Outsourcing key business operations can be a strategic decision for companies aiming to improve services, reduce expenses, or expand their capabilities. However, the success of outsourcing depends heavily on the performance of the supplier. Establishing clear service requirements and effectively assessing a supplier's performance ensures that a company receives the anticipated value from the outsourcing arrangement and strengthens the partnership between the client and the supplier. Here's how a company can effectively evaluate supplier performance in an outsourcing agreement.
- Clearly Define Services
Having clearly defined services is fundamental to successful outsourcing. The outsourcing contract should set out the services the supplier will perform with as much clarity and detail as possible to ensure there is no question about what tasks the supplier should provide. Include a responsibility assignment matrix, such as a RACI chart identifying who is responsible, accountable, consulted or informed for each task, to identify responsibilities at a more granular level and remind each party or stakeholder what is expected of them.
Even if you establish clear service descriptions and include responsibility assignment matrices in your contract, inevitably there will be some tasks tied to the services that may not be detailed fully in the contract. To ensure those tasks are captured, the parties should acknowledge in the contract that there are tasks inherent to and necessary for the proper performance of the services that the supplier will provide that may not have been specifically mentioned when the services description was prepared. Such tasks would be considered part of the services, even if they are not fully detailed in the contract.
- Establish Clear Metrics and KPIs
Now that you have defined services, how do you best measure whether the supplier is performing correctly? The first step in evaluating supplier performance is to define clear, measurable key performance indicators (KPIs) that align with the client's objectives for the outsourcing services. It's important to establish these measurements and their targets during the contract negotiation to ensure they are relevant and achievable. Typical metrics include turnaround time for a service, quality of work, cost savings, compliance rates, and client satisfaction ratings. They can be broken down further into critical and non-critical KPIs. Any performance indicators should not only be measurable but also directly tied to business outcomes. Focusing on a comprehensive set of measurements, such as financial results, knowledge management, and client satisfaction, acknowledges the supplier's broader role and impact on the client's business.
- Schedule Regular Performance Reviews
It is essential to continually assess supplier performance. Schedule regular performance reviews — monthly, quarterly, or annually — to discuss performance reports and address any concerns. Consider having weekly reviews between the key operations managers at the beginning of the outsourcing, to ensure services start and run smoothly. This helps prevent bumps along the way.
When establishing the review process, be sure to establish the type and frequency of reviews, and which stakeholders will be involved at each level, in the governance section of your contract. During the reviews, analyze the supplier's performance against the agreed KPIs. Reviews provide the opportunity to acknowledge successes and discuss areas of improvement, promoting a proactive approach to managing the outsourcing relationship.
- Feedback System
Establish a robust feedback mechanism that enables stakeholders from different levels of your company to provide feedback on their experiences with the supplier. Solicit feedback not only from end-users and management, but also from other internal teams that interact with the supplier. Regularly gathering feedback helps identify issues that may not be evident immediately through KPIs alone and can facilitate constructive discussions during performance evaluations.
- Benchmarking
When outsourcing services, it can be very beneficial to compare the supplier's performance with industry standards or similar contracts. This benchmarking should consider factors such as performance, cost, service quality, and innovation. Understanding how the supplier compares to the broader industry can drive continuous improvement and be a strong motivator for a supplier to strive for excellence.
- Relationship Management
Evaluating supplier performance is not just about measuring KPIs, regular reviews, or benchmarking, but also involves managing the supplier-client relationship. Strong relationships can lead to enhanced performance through better cooperation and communication. Reinforce your partnership by investing in relationship management activities, such as joint strategic planning sessions, training, and more informal interactions. These methods all work to build the supplier-client relationship.
- Contingency and Corrective Action Plans
Sometimes, despite regular, diligent monitoring and feedback, suppliers may underperform. It is essential to have pre-established contingency plans and corrective actions in place. These might include enhanced monitoring, or in extreme cases, reassessing the outsourcing contract. These plans should be clearly defined and mutually agreed upon during the contract negotiations to prevent disputes and have a clear process to follow when underperformance occurs.
Conclusion
A successful outsourcing arrangement requires clear service descriptions and a well-defined structured approach to evaluate the supplier's performance, using both quantitative measures and qualitative feedback. By setting well-defined expectations, using clear pre-defined methods of evaluation, regularly reviewing performance, and fostering a collaborative environment, a company can ensure that its outsourcing efforts achieve their intended outcomes. This will also build a reciprocal relationship between the company and its supplier where both parties are dedicated to continuous improvement and shared success in the outsourcing arrangement.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
