Outsourcing business processes to external service providers has become extremely popular among companies looking to reduce costs and improve efficiency. However, turning over critical functions to third party vendors also comes with significant risks if the relationships are not properly governed. Failed outsourcing initiatives can lead to missed objectives, poor service quality, hidden costs, and damaged customer satisfaction.

That’s why implementing clear performance metrics and governance processes is absolutely essential for any successful business process outsourcing (BPO) program. The right performance metrics give visibility into whether outsourced processes are executing smoothly and meeting stakeholder expectations. They enable fact-based, unbiased assessments of vendor performance and early identification of potential issues. Perhaps most importantly, solid BPO metrics help demonstrate the value being delivered so key decision makers can justify further investment and expansion.

In this comprehensive guide, we will explore recommended categories of BPO performance metrics, best practices for target setting, approaches for tracking and analyzing performance data over time, strategies for addressing any areas of underperformance, and tips for leveraging metrics to showcase BPO success.

Key Categories of BPO Performance Metrics

There are three high-level categories of metrics that should be considered when structuring the performance management framework for a BPO engagement:

Operational Metrics Show How Smoothly Things Are Running

Operational metrics provide insights into the day-to-day execution of outsourced business processes. They help assess whether service levels are being met and capacity is adequate. Examples include:

• Service Level Agreements (SLAs) – SLAs define expected timeframes for completing processes or responding to customer/user requests. Typical SLAs may measure speed to answer calls, time to resolve IT tickets, or cycle times for finance transaction processing.

• Volume – Volume metrics simply track the total quantity of transactions, service requests, or cases handled by the vendor within a given timeframe – day, week, month, etc. Monitoring volumes helps ensure adequate staffing levels and identifies major trends.

• Backlogs – Backlogs represent any work inputs that have built up waiting in queues to be processed. Growing backlogs can indicate insufficient capacity or lack of automation.

• Staff Utilization – Utilization measures the percentage of time outsourced staff are actively engaged in productive work versus idle or waiting. High utilization indicates good workload balancing and capacity planning.

• Schedule Adherence – Assesses whether service delivery milestones laid out in the BPO project plan and schedule are being met on time. Critical for major transitions.

• Automation Rates – Automation rate tracks the percentage of transactions or processes handled completely by automated systems versus manual work. This helps monitor productivity gains.

Financial Metrics

Financial metrics focus on the monetary costs, savings, and benefits associated with BPO:

– Contract Costs – Regularly validate invoiced costs against contracted rates to ensure accurate billing.

– Cost Reduction – Compare current outsourced costs versus previous in-house costs for the same functions.

– Productivity Improvements – Higher transactions volumes or lower operational costs may yield productivity gains.

– ROI – Return on investment measures overall financial benefit relative to BPO costs.

– Profit Margin – The profit margin on outsourced services factors in revenue minus direct costs. 

– Value Delivered – Assess qualitative value beyond cost savings, such as improved quality or new capabilities.

Quality Metrics

Quality metrics provide assurance that outsourced processes meet compliance standards and performance expectations:

– First Call Resolution – Percentage of inbound requests or issues resolved without escalation or transfer. 

– Customer Satisfaction (CSAT) Scores – Feedback ratings from customer surveys evaluating service quality.

– Quality Audit Scores – Periodic audits measure compliance with internal quality guidelines.

– Training Hours Completed – Verify staff complete required training to follow processes correctly.

– Complaint Ratio – Number of complaints logged compared to overall transaction volumes.

– Error/Defect Rate – Frequency at which issues, rework, or corrections occur.

Setting Targets for Each Metric

Once key metrics have been defined, BPO project leads should establish targets or benchmark levels of expected performance. Some best practices for setting BPO metrics targets include:

– Use Baselines – Review historical performance data pre-outsourcing to set a baseline target at least at that level.

– Consult Stakeholders – Business leaders often have goals around cost, turnaround times, or quality that can inform targets.

– Examine Industry Standards – Research typical performance levels for metrics based on outsourcing type and sector.

– Solicit Vendor Input – Expectations should align with vendor capabilities and reasonable ramp-up periods.

– Focus on Continuous Improvement – Set “stretch targets” beyond basic requirements to drive ongoing gains.

– Reassess Periodically – Revisit targets at least annually as needs, expectations, and capabilities evolve.

Setting clear, achievable targets provides visibility for both the client and vendor on expected performance levels and gives a goalpost for measuring success.

Tracking and Analyzing Metrics Over Time

Once meaningful metrics have been selected and targets defined, the next critical step is tracking performance over time. A system for monitoring, reporting on, and analyzing metrics on an ongoing basis should be established early in BPO contract. Key activities include:

– Automate Data Collection – Configure systems and dashboard reporting to compile key metrics seamlessly without manual effort.

– Establish Cadence for Reviews – Schedule quarterly or monthly reviews to evaluate metrics versus targets.

– Validate Root Causes – Don’t just identify shortfalls, investigate underlying drivers through interviews or data analysis. 

– Share Feedback with Vendor – Provide regular, specific feedback to vendor on areas of strong performance or needing improvement.

– Look at Trends – Review directional trends quarter-over-quarter, not just periodic snapshots.

– Segment Metrics – Break down high-level metrics by factors like service type, geography, or business unit to derive additional insights. 

– Cite Examples – Include positive or negative examples, quotes, and stories to add color behind the numbers.

Ongoing tracking and timely analysis of metrics is critical for identifying potential issues early and maintaining alignment. Both the buying organization and vendor should have a shared view into key performance data and trends.

Addressing Areas for Improvement

Inevitably, BPO engagements will have areas where targets are missed or performance declines. The key is having a structured approach for identifying and addressing these shortfalls:

– Diagnose together – Problems are rarely one-sided. Take a collaborative approach with the vendor to understand root cause. Look beyond the symptom to underlying process breakdowns.

– Outline specific actions – Don’t just document the issue, define what each party will commit to do to resolve it by specific dates.

– Consider incentives – Financial penalties or bonuses aligned to metrics can compel desired behaviors.

– Allow time – Change takes time, especially transforming processes or adding resources. Set milestones for progress.

– Escalate if needed – If issues go unresolved, escalate to senior management to secure engagement.

– Don’t let it fester – Small problems become big problems if left to linger too long without intervention.

– Review preventative measures – Look for ways to improve process robustness to prevent recurrences.

– Share lessons learned – Document insights from challenges to continuously improveoversight model.

A rigorous fact-based approach and open dialog with the vendor is key to overcoming any areas of underperformance. The focus should be on mutual understanding and commitment to resolutions.

Leveraging Metrics to Demonstrate BPO Value 

Beyond managing the vendor relationship, BPO metrics also play an important role in demonstrating value. Metrics data provides tangible evidence that helps build an ROI case and get stakeholder buy-in. Ways to leverage BPO metrics for advocacy include:

– Calculate cost savings – Benchmark current outsourced expenditures versus prior in-house costs.

– Show productivity gains – Higher output volumes or lower operating costs per transaction indicate efficiency benefits. 

– Note process improvements – Faster SLAs, lower defects and higher CSAT scores showcase operational gains.

– Share positive customer feedback – Client testimonials or satisfaction quotes add qualitative examples of value received.

– Highlight new capabilities – New services or offerings that were not feasible in-house demonstrate access to innovation.

– Track contract compliance – Metrics showing adherence to contractual obligations indicate lowered risk.

– Communicate results – Include metrics summaries in leadership reviews to maintain visibility.

Quantifiable metrics make the benefits of outsourcing more tangible and help justify ongoing investment in BPO initiatives. They also give project leads data to communicate value across the organization.

Conclusion

Developing meaningful performance metrics and governance processes to manage those metrics is a foundational element of BPO success. This enables fact-based oversight of vendor relationships. It also provides means to address areas of underperformance, demonstrate value from outsourcing, and align operations to strategic goals. Organizations that invest time upfront to define and implement robust BPO performance management driven by key metrics put themselves in the best position to achieve outsourcing objectives and maximize benefits over the long-term.