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Developing Metrics for Ensuring BPO Success
21 July 2003
Audrey L. Apfel

Document Type:  Research Note
Note Number:  DF-20-3478
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Metrics are the key to assessing value in a business process outsourcing relationship. Choose metrics that measure business activity and service delivery to ensure cost-efficiency, service stability and innovation.


What You Need to Know

Metrics are an important management-communication tool — they enable all parties in a business process outsourcing relationship to stay focused on the right things. Regardless of whether a business activity is operated internally or externally, key business-activity metrics are necessary components of effective performance management. When a BPO provider is involved, these metrics must be reinforced by key service-delivery metrics. The delivery metrics are at the heart of a successful BPO relationship because they form the basis for performance reporting, ongoing operational monitoring, construction and analyses of trends, and external benchmarking.

Analysis

As interest in using business process outsourcing (BPO) increases, enterprises need to assess service providers before signing BPO agreements, monitor the ongoing delivery of services and ensure that providers can continue to meet changing needs. However, there is no accepted way to define value in BPO deals. Most enterprises using BPO services judge value solely in terms of cost, but using just cost-related metrics works only when the type of service is so mature that performance is generally no longer an issue — customers can realistically expect services to be maintained at high levels or variations in service levels can be tolerated.

A problem with using only cost-related metrics for BPO deals is that providers have little incentive to innovate in service delivery or within the business processes, because they don't have a way to measure new value added to the relationship. Given the relative immaturity of the BPO marketplace, even the most advanced services should not be assessed purely on cost.

The starting point for defining a more complete set of BPO metrics is the operational measurements that are used to manage and optimize the business process or activity, regardless of whether it is carried out internally or by a BPO provider. Examples of business-activity metrics are shown in Figure 1.

Figure 1

Examples of Business-Activity Metrics

Figure 1

Source: Gartner Research (July 2003)

These metrics measure the outcomes of the underlying processes that affect an enterprise's performance (generally financial). For example, when assessing the performance of a logistics operation, the key outcome-oriented business metric is "on-time delivery," not "number of trucks per shift" or "number of employees per warehouse," which are internal measurements of how the provider achieves the business outcome.

Encouraging innovation is an additional advantage of focusing on a few key business-activity metrics. An internal logistics operation, or an external logistics provider, has the incentive to offer services that increase on-time delivery or service accuracy, because the increased cost or price results in measurable increased business value. A BPO provider also has the incentive to transform or re-engineer current processes in a way that provides additional measurable value for the customer, and therefore justifies value-based pricing.

The next step is to develop service-delivery metrics that measure the effectiveness and efficiency of the provider in the ongoing care and support of the service recipient. These delivery metrics ensure that the cost, satisfaction, customer care and delivery of new projects are maintained at levels which are acceptable to all of the partners in the BPO relationship. Service-delivery metrics are the foundation of the business-to-business relationship between the service provider and the service recipient (see Figure 2).

Figure 2

Service-Delivery Metrics Are the Foundation of a BPO Relationship

Figure 2

Source: Gartner Research (July 2003)

The business-activity and service-delivery metrics that might apply to the outsourcing of a logistics process are shown in Figure 3. However, you must understand the data that needs to be captured for each metric. The baseline is obtained by calculating the metrics for the current state and then tracking them against contracted targets, goals and external benchmarks. Tracking metrics in this way will identify the need for mid-course operational corrections, facilitate discussions about innovation (to reach goals) and highlight what is possible, based on external benchmarks.

Figure 3

Business-Activity and Service-Delivery Metrics for a Logistics Operation

Figure 3

Source: Gartner Research (July 2003)

Embedding a complete set of service-delivery and business-activity metrics in a BPO agreement is only the beginning of the performance-measurement program. Changes in the business and market environments, in user needs and in service-provider abilities can be analyzed best by continually reviewing the metrics and the assumptions on which the measurement program was built.

The service recipient and service provider should expect, and plan for, changes in a BPO agreement. We recommend using a two-stage, metric-based process for planning changes to a BPO agreement (see Figure 4). This process starts with individual data values, which are then analyzed to re-evaluate the basic expectations of the entire BPO relationship. The process should be used when there is an emerging problem in the relationship, triggered, for example, by user dissatisfaction or a breakdown in communications.

Figure 4

Two-Stage Process for Re-evaluating a BPO Relationship

Figure 4

Source: Gartner Research (July 2003)

Key Issue
What are the trends and directions in sourcing?

This research is part of a set of related research pieces. See AV-20-5416 for an overview.