Use metrics to find the right IT outsourcing partner: Page 2

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IT managers were asked:
What activities are outsourced at your company?

(based on 282 responses in North America)

Web site hosting -- 42.1%
Disaster recovery -- 33.5%
Application development -- 32.3%
Networks -- 28.7%
Data center -- 26.2%
Application maintenance -- 23.2%
Application installation -- 21.3%
Desktops -- 18.9%
Systems integration -- 11.6%

Source: "Critical Issues of Information Systems Management, 1999," Computer Science Corp.
These warm and fuzzy terms also come into play because outsourcing vendors are increasingly being judged by business results, notes Bruce Caldwell, a senior outsourcing analyst at Gartner Group Inc., in Stamford, Conn. "Metrics aren't just faster, better, and cheaper, they're changing the way companies take care of business, so the outcome is improved over the process," says Caldwell, who is based in Riverhead, N.Y.

"IT outsourcing relationships have evolved from strictly a client-vendor relationship to more of a partnership," says IDC's Doyle. Metrics are now linked to strategic business value and customer satisfaction, she notes. "You can recognize business value through increased productivity or new business opportunities, and increased shareholder value," she says. "These metrics are very different from traditional outsourcing metrics."

Business metrics come into play in a variety of outsourcing deals, including business process outsourcing, and are harder to measure. Which cost savings do you measure? Do you include only IT cost savings? In terms of generating revenue, do you give the outsourcer credit for being innovative or simply look at the extra dollars generated?

BP Amoco p.l.c.'s deal with Andersen Consulting, signed in January 2000, is one example of a contract where the vendor will be judged based on more qualitative measures. The $200-million outsourcing agreement calls for BP Amoco's downstream business to outsource its finance and administrative services to AC. As part of the 10-year agreement, AC will assist BP Amoco's downstream business in moving manual processes toward electronic commerce. The downstream business accounts for all activities after oil is found, such as distribution, sales, and marketing.

BP Amoco will judge Andersen Consulting on how innovative it is, according to Gartner's Caldwell. Andersen is "contractually obligated" to bring new ideas to BP Amoco, he says. The ideas need to focus on organizational structure and business processes within the finance and accounting operations. A governance body will ensure the delivery of the "innovation quotient" through a quarterly review, Caldwell notes. The contract also contains a risk/reward component.

Jim Dewar, the Chicago-based commercial manager in BP Amoco's downstream business, says AC will indeed benefit from using innovative business practices that ultimately drive down costs. In particular, the contract stipulates AC needs to demonstrate innovation in creating Web-based strategies. "We're looking to move to an e-world, wherever possible, that will facilitate cost savings, but not at the expense of service level delivery," Dewar says.

Although AC's global-managing partner for business-process management, Hugh Morris, declined to discuss the specifics of the BP Amoco arrangement, he discussed the terms of a business process and IT outsourcing deal the firm has with another company. AC is evaluated on a 100-point scale. Innovativeness accounts for 20 of those points. The deal is evaluated quarterly, but an annual evaluation determines the overall scoring in all categories and, ultimately, AC's economic benefit. Morris says the interim and annual results are expected to be similar. AC wins all 20 points in the innovation category by coming up with business-process improvements, says Morris, based in London. In other words, the client will look at the number of new ideas Andersen Consulting generates in a period, how many ideas the client accepts, and the improvements or savings resulting from the ideas.

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