Ailment #8 – Driving Blind Disease

Another ailment that bedevils many outsourcing agreements is Driving Blind Disease: the lack of a formal governance process to monitor the performance of the relationship. When we started working with companies more than 20 years ago, most outsourcing arrangements fell into this trap. They would develop arrangements but fail to outline how they would measure the success. Typically the companies would track costs, but not measure the various aspects of performance. The result was that early outsourcing agreements often failed because of unclear definition of success.

According to the Aberdeen Group, assuring that negotiated savings are actually realized on the bottom line is one of the biggest challenges in organizations today. The term “savings leakage” is used to refer to the difference between the savings that were identified, and the actual savings that were achieved, as illustrated in the graphic below.

Proper measurement and follow-up of the key cost drivers are critical to preventing this “leakage.” In addition, identified leaders in this area have linked incentives to total cost savings achieved versus initial savings negotiated. In its September 2004 report titled “Best Practices in E-sourcing – Optimizing and Sustaining Supply Savings,” the Aberdeen Group reported that other companies have “secured support from company leadership to align sourcing and spending compliance with corporate goals and incentives.”

The good news is that during the past five years we have seen many firms – companies that outsource as well as outsource providers – putting in place scorecards or dashboards to “keep score” of how the outsource provider is performing. Dashboards serve as a feedback loop to help the organization involved gather data on how it is doing. If you don’t have a dashboard, think about creating one now. However, do keep in mind that using a dashboard improperly can result in one or two of the final ailments: “Measurement Minutiae” and “The Power of Not Doing.”

Read More! Move on to Ailment #9 Measurement Minutiae

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