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Solving Outsourcing’s Value Equation
By Craig Nelson, Managing Director, ProBenchmark

Measuring the value of outsourcing has evaded even the savviest buyers of outsourcing services. Often, the intense initial focus on cost inhibits the discovery of outsourcing’s real impact on the organization as well as how well the organization is embracing the new sourcing operating model.

In addition, as the outsourcing relationship evolves and matures, new drivers of value appear and other value drivers supplant the original cost arbitrage objective. Measuring the value of outsourcing based on the terms of the contract (e.g., scope, pricing, and service level performance) may provide some level of comfort, but for CIOs and CFOs who are looking for continuous value identification and hard evidence of value creation, these measures fall short.

As with any business competency, companies should be able to measure the value of outsourcing capabilities and determine how to best improve their sourcing performance. Any assessment should be designed to help identify areas of weakness and priorities for improvement. Tools and processes should be designed to get a deeper understanding of the capabilities and performance around each of the four quadrants for sourcing success.

Many contracts only marginally address some of these value metrics, and most don’t consider them at all. Often, in long-term relationships, the relationship deteriorates because the parties are focused on measures of performance that don’t really matter to the business. All the time that providers spend on reporting service level performance, and for all the metrics that business service management dashboards splash on fancy graphs, few companies have captured and measured the economic value of outsourcing.

Companies that do not regularly evaluate the four quadrants of sourcing performance often find that 40% to 70% of the original contract value has been lost. But most disturbing, they do not realize they are losing value and continue to pay for services they are not receiving. Surprisingly, this is not the providers’ fault. The lack of a vendor management structure and poor contract and relationship management contribute to value leakage.

This white paper offers a self-assessment that provides insight into potential areas for development and areas to consider when evaluating whether or not your organization is experiencing value leakage as well as tools and methods to help buyers of outsourced services capture and measure the economic value of outsourcing throughout the course of the sourcing relationship.

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