Outsourcing — A RUNAWAY TRAIN

Internal Auditor, June, 2000 by Jonathan Figg

MEASURING PERFORMANCE

Establishing clear, qualitative performance measures is one of the most important practices to adopt when outsourcing a business process. However, Bruce Adamec, president of creative Assurance and formerly the general auditor for Ameritech, maintains that determining appropriate performance measures is also one of the most challenging aspects of finalizing an outsourcing agreement. "The internal process owners at Ameritech didn't always understand what constituted effective, professional performance before they handed over the process. As a result, they weren't always sure what type of performance to expect afterward," recalls Adamec.

Internal auditing can lend a hand by ensuring that quantifiable performance metrics and expectations are outlined in the contract with the third-party provider and verifying that those goals are reached or exceeded by the outsourcer after the process is handed over. Marcella suggests setting realistic and achievable goals to which the organization can hold the vendor accountable; the metrics can also be used to evaluate the outsourcer's performance against cost.

When auditors examine proposed outsourcing agreements, performance measures are one of the first areas Adamec recommends they review. "During any pre-outsourcing process reviews, internal auditing should suggest delaying proposal requests until the function can determine the performance and results that are expected from the outsourcer, he says. Internal auditing can work with the client to help determine appropriate performance measures, which may eliminate many potential problems.

Performance measures should be specified up-front in the request for proposal (RFP), and outsourcing firms should bid only if they are willing to meet those measures. "The organization is in a much stronger position if the specific demands are spelled out in advance, rather than after the contract has been awarded," notes Adamec. "Make it clear in the RFP how much you expect to pay for outsourcing services and what level of performance you expect from the vendor."

Once an agreement has been reached, organizations will be able to measure the tangible performance indicators versus the actual performance of the outsourcer. If the results of these evaluations suggest that the outside provider needs to make improvements, then the organization can either cut back on the fees paid to the vendor or find another provider altogether.

CONTRACT NEGOTIATION

If the terms and conditions of an outsourcing agreement are not explicitly stated in writing, problems will likely arise. "Never enter into an outsourcing agreement without a contract," warns Adamec. When Ameritech first outsourced its benefits processes, the organization relied on handshake agreements with providers. "We thought we knew what all the costs would be, but nothing was in writing," Adamec recalls. "This arrangement made it possible for the provider to charge for 'additional costs,' such as overtime, that we later recovered, only after lengthy and contentious discussions.