This is the first chapter of The Outsourcing manual which tries to start you off on the right foot when getting in to outsourcing for the first time.

Chapter 1 - Setting Clear Objectives

Why Objectives Are Important

The importance of setting objectives correctly cannot be overstated. Outsourcing agreements typically run for a number of years and involve two, usually disparate, organisations attempting to work closely together. More particularly, outsourcing agreements can take many different forms and have many different components. You may be confronted with a bewildering range of options which could lead to what will seem like a life sentence if you make the wrong choices.

The nature of the objectives set profoundly influences both the direction and the out-turn of the outsourcing agreement. Correctly set objectives will fulfil the following functions:

• Guide the assessment of internal options and suitability for external partnering.
• Guide the design of the external partnering contract or internal improvement programme.
• Provide the basis for measuring progress towards the delivery of benefits.
• Facilitate the ultimate delivery of planned benefits.
• Provide a datum against which proposed courses of action may be tested.

The absence of objectives will frustrate the ability to test the appropriateness of proposed courses of action and deficient objectives may lead to the adoption of inappropriate courses of action.

Setting meaningful and measurable objectives is, therefore, a critical success factor. It is also more difficult than most people believe.

How Objectives Influence The Outcome

The skill with which objectives are set will affect the outcome of both an investigation into the appropriateness of outsourcing and, if judged to be relevant, the resultant outsourcing agreement itself. The illustration that follows shows how.

Assume that a single objective to reduce costs is set. The resulting service or contract principles will be as follows:

• There must be an exact definition of service requirement - poor definition that excludes a service component will result in increased charges or lower service.
• Tight cost constraints will mean total adherence to the supply of those closely defined services - the supplier will have no scope to vary the service since it is tightly constrained by the need to provide a service and make a profit for the price agreed.
• There will be minimal service flexibility and no value added services.
• Constraints to the rate of business development may be imposed because the supplier is forced to a position where it is unable to agree to changes in the service requirement without the ability to see how existing poor margins will be improved or, as a minimum, not be diminished still further.
• Changes to service requirements will be subject to potentially difficult negotiation because the supplier will either perceive an opportunity to improve weak margins or, more negatively, work to avoid a further weakening of margin.
• Increased charges for changed requirements will be used to lever up the supplier's margin. The most basic of business dynamics must make this so.
• Budget constraints may constrain the desire or ability of the service provider to respond to changes in the customer's market sector, leaving the customer trailing its competitors.

If forced to operate within the principles defined above, the service provider is likely to behave in the following way:

• The service supplier may be forced to a position of inflexibility by the twin constraints of low costs or margins and a tight work specification. Low costs and low margins may mean reduced investment, research and loss of continuity, remembering that resources are tuned to the precise requirement and unnecessary resources are removed or re-assigned.
• The service supplier's priority will be the maintenance of either low margins or tight cost budgets since this is the primary demand of the customer's objective.
• The implications of the above inevitably result in a lack of emphasis on helping to deliver the customer's wider business objectives. The requirement has placed no obligation on the supplier to take a broader view and the commercial constraints make it quite impossible for the supplier to react differently.
• The supplier may seek to use every change in requirement to improve margins, which, over time, will have a debilitating effect upon both the relationship and value for money.
• There will be maximum job losses and possibly unforeseen consequences because the pressure to reduce costs will result in the apparent need for fewer people and for assets to be worked harder. The ability to respond to upward variations in service demand or recover from unplanned problems will therefore be reduced.
• There will be a low level of supplier management input. If the service requirement is very clear and the supplier is providing a low value service, the supplier management will have neither the need nor incentive to invest any management effort in the arrangement.

Notwithstanding the points above, a low cost basic service should be satisfactorily delivered against the single objective. However, were a number of objectives to be set, the effect would be quite different.

Assume now that the following multiple objectives are set:

• Reduce unit costs and minimise capital expenditure.
• Gain access to modern technologies.
• Achieve earliest delivery of new technology benefits.
• Maximise staff career opportunities.

The resultant contract will have the following characteristics:

• Service supply will emphasise value for money since the supplier, through access to a greater scope and mix potential. is now being asked to deliver a wider range of business benefits for the lowest unit and capital costs consistent with the delivery of the other objectives.
• From the supplier's viewpoint, the requirement is now of greater commercial interest since it offers the possibility for expanded involvement and reward against the delivery of new technologies and business benefits.
• The service supplier and customer will have the potential to achieve a symbiotic relationship where pursuit of individual goals benefits the other party.
• There will be a continuous downward pressure on unit costs and continuous upward pressure for innovation because, despite the pressure to reduce unit costs, there is a clear intention to seek and exploit up-to-date technological advances to mutual benefit.
• There will be scope for charging formulae that give service flexibility but maintain pricing certainty. Since the objectives do not concern reduced costs alone, charging formulae can be devised that provide flexibility.

If asked to operate within the principles defined above, the service provider is likely to behave as follows:

• The service provider will be flexible and keen to maintain the relationship because, where the agreement appears to offer real scope for the profitable use of new technologies and developed skills, the supplier will be keen to exploit these opportunities.
• The supplier will give priority to the delivery of the customer's business objectives rather than maintaining low margins. Where the supplier does not have to concentrate on the maintenance of narrow profits, it can afford to invest time, effort and resources on both existing delivery obligations and future opportunities.
• Service variations will be a normal part of the relationship. Since both parties will appreciate the need for change and, if appropriate, the need for controlled amendments to the price, processes dealing with change can be easily devised and readily subscribed to by both parties.
• There will be minimum job losses and a higher level of supplier management input. Tight margins mean that supplier management must respond appropriately to circumstances. With less financial pressure, supplier management is likely to take a more measured view of skills, apply training (as an investment) and seek alternative methods of dealing with surplus resource.

The Objectives Setting Process

Setting objectives is apparently straightforward but actually very difficult. It requires considerable thought and understanding and a significant commitment of time. Sufficient time is rarely allocated to the development of objectives, which places the procurement at risk before it has really begun. This is because objectives set a direction and, as a result, provide a test against which progress may be measured and any deviations identified. Figure 1.1 provides a schematic view of an objectives setting process.

Figure 1.1 Objectives setting process

Setting objectives is an imprecise task by nature and the results arc often difficult to corroborate or confirm. When managing a project, even the most experienced director, manager or project leader will be unsuccessful if there are no objectives by which to measure progress and success. After all, without formal and robust objectives, how can expectations be properly set? This section provides some thoughts on how one might go about setting appropriate objectives for an outsourcing agreement.

Information Required

Within the context of outsourcing, the following information will be required:

• High level corporate objectives and measures
  There will be little point to an outsourcing agreement if it does not, either directly or indirectly, further the corporate goals of the enterprise. The initial thinking surrounding the outsourcing approach and its relevance must therefore take account of both the corporate goals and their associated measures.
• An understanding of future customer needs
  If user requirements, both current but particularly future, are not understood, it will not be possible to set objectives that assure the alignment of the outsourcing agreement to those requirements.
• A view of the gap between current service provision and customer needs
  Without such a view it will not be possible either to determine the nature and size of any gap or to formulate a likely solution to its closure should it exist.
• An assessment of the extent to which technological innovation is important
  Such a view will inform judgements surrounding the general nature of any potential outsourcing agreement in terms of requirements for skills and products relating to technology, its cost effective acquisition and its exploitation.
• The likely rate of change
  All business sectors are feeling the pressure of accelerating rates of change but some sectors change faster than others. Any requirement for rapid change will bear heavily upon the structure of an outsourcing agreement, the type of supplier selected, the requirement to lever technology and, most of all, cost¬because 'change' has a significant cost. If you are clear about the likely rate of change, the potential costs can be negotiated into the outsourcing agreement at a better unit rate than would be achieved later through change control.

Careful consideration of the factors listed above should result in clearly articulated and written objectives and measures for each objective. The combination of the two will provide both a target for management action and a means by which progress can be measured.

Some Examples Of Generic Objectives

There follow some examples of generic objectives that may provide some insights into the development of objectives more specific to individual circumstances.

SKILLS, TOOLS AND TECHNOLOGIES

Objective

To gain, and maintain, access to those skills, tools and technologies appropriate to the maintenance of operational systems and the attainment of corporate objectives.

Measures

• Minimise direct investment in developing or acquiring tools and technologies. Specific financial limits may be specified if appropriate.
• Minimise direct re-skilling investment in the use of new tools and technologies. Specific financial limits may be specified if appropriate.
• Business strategic and tactical requirements not constrained by a lack of appropriate tools and technologies. Measures can include the number, nature and cost of constraints where cost can be defined as financial, performance, time to market and so on.

COST-EFFECTIVENESS

Objective

To maintain a continuous downward pressure on unit costs without detriment to delivery of business objectives.

Measure

• [x per cent] reduction in the unit cost of outputs over a five-year period.

RESPONSIVENESS AND FLEXIBILITY

Objective

To improve, by [x per cent], the identification of, and response to, customer needs.

Measures

• Maintenance of a qualitative and quantitative view of customer needs.
• Cycle time for significant innovations not to exceed [x] months.
• Cycle time for minor innovations not to exceed [y] months.

STAFF

Objective

To maximise career opportunities for existing staff.

Measures

• Retention of mission-critical skills.
• Assure the existence of, and active participation in, personal development plans.
• Avoidance of compulsory redundancy.