I am often asked by my clients, what measures are most appropriate for functions that are outsourced…particularly in terms of Vendor or Business Partner measures, accountabilities, and ultimately their compensation.
Here’s my take on it. This question is really NOT about measures at all per se, but far more about the NATURE of the business relationship itself.
Let’s face it, there is no shortage of vendors claiming to be the “business partners” of their clients. The first part of answering the measurement and compensation question is figuring out which vendors are, and which vendors are not, true business partners. A good acid test for this is to ask whether the contract you have with the partner is based on a “task list” of deliverables, versus a set of real business outcomes. If it is the former, then you should face the reality that your contractor relationship is just that- a contractor/ commodity based/ perpetually “low bid” kind of relationship, and probably not worthy of a partner performance/ partner pricing conversation. Just measure the vendor on a $ per widget/ widget quality basis and be done with it. But don’t expect them to do any more than produce good widgets.
On the other hand, if you genuinely do share business outcomes as the basis of your contract, then the measurement/ performance question gets much easier. Why? Because if your partner is genuinely accountable for YOUR business outcomes (and you for his, as I will discuss later), then it would only make logical sense that these measures would also end up on YOUR corporate scorecard. And that means you shouldn’t have to spend time coming up with a NEW or creative set of measures, but rather a delegation, if you will, of measures that you already have.
A good example of this are the partnerships Utilities have with their Vegetation Management (tree trimming) function, which incidentally and surprisingly is often the utility’s #1 O&M line item. These contracts range from the rather elementary level of $ per manhour, to the more sophisticated cost per tree or cost per span. But the ones in which a real “business partnership” exists are opting for measures like # of tree-driven interruptions, or related frequency and severity measures. For you utility foresters out there, this translates into indicators like Tree-CAIDI or Tree-SAIDI. Pretty cool huh? The real message here is that when you have a true business partnership, the measures you use to track their performance are the very same measures you use to track yours. A true win-win so to speak.
And the beauty of this is that it works both ways. A colleague of mine once told me that during each of his monthly client update meetings, his client would ask him- “how are YOU doing?” and “Is this contract making money/ profits for YOU?”- suggesting that having the vendor (my colleague/partner in this case) make money is as equally important to the client- a truly radical thought.
Another respected peer of mine told me that “the “master-slave” contractor relationship is “dead” because it will always produce “average” performance–that it is a model based primarily on distrust- essentially producing “just enough to get by” behavior. The partner model turns this on its head, and has the client saying to the partner “I want to make you as wildly successful as you make me” “.
So the long and short of it is that this is not a question of what you should measure or pay a contractor for, but rather a question of whether the contractor is really a business partner. versus a basic commodity type vendor. If the latter is the case, then you should be spending your time ensuring that the measure of success that you choose is something that should show up on BOTH of your scorecards, and be given equal attention.