Measure and Evaluate IT Outsourcing

The following provide some simple ideas on how IT Outsourcing can be assessed:

Outsourcing Metrics

Metrics relating to costs, quality, timeliness and risk can be used to monitor outsourcing performance. The relevance and weight applied to each measurement depends on an organisation’s current strategy. The following selection of metrics, adapted from Rottman & Lacity [26] and Ian Hayes [11], help explore the elements for inclusion in a balanced scorecard that can be used as part of the service level agreement provisions for IT outsourcing (more examples of suitable measures can be found in the BPIR.com Performance Measures database).

A. Supplier Management

Percentage of supplier business: i.e.,

Revenue spent as a percentage of total supplier revenue. This is a measurement of the level of a supplier’s revenue that is derived from the client organisation. This measurement seeks to establish how dependent a supplier might be upon the client’s business and provides an indication of the risks involved. A high percentage for this measurement may motivate the supplier to provide premium service; on the other hand, a low reading may indicate less risk and lower responsibility for the client. 

Percentage of supplier choice: i.e.,

Chosen supplier/available suppliers. This measures the spread of suppliers available to provide a given product of material. It indicates risk, availability and levels of competition.

Utilisation rates or utilisation percentage: i.e.,

Time paid for/time used. This measures the effectiveness or value for money of the services provided. Utilisation rates are particularly important in association with fixed price contracts.

B. Overall Supplier Performance

Percentage delivered on time: i.e.,

The materials or products delivered on time as a percentage of the total quantity of materials or products delivered. This forms a measurement of supplier performance against agreed standards.

Service satisfaction: i.e.,

Client satisfaction with the perceived level of service provided by the outsourcer, captured for each major function through internal and/or external surveys.

Time-to-market or time-to-implement: i.e.,

The measurement of time elapsed from the original receipt of a request until an issue has been completely resolved. Sample metrics include time to implement an enhancement or time to resolve production problems.

C. Comparative Costs

Outsourcing costs: i.e.,

The total cost of outsourcing tasks, processes or goods as a percentage of the total product or service cost, or
- Average cost of goods and/ or services purchased in a given period, or
- Average change in cost of purchased goods and services in a given period, or
- Cost of purchased goods and services as a percentage of total costs, or
- Average internal cost per order. These measures provide an indication of the value, impact and outsourcing risk exposure/reliance on sub-contracted agencies.

Cost per information system function point: i.e.,

A function point is a unit of measurement used to express the amount of business functionality that an information system provides to a user. Function points are an ISO-recognized software metric, used to quantify information systems based on the functionality perceived by users. Function points are intended to measure information system functionality independent of the technology platform used to implement the system. The method of measuring the size of an information system and expressing it in a number of function points is called Function Point Analysis.

Onsite/offsite/offshore cost comparisons: i.e.,

The comparison of quoted costs for similar services. This measurement provides bargaining information and indicates the relative profitability associated with options available.

D. Quality of Work

Error rates to work ratio: i.e.,

The number of errors per number of products or services provided. This measurement indicates trends and test for acceptable levels of performance.

Defect rates: i.e., 

Checks measuring errors in major deliverables, including the number of production failures per month, missed deadlines, and deliverables rejected and reworked.

Standards compliance: i.e.,

Internal standards for application source code, documentation, reports and other tangible deliverables, including the number of enhancement tasks passing standards reviews and the number of documented programs.

Technical quality: i.e.,

Measurements of the technical quality of the application code, normally produced by commercial tools that look at items such as program size, degree of structure, degree of complexity and coding defects.

E. Comparative Efficiency

Comparative efficiency: i.e.,

This assesses the relative productivity of in-house employees in relation to offshore employees. In-house employees may be able to produce more work than offshore suppliers in a given time period, but offshore employees may be significantly less expensive. Thus the target metric might not aim at equal performance.

Cost/effort efficiency: i.e.,

This indicator is commonly tied to an index that is based upon cost per unit of work produced, and is used to document cost reductions or increases in productivity. Sample metrics include the number of programs supported per person and the cost per support call.

Team utilisation: i.e.,

This measurement tracks the workload of each team member as an aid to better resource utilization. Sample metrics include the percentage of time spent on support and the percentage on utilization.

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