This is the first chapter of The Outsourcing manual
which tries to start you off on the right foot when getting in to outsourcing
for the first time.
Chapter 1 - Setting Clear Objectives
Why Objectives Are Important
The importance of setting objectives correctly cannot be overstated.
Outsourcing agreements typically run for a number of years and involve two,
usually disparate, organisations attempting to work closely together. More
particularly, outsourcing agreements can take many different forms and have many
different components. You may be confronted with a bewildering range of options
which could lead to what will seem like a life sentence if you make the wrong
The nature of the objectives set profoundly influences both the direction and
the out-turn of the outsourcing agreement. Correctly set objectives will fulfil
the following functions:
- Guide the assessment of internal options and suitability for external
- Guide the design of the external partnering contract or internal improvement
- Provide the basis for measuring progress towards the delivery of benefits.
- Facilitate the ultimate delivery of planned benefits.
- Provide a datum against which proposed courses of action may be tested.
The absence of objectives will frustrate the ability to test the
appropriateness of proposed courses of action and deficient objectives may lead
to the adoption of inappropriate courses of action.
Setting meaningful and measurable objectives is, therefore, a critical
success factor. It is also more difficult than most people believe.
How Objectives Influence The Outcome
The skill with which objectives are set will affect the outcome of both an
investigation into the appropriateness of outsourcing and, if judged to be
relevant, the resultant outsourcing agreement itself. The illustration that
follows shows how.
Assume that a single objective to reduce costs is set. The resulting service
or contract principles will be as follows:
- There must be an exact definition of service
requirement - poor definition that excludes a service component will result in
increased charges or lower service.
- Tight cost constraints will mean total adherence to the
supply of those closely defined services - the supplier will have no scope to
vary the service since it is tightly constrained by the need to provide a
service and make a profit for the price agreed.
- There will be minimal service flexibility and no value
- Constraints to the rate of business development may be
imposed because the supplier is forced to a position where it is unable to
agree to changes in the service requirement without the ability to see how
existing poor margins will be improved or, as a minimum, not be diminished
- Changes to service requirements will be subject to
potentially difficult negotiation because the supplier will either perceive an
opportunity to improve weak margins or, more negatively, work to avoid a
further weakening of margin.
- Increased charges for changed requirements will be used
to lever up the supplier's margin. The most basic of business dynamics must
make this so.
- Budget constraints may constrain the desire or ability
of the service provider to respond to changes in the customer's market sector,
leaving the customer trailing its competitors.
If forced to operate within the principles defined above, the service
provider is likely to behave in the following way:
- The service supplier may be forced to a position of
inflexibility by the twin constraints of low costs or margins and a tight work
specification. Low costs and low margins may mean reduced investment, research
and loss of continuity, remembering that resources are tuned to the precise
requirement and unnecessary resources are removed or re-assigned.
- The service supplier's priority will be the maintenance
of either low margins or tight cost budgets since this is the primary demand
of the customer's objective.
- The implications of the above inevitably result in a
lack of emphasis on helping to deliver the customer's wider business
objectives. The requirement has placed no obligation on the supplier to take a
broader view and the commercial constraints make it quite impossible for the
supplier to react differently.
- The supplier may seek to use every change in
requirement to improve margins, which, over time, will have a debilitating
effect upon both the relationship and value for money.
- There will be maximum job losses and possibly
unforeseen consequences because the pressure to reduce costs will result in
the apparent need for fewer people and for assets to be worked harder. The
ability to respond to upward variations in service demand or recover from
unplanned problems will therefore be reduced.
- There will be a low level of supplier management input.
If the service requirement is very clear and the supplier is providing a low
value service, the supplier management will have neither the need nor
incentive to invest any management effort in the arrangement.
Notwithstanding the points above, a low cost basic service should be
satisfactorily delivered against the single objective. However, were a number of
objectives to be set, the effect would be quite different.
Assume now that the following multiple objectives are set:
- Reduce unit costs and minimise capital expenditure.
- Gain access to modern technologies.
- Achieve earliest delivery of new technology benefits.
- Maximise staff career opportunities.
The resultant contract will have the following characteristics:
- Service supply will emphasise value for money since the
supplier, through access to a greater scope and mix potential. is now being
asked to deliver a wider range of business benefits for the lowest unit and
capital costs consistent with the delivery of the other objectives.
- From the supplier's viewpoint, the requirement is now
of greater commercial interest since it offers the possibility for expanded
involvement and reward against the delivery of new technologies and business
- The service supplier and customer will have the
potential to achieve a symbiotic relationship where pursuit of individual
goals benefits the other party.
- There will be a continuous downward pressure on unit
costs and continuous upward pressure for innovation because, despite the
pressure to reduce unit costs, there is a clear intention to seek and exploit
up-to-date technological advances to mutual benefit.
- There will be scope for charging formulae that give
service flexibility but maintain pricing certainty. Since the objectives do
not concern reduced costs alone, charging formulae can be devised that provide
If asked to operate within the principles defined above, the service
provider is likely to behave as follows:
- The service provider will be flexible and keen to
maintain the relationship because, where the agreement appears to offer real
scope for the profitable use of new technologies and developed skills, the
supplier will be keen to exploit these opportunities.
- The supplier will give priority to the delivery of the
customer's business objectives rather than maintaining low margins. Where the
supplier does not have to concentrate on the maintenance of narrow profits, it
can afford to invest time, effort and resources on both existing delivery
obligations and future opportunities.
- Service variations will be a normal part of the
relationship. Since both parties will appreciate the need for change and, if
appropriate, the need for controlled amendments to the price, processes
dealing with change can be easily devised and readily subscribed to by both
- There will be minimum job losses and a higher level of
supplier management input. Tight margins mean that supplier management must
respond appropriately to circumstances. With less financial pressure, supplier
management is likely to take a more measured view of skills, apply training
(as an investment) and seek alternative methods of dealing with surplus
The Objectives Setting Process
Setting objectives is apparently straightforward but actually very difficult.
It requires considerable thought and understanding and a significant commitment
of time. Sufficient time is rarely allocated to the development of objectives,
which places the procurement at risk before it has really begun. This is because
objectives set a direction and, as a result, provide a test against which
progress may be measured and any deviations identified. Figure 1.1 provides a
schematic view of an objectives setting process.
Figure 1.1 Objectives setting process
Setting objectives is an imprecise task by nature and the results arc often
difficult to corroborate or confirm. When managing a project, even the most
experienced director, manager or project leader will be unsuccessful if there
are no objectives by which to measure progress and success. After all, without
formal and robust objectives, how can expectations be properly set? This section
provides some thoughts on how one might go about setting appropriate objectives
for an outsourcing agreement.
Within the context of outsourcing, the following information will be
- High level corporate objectives and measures
There will be little point to an outsourcing agreement if it does not, either
directly or indirectly, further the corporate goals of the enterprise. The
initial thinking surrounding the outsourcing approach and its relevance must
therefore take account of both the corporate goals and their associated
- An understanding of future customer needs
user requirements, both current but particularly future, are not understood, it
will not be possible to set objectives that assure the alignment of the
outsourcing agreement to those requirements.
- A view of the gap between current service provision
and customer needs
Without such a view it will not be possible either
to determine the nature and size of any gap or to formulate a likely solution to
its closure should it exist.
- An assessment of the extent to which technological
innovation is important
Such a view will inform judgements surrounding
the general nature of any potential outsourcing agreement in terms of
requirements for skills and products relating to technology, its cost effective
acquisition and its exploitation.
- The likely rate of change
sectors are feeling the pressure of accelerating rates of change but some
sectors change faster than others. Any requirement for rapid change will bear
heavily upon the structure of an outsourcing agreement, the type of supplier
selected, the requirement to lever technology and, most of all, cost¬because
'change' has a significant cost. If you are clear about the likely rate of
change, the potential costs can be negotiated into the outsourcing agreement at
a better unit rate than would be achieved later through change control.
Careful consideration of the factors listed above should result in clearly
articulated and written objectives and measures for each objective. The
combination of the two will provide both a target for management action and a
means by which progress can be measured.
Some Examples Of Generic Objectives
There follow some examples of generic objectives that may provide some
insights into the development of objectives more specific to individual
SKILLS, TOOLS AND TECHNOLOGIES
To gain, and maintain, access to those skills, tools and technologies
appropriate to the maintenance of operational systems and the attainment of
- Minimise direct investment in developing or acquiring tools and technologies.
Specific financial limits may be specified if appropriate.
- Minimise direct re-skilling investment in the use of new
tools and technologies. Specific financial limits may be specified if
- Business strategic and tactical requirements not
constrained by a lack of appropriate tools and technologies. Measures can
include the number, nature and cost of constraints where cost can be defined as
financial, performance, time to market and so on.
To maintain a continuous downward pressure on unit costs without detriment to delivery of business objectives.
- [x per cent] reduction in the unit cost of outputs over a five-year period.
RESPONSIVENESS AND FLEXIBILITY
To improve, by [x per cent], the identification of, and response to, customer needs.
- Maintenance of a qualitative and
quantitative view of customer needs.
- Cycle time for significant innovations
not to exceed [x] months.
- Cycle time for minor innovations not to exceed [y]
To maximise career opportunities for existing staff.
- Retention of mission-critical skills.
- Assure the existence of, and active participation in, personal development
- Avoidance of compulsory redundancy.