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How to Measure Real Outsourcing Success (Hint: It's Not the SLAs)

If you really want to assess the health of your outsourcing relationship, you've got to give it a full physical, says Forrester analyst Dr. Paul Roehrig.

September 17, 2007 — CIO — "There's a lot of pain around outsourcing deals," admits Dr. Paul Roehrig, a senior analyst with Forrester. The situation in the $120 billion-a-year IT services market isn't quite as dire as some would have you believe, says Roehrig. About 57 percent of IT buyers are somewhat satisfied with their primary outsourcer and 22 percent are very satisfied, according to Forrester's research. But that leaves more than 20 percent indicating it could be better.

"It's not as bad as a lot of people make it out to be. You're not inviting disaster into your firm by outsourcing," Roehrig says. "But there's a tremendous amount of room for improvement."

That's why Roehrig advocates regular checkups on outsourcing deal health. And that doesn't just mean looking at performance against service-level agreements (SLAs) or price benchmarking. "All the service providers are capable of delivering a basic suite of services," says Roehrig. Vendors tend to come within plus or minus 2 percent on most SLAs, so they're "not the real driver of satisfaction" or dissatisfaction, he says. When it comes to cost savings, most IT buyers are able to save an average of 12 percent to 17 percent by outsourcing, according to outsourcing adviser TPI, but there's lots of variation based on what you're outsourcing and where. Buyers can try to use benchmarking to see how their outsourcers' prices compare to the market, but Roehrig says the price benchmarks are limited in their accuracy. And the cards are stacked against customers in the often adversarial benchmarking process. (For more on benchmarking, see "Outsourcers May Try to Prevent Benchmarking.") "In many cases, the customer gets unhappy and they reach for the benchmarking clause. But the savvy IT service guys know way more than the customer about benchmarking and they contest the benchmark," says Roehrig. "Everyone ends up really unhappy, except the people who perform the price benchmarking."

Roehrig advocates a more holistic assessment of outsourcing success or failure. "You need to assess the deal systemically beyond 'price per widget' or whether the service provider met the SLAs," says Roehrig. That would be almost like assessing your physical health by taking your temperature and having you open up and say, "Ah."

Forrester itself provides such a service it calls a "sourcing deal X-ray," which includes an onsite assessment of the deal on 150 separate measures. However, says Roehrig, it's not rocket science. IT leaders can and should try this at home.

The parameters for the outsourcing checkup are based on what Roehrig calls the "key pain points" in outsourcing. According to Forrester, IT services buyers are more likely to be disappointed with the innovation of their provider (42 percent were dissatisfied), their ability to manage change (37 percent), and their business savvy and value (31 percent) than the contractual aspects of the deal (23 percent) or performance against SLAs (15 percent).