4. Creating Iron-Clad Performance Metrics
Just as employees on the job are evaluated, the performance of contract companies must also be assessed. Surprisingly, in only rare instances do clients and vendors establish specific criteria for measuring performance, and when they do, the criteria are hardly ever enforced. Two approaches to metrics should be employed: service-level agreements (SLAs), which include incentives for good performance and penalties for underachievers, and key performance indicators (KPIs), which lack incentive plans. In general, it’s best to limit the SLA to three or four tangible and measurable items, such as project timing and scheduling or budget performance. By contrast, KPIs should reflect aspects of the job that can be readily monitored, such as employee attrition or the length of time it takes to resolve a problem. If improvements are needed in KPIs, they should be negotiated in collegial, not legalistic or contentious, discussions.
To their detriment, many companies define SLAs loosely and leave too much to interpretation, making these agreements difficult to enforce. Alternatively, client companies feel that negotiating or determining the best metrics to track is too time-consuming, so they choose easily achievable benchmarks or agree to the performance levels proposed by the vendors. Either way, the relationship sours when a couple of projects fail and the client company attempts to penalize the contracting outfit for failing to live up to the SLAs.
It is critical that SLAs and KPIs are planned, negotiated, and agreed on before the contract is signed. Contracts should include clear and concise definitions of expected work and performance levels; quantifiable and measurable benchmarks; who tracks performance, when, and how; how frequently these agreements are reviewed and perhaps renegotiated; and, in the case of SLAs, incentives and penalties.
5. Establishing a Strong Governance Structure
Governance is the most important pillar. Strategic and cost initiatives, including engineering outsourcing, are better managed when they are supervised by an executive who champions the project. In the case of engineering, the vice president of engineering or product development is the likely candidate to take on this job.
But the governance structure must go beyond just a single individual assigned to the effort. The most effective setup for an engineering outsourcing initiative includes a steering committee composed of key executives from both the client and vendor companies; a program management office made up of senior managers from IT, finance, engineering, and purchasing, among others, to review the project monthly or quarterly; and at the bottom of the pyramid, execution teams, including the client’s project managers and the vendor’s project team, to oversee daily and weekly activities.
One of the common mistakes that companies make in engineering outsourcing is failing to create a separate governance structure. More often than not, these initiatives are led by a vice president with multiple responsibilities and little time to pay much attention to the offshoring program. As a result, outsourcing-related issues are dealt with perhaps once a quarter under the umbrella of an operational meeting, which includes a slew of other organizational issues. The amount of time spent discussing any of these issues is usually driven by the urgency of the matter — projects in crisis get the most attention — and not its long-term importance. Such omnibus operational meetings are the wrong venues for granular discussions about outsourcing and whether it is delivering the anticipated value to the company.
A clear governance process not only increases the efficiency of sourcing initiatives but also ensures that objectives are met and financial benefits are realized. In addition, it can ensure that disputes and conflicts involving the engineering outsourcing agreement are resolved quickly, with little strain on the organization, and that the long-term relationships with contract companies are strong.