Roles of Performance Metrics in the (Out)Sourcing Process

I recently stumbled upon Strategic Sourcing: Measuring and Managing Performance again, a report prepared by RAND for Project Air Force back in 2000. Barely over a page into the summary, it notes that in managing their relationship, a customer and a provider jointly choose metrics that they believe will support the corporate goals of the customer organization. The goal is that such metrics align the provider’s priorities with those of its customer. Since procurement outsourcing is going to become the rage, as per my Why You Should Consider Procurement Outsourcing, it’s important to understand what the role of metrics is in the sourcing, and outsourcing, process since you never know when your CEO is going to get the outsourcing bug.

The paper enforces that customers (should) tend to focus on metrics that easily convey to providers the dimensions of performance most important to them. However, although the summary notes that customers and providers tend to refine the set of metrics used to measure performance throughout the relationship, it fails to mention that providers tend to want those metrics that focus on the performance measures that make them look good. Although it does imply relatively early on that outsourcers may have their own choice of metrics early on, it doesn’t make it particularly clear. In particular, there are providers that will try to steer the customer toward transaction oriented and fixed cost reduction metrics that are easy to measure, manage, and achieve.

Even though the key to a great outsourcing relationship is for a provider to insure that metrics are aligned with those aspects of performance that matter most, not all outsourcing providers may recognize the fact, or even if they do, be able to recognize which aspects of performance matter most to a customer. The fact of the matter is that there is no magic set of metrics that fits every sourcing need – and different managers at different levels within the customer firm may want different metrics, especially if the customer does not have its house in order before jumping on the outsourcing bandwagon.

It’s important that the metrics chosen focus on the strategic goals of outsourcing the process, and not the transactional nature of the process being outsourced. Specifically, are costs being reduced, are they being reduced with approved, quality suppliers, and are they tracking well against market averages? Has overall spend throughput in the outsourced categories increased by an acceptable percentage? What percentage of spend is being captured in the system? Have project timelines decreased on average?

After all, if costs are being reduced, but are still more than market averages, then outsourcing is not working very well. If overall spend throughput through strategic sourcing projects has not increased, then outsourcing has not succeeded. If the provider is not capable of capturing 100% of sourced spend in their systems, then their technology is not up to snuff. If project timelines have not decreased, then the customer is better off doing everything in house.

Furthermore, the set of metrics chosen should be helpful in making the in-house vs. outsource decision, should be useful in selecting the right provider, should be capable of measuring the progress of the relationship, and should promote continuous improvement. In addition, when evaluating a potential provider, the customer should have a set of metrics that address total cost, service quality, HR policies, technological capability, financial stability, and other special interests of the customer, such as carbon neutrality goals.

Procurement outsourcing, like any type of outsourcing, is not an easy decision and should not be made quickly or lightly. Significant research should be done up front by both parties because the full value of a successful relationship will generally not be realized for three to five years, as there are a lot of up-front costs in making the transition and outsourcing adds head-count (as you need people on your team overseeing and managing the relationship). Even though outsourcing the right categories to the right provider can be a great success, outsourcing the wrong categories to the wrong provider can significantly increase costs. So do your research, and take some time to find the set of metrics that will work for you.