Outcome-based outsourcing is the holy grail of IT services. Both customers and providers agree that if they can figure out a way to tie sourcing strategy to business results everyone will be happier in the end.
The problem with many traditional outsourcing arrangements is that they focus on input rather than output. Just as U.S. health care reform advocates criticize a system that incents doctors to perform tests and procedures with few rewards for the ultimate goal--a healthy patient, some outsourcing reformers say too many IT services deals are myopically focused on tasks or man-hours rather than business results.
Outcome-based contracts--at least, in theory--can change that. "Paying for outcomes is the idea of paying for success toward a desired result instead of paying for individual items like servers or programming hours," says Adam Strichman, an independent outsourcing consultant based in Mechanicsville, Va. "Nobody really wants servers, or switches or a mainframe. They generally want a business outcome, such as faster access to information or an automated delivery system."
But devising outcome-based outsourcing deals that satisfy both the customer and the vendor has proven difficult. Time-and-materials contracts remain the most common outsourcing model in the industry, particularly offshore, says Sandeep Karoor, managing director of outsourcing consultancy Neo Advisory. Fixed-price contracts run a distant second. Outcome-based contracts account for, at most, 15 percent of new deals, says Strichman, and they may only apply to part of the outsourced work.
Who's Outcome Is It Anyway?
Part of the problem with this new paradigm, whereby contracts are based on results rather than resource consumption, is in defining outcomes. Every stakeholder has a different desired end state--or two or three. The CEO wants happy customers and shareholders or to be the industry leader. The CFO wants an increase in profitability. The business unit leader may desire best-of-breed systems. And the CIO? He's got a whole list--lower costs, better service levels, increased customer satisfaction.
What may be the biggest problem of all is that the IT service provider has very little control over or connection to any of those outcomes.
Outcome-Based Outsourcing: Pros and Cons
* More cohesion of work being delivered
* Freedom from interviewing and monitoring individual staff members
* Ability to incent more innovative behavior from provider
* Potential for higher eventual savings as labor arbitrage is replaced by productivity and synergies between tasks as key savings drivers
* Lack of transparency into how work is being performed
* Little insight into costs of service (unless visibility into resource consumption is maintained)
* Additional administrative burdens associated with root cause analysis (if service is not being delivered as promised) and evaluation of service delivery from outcome-based perspective
--Source: Forrester Research
"The measure of success--or outcome--has to be directly related to the success or failure of the underlying services," says Strichman. "It sounds simple, but it can be hard when you start talking about business outcomes. The supplier cannot influence things beyond the supplier's realm of responsibility."
For example, the CFO may want to tie the outsourced application development of a new product to the profitability of that new product, but that may be impossible. The application development provider could design the world's best system two weeks ahead of schedule and a million dollars under budget, but it has little control over other factors--such as marketing, economic conditions, bad management, inept delivery managers, bad press--that affect the profit outcome.
"There are all types of outcome-based pricing," says Strichman. "Sometimes these models have moderate success. Often they have no success whatsoever."
The most common business outcome tied to IT services deals to date is increased customer satisfaction, says Strichman, but that may encourage the vendor to construct customer surveys that will deliver the desired result.
"The belief is that by tying metrics and pricing to the success of the business, both parties now have their goals in alignment," says Strichman.
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