Over the years a lot has been said and written about the use of performance metrics in sourcing relationships. Everyone understands that metrics need to be in place to measure supplier contributions and the overall success of the engagement, but most sourcing professionals will also acknowledge the challenge of using these metrics effectively.
SLAs (Service Level Agreements) typically focus on operational processes or technical performance like, system availability, incident resolution times, service desk response times, mean time to recovery, problem backlog and number of complaints. They are typically output based, in that their purpose is specifically to define product or service quality attributes. They can be very comprehensive but still fail to deliver the anticipated success.
Why service levels don’t cut it
Although SLAs can be quite comprehensive they do not define the benefits or business value the client expects to get from these outputs. They common focus on systems and processes introduces a major issue; it creates a short term orientation and leaves out the bigger picture of overall business objectives and expectations of the sourcing relationship. It results in what we call watermelon metrics; green on the outside, but red on the inside. Green in terms of how the contractual service levels are measured and reported. Red in terms of how the business experiences the services. This mismatch is a main cause of friction and conflict in many sourcing relationships.
In case of troubled supplier relationships the default management response is often to introduce more service level metrics and put more pressure on the supplier. These strategies however mostly don’t bring about the results organizations are looking for. And organizations that continue on this road will continue to fail on their objectives. Why? Because they continue to manage their sourcing relationships from a short term operational perspective and not from the longer term business outcome point of view. They focus on ‘the how’ and not on ‘the what’. In order to get to a new level of success, a different approach is necessary.
So, what’s the alternative you might ask. For this we look at Objectives and Key Results (OKRs)
Just what is OKR?
Objectives and Key Results is a popular goal management framework that helps organizations implement strategy. The framework was initially developed by Intel and later introduced by John Doerr, one of the most successful venture capitalists of all time, to major companies like Google, Linkedin, Twitter and Uber.
An OKR refers to a desired business outcome and consists of an Objective, which defines a goal to be achieved, and a set of (typically) up to 5 Key Results, which measure progress towards the objective. Objectives are what you want to accomplish; they are aspirational. Key Results are concrete, specific and measurable. They are the milestones that indicate whether an objective is accomplished or not.
Here is an everyday life example to better understand the concept of OKRs.
OKRs define a desired outcome, that focuses on what will be accomplished as a result of the work performed. To determine appropriate key results that define success of the objective, it’s critical to have a firm understanding of the motive behind the objective. For instance, suppose someone has an objective to learn to swim. Is the motive just to paddle in the fun pool while on vacation? Or the ability to participate in a swimming competition? Or to impress others with a better body shape? Or to reduce the risk of drowning when falling in the water? Once it‘s clear what learn to swim means, the next step is to determine key results that clearly define what a successful outcome is.
Here are some easy to understand examples to get a clear picture of what we mean when wo use the term objectives or outcomes and why it’s critical to understand the motive.
|For a 5-year-old girl||Learn the basic strokes to swim a distance of 25 meter to prevent her from drowning should she fall in the water|
|For a 20-year-old boy||Be able to swim the 100 meter in under a minute to quality for the university swim team|
|For a 40-year-old woman||Improve overall health by losing 10 kg and achieve a BMI of under 23|
|For a 65-year-old man||Reduce the risk of a heart attack by reducing bloodpressure to 130/80|
In each of these examples, the objective is the same (learn to swim), but because each individual has a different motivation, the key results that measure success are quite different. In a business setting the principles are the same; the motive behind the objective should be clear in order to determine appropriate key results.
Let’s look at some business examples of objectives and key results.
|Objective||Provide excellent customer support|
|Key Results||1. Achieve NPS of 80 or above|
|2. Reduce the need for managerial involvement in support calls by 10%|
|3. Achieve CSAT rate of 80%|
|4. Reduce churn rate from 5% to 3%|
|5. Achieve SLA approval rate of 90%|
|Objective||Become more energy efficient|
|Key Results||1. Reduce carbon footprint by 25%|
|2. Increase use of solar energy by 15|
|3. Reduce energy consumption of exterior lightning by 50%|
|4. Increase use of public transportation by employees by 20%|
|5. 80% of offices will have green roofs/td>|
|Objective||Improve employee engagement|
|Key Results||1. Average weekly satisfaction score of 4.8 points|
|2. 100% of employees have access to an adequate job training program|
|3. Each team has a quarterly team event|
|4. 80% of employees has a clear understanding how they contribute to overall objectives|
|5. 80% of employees is satisfied with the office space they work in|
To realize OKRs they will be underpinned by initiatives, which describe the work required to drive progress on the key results. In sourcing these initiatives are typically the obligations and contributions contracted with the supplier. ‘Contribute’ means more than just meeting service metrics. It means products, services, knowledge, risk reduction, software products, etc… Anything that helps to realize the OKR. Please note that these are not limited to just the ‘hard’ factors of the relationship – the KPIs (Key Performance Indicators) -, but can also include the ‘soft’ factors of the relationship – the KSIs (Key Social Indicators). The hard factors typically focus on technology, products, rules, regulations and processes required to deliver a service, while soft factors address personal behaviours, perceptions and experiences of customers or employees.
The use of OKRs help you create an integral view of the sourcing relationship and create alignment, focus, transparency and engagement on the things that really matter; the expected business outcomes.
OKR in sourcing relationships
In today’s complex business environment sourcing organizations pursue a wide range of objectives and strategies. The days of management guru Michael Porter, who learned us to choose between cost, focus or differentiation, are long gone in this respect. Now organizations want to reduce costs, improve quality, be more agile, innovate, be compliant and improve customer satisfaction all in the same time.
Clearly, these objectives are not realized by focusing only on (short-term) technical and process oriented service levels. Also, they are not realized by telling your supplier one thing today and another thing tomorrow. It calls for a new collaborative approach that focuses on the big picture and the overall business outcome of the engagement.
OKRs help you open the way to a new generation of agreements, centered around business outcome, including the expectations and experiences of critical stakeholders from both the client and the supplier side. It provides a better way for the parties to align on objectives and collaboratively work on their realization. This does not mean that all the traditional service level metrics are thrown out of the window, but they should clearly underpin OKRs, be limited in number and not get in the way of changing ways of working to achieve the business outcome.
The biggest impact of using OKRs in sourcing organizations without goal management already in place, or those who focus purely on traditional service levels, is a cultural shift from output to outcome. OKRs make business outcomes more tangible, create focus, transparency and alignment for all activities in the sourcing arrangement. These factors combine and lead to increased employee and supplier engagement. It facilitates for a more open and balanced relationship with the supplier with open communication and working towards a shared set of outcomes.
You may also want to read our article on how to apply OKR in Agile Development Projects.
Set, allign and manage OKR
During the early stages of the sourcing lifecycle the sourcing company will define the purpose and scope of the future sourcing relationship. This includes translating intents and desired outcomes into OKRs, which will become the foundation of what will be included in the contract in later stages. Once a sourcing partner is selected it’s time to align interests. This includes communicating intents and desired outcomes to each other and establishing a single balanced set of OKRs. These will include the key deliverables for which the supplier will be held accountable. In a later stage these OKRs will be underpinned with lower level technical service levels.
Once the OKRs are set, they need to be managed. The aim is not to set and forget. The aim is to actively use them to guide the relationship in realizing the desired outcomes. It also means that OKRs are periodically reviewed and adjusted if needed. In a dynamic sourcing relationship key results that are achieved can be removed or replaced by others. Also, in a complex and dynamic business environment, objectives and key results that are set today may not be the right ones in a year’s time.
For complex and dynamic sourced services engagements, with multiple objectives and a wide range of supplier obligations and contributions, it’s however easy to lose track and oversight. To address this problem and minimize the administrative overhead, we make use of TRAC; our collaborative cloud based end-to-end contract management solution that supports all critical contract management functions. A key feature of TRAC is that it transparently links supplier obligations and contributions to business objectives and services, so that you’re always on top of the game without additional administrative efforts. In addition, TRAC supports a flexible and controlled way of efficiently changing the contract itself, which is not unnecessary in a complex and dynamic business environment.
To summarize, OKR’s are a simple way to create alignment and engagement around measurable and dynamic goals. They help to make sourcing initiatives more outcome based and collaborative, allowing for a mix of hard/objective metrics and softer perception based measures. It keeps organizations in step which each other and let’s everybody know what is important and turns the focus of both parties to the engagement on the things that really matter; the intended business outcome. By translating business outcomes into tangible OKR, and making sure contracted obligations and contributions are clearly aligned to them, you create more focus, transparency, engagement and ultimately better results.
For more information on OKRs, how to select and apply them and how to manage them in a practical way throughout the life time of the contract, please contact us.