How IT service providers are linking their performance to real business outcomes
It seems like we’ve been talking about outcome-based contracting for a number of years, but we have yet to see it reach mainstream adoption. However, as IT becomes more closely linked to core business processes and delivery of customer experience, are we seeing a turning point?
While uptime and availability remain key, are business outcomes such as speed, efficiency, and flexibility now taking a starring role as buyers seek to measure a real return on investment?
Depending on a business’s maturity and size, IT service delivery has evolved from simple ‘payment for people model’ to a delivery model whereby KPIs (key performance indicators) and service management methodology (ITSM) are used to measure and improve levels of services delivered to business functions.
In more mature organizations, targets and metrics are jointly set by the IT department and their customers, reflecting desired service levels (SLAs) and any critical outcomes. Thereafter, the IT department manages the service using ITSM techniques to drive service improvement, most commonly focusing on quality and customer experience.
Traditionally, there has been a strong underlying focus on uptime and availability, but more recently technological advances have enabled a shift to more value-added tasks and outcomes. For example, in the Data Center, technological leaps in server tech, virtualization, containerization, and dev ops automation have enabled vendors to move upstream from completing manual tasks such as patching, to reviewing ecosystem data to improve overall ecosystem performance, and customer outcomes.
With more focus on value, vendors have been able to switch the emphasis on metrics and commercial models, which is perhaps the best way of describing the difference between contracting a traditional “people” managed service, and contracting for outcomes.
KPIs and SLAs have long since been SMART (specific, measurable, achievable, realistic and time-bounded) and aligned to the user strategy. Traditionally, uptime and availability have mattered most to stakeholders, at least have been the most tangible measure of performance.
In the new world, mature buyers are making a shift to agreeing on metrics that matter to the business, rather than a set of users or department. The process of setting these KPIs under a Business Outcomes model is no different, other than moving from pure IT metrics into defining business outcomes rather such as speed, revenue, or profit.
There is a further shift in the way costs are constructed and their transparency to the buyer. Historically, contracting for IT services has been either on a basis of either staff augmentation (input model) or a managed service (output model). In either model, the cost of service is predominantly driven by resources and tools required. When vendors contract for outputs, they often also take a larger risk/reward share.
Business outcomes go a step further. This is partly because they seek to measure the value impact of the supplier, and further because it often takes time for benefits to materialize in full. For this reason, there are common relationship characteristics:
- The supplier tends to be a strategic partner, reflecting the need for collaboration and trust, as well as the importance of the services and business impact.
- There is typically a long term relationship between buyer and supplier, enabling both to invest in achieving success, and allows time for success to materialize.
- There is a clear understanding of the impact of the IT solution or service on the nominated business outcome and overall value to the business.
- A larger part of the revenue (than a managed service contract) is tied to the delivery of the required outcomes in a heavily weighted risk-reward mechanism.
- Dependent upon the chosen partner, there tends to be less commercial transparency of cost components.
Not all businesses or suppliers are ready for business outcome contracting
The reality is that this is a maturity journey, and not everyone is ready, operationally, culturally, or commercially. There needs to be close alignment (nee collaboration) between supplier, the IT department and the department receiving the service, and critically a clear understanding of the linkage between service provided and required outcomes to meet the business department’s goals. SMART metrics help here.
However, perhaps most importantly, both parties need to trust each other commercially. When outcomes are met and payments, and even bonuses, are triggered, the numbers can be large. It is important that the buyer understands why this is so, and the context against the achievement of the business objective. Put simply, they must understand why its value for money and for this reason when embarking on contracting for outcomes for the first time, it’s good to have a clear understanding of the current cost of service, and likely value that can be achieved.
When is business outcomes contracting a good fit?
Whether organizations choose a managed service or business outcome model, prior to engaging suppliers, they should spend time:
- Understanding current processes (what works well and current challenges)
- Documenting current services provided (do these need to be changed?)
- Linking business strategy to business and IT service metrics
The reality is that Managed Services continue to be a good delivery model (with a risk-reward mechanism), and for many organizations, there is still a lot to achieve at this stage before thinking about business outcome models. Only the most mature should be thinking about business outcomes. And if departmental alignment doesn’t exist, or if the metrics are a bit vague, there is a very real risk of cost leakage, value shortfall, and buyer/supplier dissatisfaction.
Reality also dictates that understanding the drivers of service against departmental and overall company goals is not always an exact science. It is not always possible to choose metrics where only the outsourced service affects the overall company goal. If the metrics are not aligned at all three levels, the service will be provided and potentially paid for, but outcomes may fall short or be unproven.
There is work to be done upfront, ensuring readiness and evaluating whether the services under review are a good candidate for business outcomes contracting:
- Can the provided service be measured in terms of availability, completion, time or quality?
- What business metrics are the service metrics going to be aligned against?
- What is the causal link and measurable effect of the service metric on the business metric?
- Is this the only factor that affects the business metric?
- If not, can all factors be measured to ensure the service metrics are evaluated effectively?
Finally, as any service is outsourced, risks are quantified and a value and likelihood of occurrence is factored into the overall contract price. Businesses should ensure they have a clear understanding of the cost drivers of the service when going to market and expect partners/suppliers will, to some extent, build in cost for failure.
If you are ready, then be brave and contract for outcomes.