Outsourcing of IT functions is a major way to reduce costs as many top companies have found out. However, the success of outsourcing depends on controlling the performance of the agency to which work is outsourced. Service level agreements (SLAs) have been traditionally used to do this. In SLAs, the outsourcer and vendor clearly articulate expected performance in measurable terms, such as “All support requests from customers will receive response within 24 hours.”
Such outcome-based SLAs have become the major tool for controlling outsourcing performance. Penalties are stipulated if the outcomes are not met. In practice, however, the analysis involved before fixing the contractual responsibilities often result in an inability to recover the penalties. This is in addition to the fact that recovery of penalties is often a poor compensation for the poor performance of key business processes.
SLAs have thus not proved a satisfactory solution to problems of outsourcing.
It is in this context that the suggestion to use a modern control tool, the Balanced Scorecard, to control outsourcing has been mooted.
Balanced Scorecard focuses on intangibles that lead to good performance. For example, the skill levels of employees, which are not traditionally reflected in financial statements, are considered by Balanced Scorecard. This methodology seeks to identify all the factors, tangible and intangible, that have an impact on delivering desired performance.
With such a focus, it becomes more likely that outsourcing services vendors can be assessed more thoroughly before work is entrusted to them.
Read the article Managing Outsourcing with Balanced Scorecard at Brian Zaugg.
Tags: information technology, outsourcing IT, vendor performance control
