance Objectives define the performance level    required to meet the service delivery and...
Performance Assessment•   Based on Quality Assurance Surveillance Plan (QASP)•   QASP follows-on from requirements listed ...
Quality Assurance Surveillance Plan (QASP)•   QASP enables you to evaluate if the supplier is meeting the performance    s...
Performance Assessment Report (PAR)•   Evaluation of the services supplied•   Frequency of PARs production defined in over...
Performance Assessment•   Measures and metrics inform the supplier how the    requirements are being met•   High and low t...
Performance Measurement Framework                                                  Customer                     Collects  ...
Performance Assessment Reporting Framework     Month Month Month Month Month Month Month Month Month Month Month Month    ...
Performance Metrics•   Need to define set of metrics that capture what is important to the    service delivery•   Balance ...
Define Measures Linked to Key Service Elements andProcesses                  Metric 1    Metric 2    Metric 3    Metric 4 ...
Define Measures Linked to Key Service Elements andProcesses•   Create service landscape/architecture with cross-    functi...
Metrics Hierarchy                                 High-Level Metrics Which                       KPI       Measure Progres...
Outsourcing Contract Types•   Different types of contract (payment) structures available    to customer•   Many contract t...
Outsourcing Contract Types                                                          Contract Types                        ...
Outsourcing Model High-Level Approach and Steps                                         Build the Sourcing Team With Execu...
Requirements•   Defining requirements is crucial to the entire sourcing process•   Requirements need to be well-defined, r...
Requirements•   Requirements measured against performance•   Performance must be linked to a performance objective•   Must...
SOO MoSCoW Prioritisation of Requirements•   MoSCoW      − Must Have              • Requirements that are fundamental to t...
Requirements Structure                                                               Business Outcome                     ...
Performance•   Performance standards define what level of performance    must be met to satisfy the performance objective•...
Inspection/Validation• Inspection is needed to know if the standard is being met• Customer needs to perform inspection/ver...
Incentives/Penalties•   What are the impacts of meeting or not meeting the    standards of the objectives?•   Should penal...
Prioritisation of Requirements•   Determine which performance objectives are the most    important and weight accordingly•...
Requirements Structure                                        Objective      Performance                  Inspection/ Vali...
Requirements Structure•   Objectives need to be specified in terms of      − Performance              • Which specifies   ...
Summary•   Getting outsourcing right is not easy•   PBSC provides a potential approach for maximising results•   PBSC is g...
More Information           Alan McSweeney           alan@alanmcsweeney.com April 10, 2012                     38
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Taking a Performance-Based Services Approach to Improve the Effectiveness of Outsourcing

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Performance-Based Services Contracting (PBSC) is 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.

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

  1. 1. Taking a Performance-BasedServices Approach to Improvethe Effectiveness ofOutsourcingAlan McSweeney
  2. 2. 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 2
  3. 3. Service Becomes “Black Box” Results/ Requirements Service Outcomes Measures Data Expected vs. Actual April 10, 2012 3
  4. 4. Types of Outsourcing Arrangement Complexity of Outsourcing Arrangement Business Efficiency/Utility Transformational Enhancement(Make It Cheaper) (Make me Money) (Make it Better)Focuses primarily on cost Partnership between the control and, over time, Improve business service provider and cost reduction, with the productivity resulting in service recipient that is goal of maintaining movement toward focused on innovation consistency in the defined business goals and new business delivery of services April 10, 2012 4
  5. 5. Why Use Performance-Based Services ContractApproach?• 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 April 10, 2012 5
  6. 6. Concerns With Performance-Based Services ContractApproach• 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 April 10, 2012 6
  7. 7. Types of Outsourcing Arrangement and Use ofPerformance Based Service Contracts Complexity of Outsourcing Arrangement Business Efficiency/Utility Transformational Enhancement(Make It Cheaper) (Make me Money) (Make it Better) Performance Based Service ContractsFocuses primarily on cost Partnership between the control and, over time, Improve business service provider and cost reduction, with the productivity resulting in service recipient that is goal of maintaining movement toward focused on innovation consistency in the defined business goals and new business delivery of services April 10, 2012 7
  8. 8. Key Components of Performance-Based ServicesContract Performance-Based Services Arrangement Performance Incentives Performance Measurable (Where Work Statement Performance Appropriate), (PWS) Standards Overall Cost Model April 10, 2012 8
  9. 9. Overall Outsourcing Service Framework Requirements PARs Affect Service Contract and Feed Into Payments Cost/Payment Model Contract Contract Governs Overall Service Delivery Quality SOO Assurance Statement of Expanded Surveillance PlanObjectives (SOO) Into Detailed Delivery of (QASP) PWS PWS Measures by QASP QASP Performance Reported on Work Statement in PARs (PWS) Performance PWS Contains Assessment Requirements Detailed Report (PAR) Requirements April 10, 2012 Requirements Feed Into QASP 9
  10. 10. 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 cost- effective methods of performing the services April 10, 2012 10
  11. 11. 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? April 10, 2012 11
  12. 12. 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 April 10, 2012 12
  13. 13. 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 supplier’s performance of service delivery and operation April 10, 2012 13
  14. 14. 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 April 10, 2012 14
  15. 15. 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 supplier’s 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 April 10, 2012 15
  16. 16. 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 April 10, 2012 16
  17. 17. 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 April 10, 2012 17
  18. 18. Performance Measurement Framework Customer Collects Analyses Provides Review RespondDefines and Monitors and Takes Performance and toMetrics Supplies Compliance Requests Actions Assessment Respond Feedback Data Actions Reports (PARs) 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 April 10, 2012 18
  19. 19. 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 April 10, 2012 19
  20. 20. 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 April 10, 2012 20
  21. 21. Define Measures Linked to Key Service Elements andProcesses Metric 1 Metric 2 Metric 3 Metric 4 Metric 5 Metric 8 Metric 6 Metric 9 Metric 7 Metric 10 Metric 11 Metric 12 Metric 13 April 10, 2012 21
  22. 22. Define Measures Linked to Key Service Elements andProcesses• Create service landscape/architecture with cross- functional processes• Define hierarchical metric framework that measures outcomes for individual service components, collections of service components and overall service April 10, 2012 22
  23. 23. Metrics Hierarchy High-Level Metrics Which KPI Measure Progress Toward Strategic Service Objectives Align Metrics to Allow Roll- up Process Metrics – Roll-up Process Metrics of Operational Metrics Results Metrics Operational Metrics April 10, 2012 23
  24. 24. 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 April 10, 2012 24
  25. 25. Outsourcing Contract Types Contract Types Time-and- Cost- Fixed-Price Indefinite-Delivery Materials, Labour- Agreement Reimbursement Hour, and Letter Time-and- Firm-Fixed-Price Cost-Only Basic Materials, Fixed-Price with Cost-Plus- Economic Price Labour-Hour Basic Ordering Incentive-Fee Adjustment Fixed-Price Cost-plus-Award- Letter Incentive Fee Fixed-Price with Cost-Plus-Fixed- Prospective Price Fee Redetermination Firm-Fixed-Price, Level-of-Effort Term April 10, 2012 25
  26. 26. Outsourcing Model High-Level Approach and Steps Build the Sourcing Team With Executive Sponsorship and Support 1. Form theSourcing Team Conduct Analysis of Previous Sourcing Arrangements Define Stakeholder and Customer needs 2. Review Current Sourcing Strategy Analyse the Market and Identify Potential Suppliers 3. Perform Market Research Define Requirements 4. Define Requirements Define Sourcing Approach and Create 5. Define Sourcing Strategy – Strategic or Tactical Sourcing Strategy Select the Most Appropriate Supplier 6. Execute and Implement Sourcing Strategy Sourcing Strategy Build Supplier Relationship 7. Manage Monitor and Manage Performance Performance April 10, 2012 26
  27. 27. 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 April 10, 2012 27
  28. 28. 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? April 10, 2012 28
  29. 29. 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 April 10, 2012 29
  30. 30. Requirements Structure Business Outcome Objective 1 … Objective N Performance Inspection/ Validation Incentive/ Penalty Performance Objective Data Source(s) Standard(s) and Frequency Measure(s) Minimum Acceptable Measure Quality Level April 10, 2012 30
  31. 31. 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? April 10, 2012 31
  32. 32. 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 April 10, 2012 32
  33. 33. 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 April 10, 2012 33
  34. 34. 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 April 10, 2012 34
  35. 35. Requirements Structure Objective Performance Inspection/ Validation Incentive/ Penalty Performance Objective Data Source(s) Standard(s) and Frequency Measure(s) Minimum Acceptable Measure Quality Level April 10, 2012 35
  36. 36. 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 April 10, 2012 36
  37. 37. 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 April 10, 2012 37
  38. 38. More Information Alan McSweeney alan@alanmcsweeney.com April 10, 2012 38
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