By Dan Berthiaume
Productivity is most simply defined as the ratio of inputs to outputs. Increasing outputs while decreasing inputs, or doing more for less, is the basic goal of productivity initiatives.
As explained in a new white paper from advisory firm ISG, “Outsourcing Productivity,” outsourcing at its core is an effort to do more for less, but typically results in what is euphemistically called “the same mess for mess.” This phrase refers to tightly controlled outsourcing contracts which reduce cost while also limiting creativity and reengineering that could potentially improve labor productivity. And even outsourcing programs that do improve labor productivity frequently focus on staff augmentation rather than on providing employees with time to create added value.
The Starting Point – Clarity
ISG recommends that organizations seeking to truly improve labor productivity through their outsourcing programs begin by creating a clear outsourcing objective and operating model. Outsourcing is not a “one size fits all” solution, so objectives will vary in factors such as degree of control, level of creativity allowed, access to capability, and cost structures. However, organizations need to determine whether they want more for less and then design the operating model that best facilitates this objective. The focus should be on specialization of labor, economies of scale and labor arbitrage, while at the same time focusing on increasing outputs through such means as process reengineering, automation and resource efficiency.
ISG advises that organizations that benchmark costs and service levels can better understand the input baseline and the performance gap compared to industry peers. A consumption management assessment further helps companies understand the utilization of assets and how to do more with less, or at least identify which assets are underutilized and overcharged. In addition, organizations that use a customer satisfaction survey and staff satisfaction survey gain a view into what users and employees consider to be scope for improvement. Such a baseline helps to define the end point as well as the starting point.
ISG says these measurements work to track the increase in outputs as well as to track the decrease in inputs. Defining the specific productivity objectives and creating a system to measure them will focus the appropriate attention on outputs as well as inputs. Aligning Stakeholders The next step toward outsourcing productivity defined by ISG is to align the interests of the various demand-side and supply-side stakeholders so that they can see how increasing productivity benefits them. Self-interests of all stakeholders need to be identified and areas of potential conflict between client and service provider resolved, as ISG notes doing more for less often means greater output for the client, but less revenue for the service provider. Interests should be balanced to create incentives and service levels.
Focusing on the Employees
According to ISG, improved productivity primarily results from “selecting, augmenting, empowering and motivating the right employees to work hard and to work smart.” Creating value for employees includes treating them respectfully and involving them in decision-making. Employees also value meaningful work, competitive performance-based compensation opportunities and continued training and development. Outsourcing contracts should provide a scope broad enough to create this value for employees.
The final step toward outsourcing productivity is establishing good contract governance. Governance helps to reduce value leakage from such basic compliance areas as errors in service levels or invoices, deliverables that are not met, and issues that escalate into disputes. ISG research indicates that these errors can have a cumulative cost to the client of 10-20% of the annual contract value. ISG offers concluding advice that beyond compliance, good governance focuses on the relationship with the external service provider and with the internal customer to manage by exception, hold each other accountable and explore areas of process improvement.