Measuring the Value of IT Outsourcing

By Tim Young

(Back to article)

As more organizations turn to IT outsourcing to lower operational costs and improve the quality of their IT-dependant business services, new methods are being sought to better understand the value of these burgeoning relationships.

While measuring compliance against service level agreements (SLA) does provide an indicator that things are on track, it offers little insight into the impact of the IT outsourcing engagement on the business. If the only basis for judging success -- compliance against a contract -- lacks relevancy, it is difficult, if not impossible, to make meaningful investment decisions in favor of IT outsourcing.

As IT becomes an even more critical component of today's business models, this downfall becomes even more glaring. As Gartner observes, "[IT outsourcing deals] tend to fail when the service levels are being met, but there is no alignment of the scope of work to a higher notion of business value."

Achieving alignment between the managed service and the user's business processes requires new reporting mechanisms that show IT service in business terms.

For those accountable for the delivered service, reporting "business value" creates a significant opportunity -- most notably the ease with which additional service contracts can be signed. After all, where service improvements measurably increased a client's revenue, profitability, or productivity, this would be an easy choice over a competitor who can only talk about service quality in terms of incident management and avoiding breaches.

The Balanced Scorecard

A balanced scorecard is a proven business management technique that provides this solution. A balanced scorecard provides a measurement system that provides real insight into the status of a business or some part of it.

Developed in the 1990's by Kaplan and Norton, this approach converts value drivers such as customer service, innovation, operational efficiency, and financial performance into a series of defined metrics.

Companies record and analyze these metrics to help determine if they are achieving strategic goals. They then use this model to ensure each potentially conflicting perspective is in balance.

For example, an insurance company may increase profitability by offering incentives to claims assessors for taking a tough stance on payout, but they will also quickly find dissatisfaction among their clients that may lead to attrition. Scorecards help achieve balance and are a significant breakthrough over more traditional single dimension approaches that tend to be based purely on expense management and revenue growth.

Balanced scorecards are very relevant to service provisioning through IT outsourcing. Not only is this a data-intensive task that needs unscrambling, but it also exists in an electronic universe in which vast amounts of data is easily captured and analyzed to establish true meaning.

Furthermore, IT outsourcers need tools to improve service quality and reduce costs, but they also need tools to articulate their value in terms meaningful to their clients. And, finally, the users of the outsourced service need to fully understand where their investment is paying off.

What better way than to use the de facto management measurement system for this purpose?

Although the balanced scorecard has yet to gain real recognition in the context of IT governance, there are some early signs of appreciable use.

EDS is reporting success with this technique in several client engagements, while other organizations, such as Tata Consulting Services (TCS), are utilizing the technique internally throughout their organizations.

Less is More

A scorecard implementation takes the "less is more" adage to its logical conclusion by providing a picture of service quality that is instantly accessible to all participants in service delivery.

From the technicians operating the service to the client delivery executives accountable for it, to the end users who are the ultimate beneficiaries, everyone has a common understanding of value -- with each viewpoint tailored to specific responsibilities.

Tim Young has worked in the IT industry for 20 years as a consultant, product designer and, currently vice president at Proxima Technology. His client engagements have included business process design projects at Shell, British Airways and Ford. He has worked on the product specification and design teams for Oracle CASE, Patrol (BMC) Software PATROL and more recently Proxima Technology's Six Sigma/ITIL service level management tools.