Outsourcing, when executed effectively, can be a game-changer for organisations, offering cost savings and access to valuable specialised expertise. However, our own experience of being involved in nearly 600 strategic outsourcing relationships, reveals that this is an opportunity that is not always realised. We are often brought in to review and address underperforming outsourcing relationships, where clients’ express concerns about whether their outsourcing partners are acting in a strategic enough manner. In many circumstances, this belief stems from a perceived deficit in ‘innovation’ on the part of their partners.
Innovation is really hard to articulate clearly
For clients, clearly articulating and quantifying innovation to their outsourcing partner can be a challenging endeavour. And for lawyers, trying to draft practical contract terms to drive innovation, this lack of ‘clear’ articulation from their clients (in terms of how they expect any innovation to improve their business outcomes), means their contract terms are often unable to drive the ‘right’ behaviours between both parties.
Although rarely articulated in a ‘contractable’ manner by clients, the innovation desired by them from their outsourcing partners is often reduced to wishful aspirations around the client wanting ‘better, faster and cheaper’ in the delivery of their services. Outsourcing partners that represent or imply they are ‘specialists’, often have implied duties to clients to critical friend challenge (emphasis on the ‘friend’ bit) where their outsourcing expectations are not articulated in a way that can be practically delivered against and sensibly measured.
While specialist outsourcing partners do have a responsibility to ‘tease out’ and subsequently quantify what a client’s expectations really are on innovation, the client also has to take responsibility for clarity and detail on them. While innovation (the practical delivery of ideas generation – often confused with the idea generation process itself) is hard to deliver, it’s usually even harder for the client to quantify what it means by innovation. This misalignment in language and expectation can have a significant impact on the success likelihood of the project outcomes.
Our extensive experience in this area has helped us to define a five step process that clients can follow to make abundantly clear to their strategic outsourcing partner what they expect from them in terms of innovation. We find that some clients assume that if outsourcing partners highlight great ideas during the sales process, that a plethora of new concepts, ideas and ways of working will somehow be inherently adopted in its delivery. Rarely does this approach manifest itself in reality.
Missed opportunities to drive innovation
When your outsourcing partner doesn’t act in what you consider to be a ‘strategic manner’ to drive innovation, it often leads to missed opportunities and the perception of underwhelming performance. Another critical part of ensuring a successful outsourcing relationship lies in the Key Performance Indicators (KPIs) you set and the contract you draft. This article will hopefully help to supplement your existing thinking on how to fix your KPIs and adjust your contract to accommodate a ‘proof of concept’ for innovation and reshaping.
The Problem: Lack of Strategic Engagement
Many client organisations encounter difficulties when their outsourcing partners fail to act strategically to drive innovation. This deficiency can manifest in several ways:
- Poor alignment with business goals: Partner may prioritise immediate tasks over long-term objectives.
- Limited innovation: Minimal focus on enhancing processes or introducing new technologies.
- Reactive rather than proactive approach: Partners tend to address issues as they arise, instead of anticipating and preventing them.
Before you try to fix your KPIs, do you have an internal consensus on what a ‘KPI’ really is?
KPIs are often viewed by both clients and their legal teams as tools for measuring performance. For pure transactional outsourcing provision – such as payments, invoice and payroll processing – this is fine. But for strategic outsourcing arrangements where you collaborate to drive real and practical innovation to improve service for your own external and internal customers, the prime purpose of a KPI should be as a ‘learning tool’ for continuous service reshaping and improvement in your outsourcing relationships and related service delivery.
Beyond simply evaluating successful delivery metrics, well-structured KPIs often help identify areas in need of enhancement, promote data-driven decision-making and encourage a culture of innovation.
By regularly reviewing KPIs and using the insights gained from these to make incremental or foundational adjustments, organisations can foster a more collaborative and innovative partnership with their outsourcing partners.
Using KPIs as a learning tool involves setting clear, aligned objectives, conducting regular reviews and engaging in root cause analysis (but without ‘witch hunting’) when performance falls short. This approach ensures transparency, accountability and ongoing improvement, transforming KPIs from static benchmarks into dynamic drivers of growth and innovation.
Embracing KPIs in this expansive role helps organisations and their outsourcing partners work together more effectively to achieve long-term success.
Fixing Your KPIs
To transform KPIs into effective learning tools, start by clearly defining what success looks like in your strategic outsourcing partnership. This involves not only setting measurable targets but also ensuring these targets are aligned with your broader business goals. Engage with your outsourcing partner to understand their perspective and collaboratively develop KPIs that encourage innovation and proactive problem-solving.
Next, integrate regular feedback loops where both parties can discuss progress, share insights and adjust strategies based on performance data. Use these sessions to identify trends, pinpoint areas for improvement and celebrate successes. This ongoing dialogue helps maintain alignment and fosters a culture of continuous improvement.
Refine KPIs to Drive Outsourcing Partner Innovation
Here are some examples of approaches we have seen that work really well to refine KPIs to drive strategic and innovative engagement:
- Align KPIs with Business Goals
Ensure that your KPIs are directly tied to your strategic business objectives. For example, if customer satisfaction is a priority, set specific KPIs around customer service metrics. This alignment ensures that the outsourcing partner understands and contributes to your broader business goals.
- Incorporate Innovation Metrics
Include KPIs that measure the partner’s contribution to innovation. This could involve tracking the number of process improvements, the adoption of new technologies or the implementation (not just creation) of new ideas. Innovation metrics encourage your partner to go beyond routine tasks and seek ways to add value.
- Emphasise Proactivity
Develop KPIs that encourage a proactive approach. For instance, track the frequency of preventive maintenance or the number of issues resolved before they escalate. Proactive KPIs foster a forward-thinking attitude and help prevent problems before they arise.
- Set Clear Expectations and Regular Reviews
Define clear, measurable targets and establish a routine for reviewing performance. Regular reviews provide opportunities to address issues and realign goals as needed. These reviews ensure ongoing communication and adjustment to keep the partnership aligned with your strategic objectives.
Behaving well, together
For KPIs to effectively drive innovation, contract terms crafted by lawyers need to focus on getting both parties to ‘behave well together’. This means creating a contractual environment that encourages (or at minimum, does not implicitly discourage) collaboration, transparency and mutual respect – not always the easiest of tasks. Contract terms should be designed to promote joint problem-solving, open communication and shared incentives for achieving innovation goals. But at the same time, the terms need to reflect the domain expertise and (often) greater experience of your partner’s and their “Duty to Warn”, so you can make the best use of their capability.
Unfortunately, many contract terms are designed to penalise providers if they do not deliver to an agreed KPI level, rather than focusing on how the client can support its partner to consistently deliver really well and, in turn, encourage the client to have trust and confidence in its partner to innovate new and much more effective ways of working.
How to Support Strategic Engagement
To support strategic engagement, if you consider the following adjustments to your contract terms this will usually help to drive better joint behaviours:
- Allow a Trial Period for Innovation
Provide a grace period for your partner to demonstrate their ability to innovate and reshape processes but in specially targeted service areas. This period should ideally have more relaxed KPI monitoring in the specific service pilots, giving you both the flexibility to experiment and implement changes. This proof of concept time fosters a culture of innovation in targeted areas of service delivery, without the immediate pressure of performance metrics.
- Establish Flexible KPI Clauses
Draft contract clauses that permit temporary suspension or adjustment of KPIs to accommodate significant or specific innovation projects in context with the service pilots to be undertaken. This flexibility ensures that short-term KPI performance does not hinder long-term improvements. It allows for the necessary adaptation required during transformative projects.
- Incentivise Innovation
Incorporate incentives for meeting innovation milestones. Bonuses or extended contract terms can motivate your partner to prioritise strategic initiatives. Financial and contractual incentives can in certain cases, align the partner’s interests with your strategic goals.
Perversely, some incentives can inadvertently drive the wrong behaviours. In a number of cases, we have seen contract terms that compel outsourcing partners to reduce their BAU delivery costs by an agreed percentage each year over the period the contract is running. In theory, this is a sound concept because you might expect such terms to require the partner to carefully consider reducing client charges through the use of innovation to accommodate this.
However, the reality is often quite different, with some outsourcing partners either unwilling or unable (for a multitude of reasons) to use a truly innovative mindset, and instead opting to simply reduce staff numbers in service delivery to cut costs. This is quite likely to lead to declining customer service. In rare cases, this can even result in partners manipulating KPI performance to avoid breaching contractual terms. Ultimately, this creates a lose-lose situation for both client and partner.
Some of these ‘simpler’ savings are, in fairness, a result of optimising existing processes and sharing technology services and systems with other parts of the outsourcing partner’s group. But rarely do these simple savings involve the wholesale ‘hard thinking’ necessary to really innovate how services are being delivered to improve the client’s own customer experiences, but at a lower delivery cost.
- Define Clear Governance Structures
Ensure your contract outlines a governance structure that promotes better collaborative working between you and your partner. This includes clearly defined roles, any shared responsibilities (but not detracting from your partner’s Expert Responsibilities and their Duty to Warn) and joint escalation procedures to encourage idea sharing, feedback and workshops on experimental service piloting, along with addressing disputes and BAU (and attitude) performance issues. Such governance fosters a mutual understanding of obligations and provides mechanisms for accelerating innovation delivery, in addition to resolving conflicts together and enhancing cooperation and partnership.
Assessing Evidence for Poor Outsourcing Partner Innovation Performance
When evaluating innovation performance in your outsourcing partnership, it is crucial to rely on objective evidence rather than subjective perceptions. Here’s a structured approach to ensure that you are conducting a thorough and evidence-based assessment:
- Define Clear Innovation Metrics
Start by establishing specific, measurable innovation metrics. These should be aligned with your business goals and clearly communicated to your outsourcing partner. Common innovation metrics include:
-
- Number of new ideas proposed: Track the volume of innovative ideas submitted by the partner.
- Implementation rate of new ideas: Measure the percentage of proposed ideas that are successfully implemented.
- Time to market for new initiatives: Assess how quickly innovations are developed and brought to market.
- Cost savings from innovations: Quantify the financial impact of implemented innovations.
- Customer satisfaction improvements: Use customer feedback and satisfaction scores to evaluate the impact of innovations on customer experience.
- Gather Data Consistently
Consistent and systematic data collection is essential. Use the following methods to gather relevant data:
-
- Regular reports: Require your outsourcing partner to submit regular innovation performance reports detailing the metrics mentioned above.
- Surveys and feedback: Collect feedback from stakeholders, including employees and customers, to gauge the impact of innovations.
- Benchmarking: Compare the partner’s innovation performance against industry standards or competitors to provide context and identify areas for improvement.
- Conduct Performance Reviews
Regular performance reviews are crucial for assessing innovation objectively. Schedule these reviews at predetermined intervals (e.g. quarterly or biannually) and focus on:
-
- Progress against metrics: Evaluate how well your partner is meeting defined innovation metrics.
- Case studies and examples: Review specific examples of innovations proposed and implemented, including their outcomes.
- Stakeholder feedback: Incorporate feedback from internal stakeholders who interact with the outsourcing partner.
- Use Analytical Tools
Employ analytical tools to gain deeper insights into innovation performance:
-
- Data analytics software: Use software to analyse large sets of performance data, identify trends and uncover insights.
- Dashboards: Create dashboards to visualise key innovation metrics and track progress over time.
- Root cause analysis: If poor performance is identified, conduct a root cause analysis to determine underlying issues and address them systematically.
- Establish a Governance Framework
Implement a governance framework to oversee innovation performance:
-
- Innovation groups: Form groups comprising representatives from both your organisation and your outsourcing partner to oversee innovation activities and ensure alignment with business goals.
- Regular meetings: Hold regular meetings to discuss innovation performance, address challenges and plan future initiatives.
- Escalation procedures: Define clear procedures for escalating issues related to poor innovation performance, ensuring they are addressed promptly.
- Document and Communicate Findings
Document all findings from your assessment process:
-
- Performance reports: Create comprehensive reports detailing the evidence collected, analysis conducted and conclusions drawn.
- Action plans: Develop action plans to address any identified issues, including timelines, responsibilities and expected outcomes.
- Communication: Communicate findings and action plans to all relevant stakeholders, ensuring transparency, and fostering a collaborative approach to improvement.
Identifying Underlying Causes of Poor Innovation Performance
If you have already taken extensive measures to assess and improve innovation performance, but results are still lacking, there may be deeper underlying causes at play. Here are a number of the most important underlying causes to watch out for and the explicit steps to identify them:
Key Underlying Causes
- Misalignment of Goals and Vision: Differences in strategic vision and priorities between those of your organisation and your outsourcing partner can lead to misaligned efforts.
- Cultural Barriers: Differences in organisational culture, including risk aversion, resistance to change, and communication styles, can stifle innovation.
- Resource Constraints: Lack of necessary resources, such as skilled personnel, technology or budget, can impede innovation efforts.
- Ineffective Leadership: Leadership at the partner organisation may lack the vision or capability to drive innovation.
- Inadequate Incentives: The partner may lack sufficient motivation or rewards to prioritise and deliver innovation.
- Process Inefficiencies: Outdated or cumbersome processes can hinder the ability to innovate efficiently.
- Poor Collaboration: Weak collaboration and communication channels between your organisation and your partner, can limit innovation.
Steps to Identify Causal Issues
- Conduct a Comprehensive Review
- Internal Audit: Perform an internal audit of all processes, interactions and strategies related to the outsourcing partnership. Look for gaps and inconsistencies in execution and alignment.
- External Audit: Engage an independent third-party firm that specialises in reviewing innovation-led strategic partnerships to provide an unbiased assessment of the partnership and its innovation capabilities.
- Perform Root Cause Analysis
- Fishbone Diagram (Ishikawa): Use this tool to systematically identify potential causes of poor performance by categorising them into key areas such as people, processes, technology and environment.
- 5 Whys Technique: For each identified problem, ask ‘why’ five times to drill down to the root cause. Begin with the perceived problem statement and ask why, then use the answer this generates to form the next why question and so on. This iterative questioning helps you to drill down from a surface symptom to an underlying cause.
- Engage in Deep-Dive Workshops
- Joint Workshops: Organise workshops with key stakeholders from both organisations to discuss challenges openly and brainstorm potential solutions.
- Focus Groups: Conduct focus groups with employees at various levels to gain insights into their perspectives on innovation barriers.
- Assess Organisational Culture and Alignment
- Cultural Assessment Tools: Use tools and surveys to evaluate cultural compatibility between your organisation and your partner.
- Vision Alignment: Ensure that both organisations share a common vision and goals for innovation through strategic alignment sessions.
- Evaluate Leadership and Governance
- Leadership Interviews: Conduct interviews with leadership from both organisations to understand their commitment to and vision for innovation.
- Governance Review: Examine the existing governance structure to ensure it supports innovation efforts effectively.
- Analyse Resource Allocation and Utilisation
- Resource Audit: Review the allocation and utilisation of resources dedicated to innovation, including personnel, technology and budget.
- Skill Gap Analysis: Identify any skill gaps in both your team and that of your outsourcing partner, that might be limiting innovation. Think about filling those gaps by exploring training or hiring solutions.
- Review Incentives and Rewards
- Incentive Structure: Analyse the current incentive structure to ensure it adequately motivates the partner to prioritise innovation without sacrificing BAU performance.
- Performance Metrics: Adjust KPIs and performance metrics to better align with innovation goals and desired outcomes.
- Map Processes and Identify Bottlenecks
- Process Mapping: Create detailed process maps to identify inefficiencies and bottlenecks that may be hindering innovation.
- Lean and Agile Practices: Consider adopting lean or agile methodologies to streamline processes and improve responsiveness.
- Enhance Collaboration and Communication
- Collaboration Tools: Implement collaboration tools and platforms to facilitate better communication and idea sharing.
- Regular Touchpoints: Establish regular meetings and touchpoints to ensure continuous alignment and progress tracking.
Collaborative Steps for Improving Performance between Clients and Outsourcing Providers
To address challenges in innovation performance, you and your outsourcing provider need to work closely together, ensuring both parties fulfil their responsibilities, including the provider’s Expert Responsibilities and Duty to Warn.
Below we have listed some of the key actions that may help to supplement your thinking for performance improvement:
- Establish a Joint Innovation Task Force
- Composition: Include representatives from both the client and the provider, encompassing leadership, management and operational teams.
- Mandate: Task the group with diagnosing issues, formulating strategies and overseeing the implementation of innovation initiatives.
- Conduct Joint Strategic Alignment Sessions
- Shared Vision and Goals: Ensure both parties are aligned on the strategic vision and goals for innovation.
- Innovation Roadmap: Develop a detailed roadmap that outlines short-term and long-term innovation objectives and milestones.
- Perform a Comprehensive Innovation Audit
- Current State Analysis: Review the current state of innovation efforts, processes and outcomes.
- Identify Gaps: Identify gaps and areas for improvement, considering both internal and external factors.
- Implement a Governance Structure
- Roles and Responsibilities: Clearly define the roles and responsibilities of both parties in driving innovation.
- Regular Reviews: Schedule regular governance meetings to review progress, address issues and realign strategies as needed.
- Enhance Communication and Collaboration
- Collaboration Tools: Utilise advanced collaboration tools to facilitate seamless communication and information sharing.
- Regular Touchpoints: Establish regular touchpoints, such as weekly meetings and monthly progress reviews, to ensure continuous alignment and collaboration.
- Address Cultural and Organisational Barriers
- Cultural Workshops: Conduct workshops to bridge cultural gaps and foster a collaborative environment.
- Change Management: Implement change management practices to support the adoption of new processes and mindsets.
- Focus on Capacity Building and Resource Allocation
- Training and Development: Invest in training programmes to build the necessary skills and capabilities for innovation.
- Resource Allocation: Ensure adequate allocation of resources, including personnel, technology and budget, to support innovation initiatives.
- Refine Incentives and Performance Metrics
- Incentive Structures: Review and refine incentive structures to motivate the outsourcing provider to prioritise innovation.
- KPIs: Align KPIs with innovation goals and ensure they are measurable, achievable and relevant.
- Conduct Root Cause Analysis for Persistent Issues
- Analytical Tools: Use tools like fishbone diagrams and the ‘5 Whys’ technique to identify and address root causes of poor performance.
- Action Plans: Develop and implement action plans to address identified issues, with clear timelines and accountability.
- Set Up Joint Innovation Workshops
- Conduct Workshops: Conduct workshops to brainstorm and co-create innovative solutions, ensuring both parties contribute their expertise and perspectives.
- Establish Clear Communication Channels
- Dedicated Channels: Create dedicated communication channels for innovation-related discussions, ensuring timely and effective information exchange.
- Develop a Shared Innovation Dashboard
- Shared Dashboard: Use a shared dashboard to track innovation metrics, progress and outcomes, ensuring both parties have real-time visibility.
- Regular Innovation Reviews
- Quarterly Reviews: Schedule quarterly innovation reviews to assess progress, celebrate successes, and course-correct as needed.
- Address Resource Gaps
- Resource Allocation: Identify and address any gaps in resources or capabilities, whether through training, hiring or leveraging external expertise.
- Create an Innovation Charter
- Innovation Charter: Draft an innovation charter that outlines the vision, goals, roles, responsibilities and expectations for both parties, ensuring a shared commitment to innovation.
Conclusion
Transforming your outsourcing relationship into a strategic partnership requires careful attention to the relationship, learning-based KPIs and contractual terms that drive optimal behaviours from both parties. By aligning your working relationship, KPIs and contract terms with your business goals, emphasising innovation and allowing a trial period for new initiatives, you can foster a more proactive and strategic engagement from your outsourcing partner. Adjusting your contract to support these goals ensures that both parties are committed to achieving long-term success and a continuous programme of improvement.
