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Effective outsourcing processes deliver benefits



Effective outsourcing

There are key principals that if followed can greatly increase the chances creating an effective outsourcing process. There are still issues in proving whether outsourcing can deliver measurable business improvement and better-cost performance. Many outsource deals fail to deliver the grand promises in the press release and back sourcing or early closure is an increasing trend. And the COVID pandemic has shown us the susceptibility of extended supply chains to disruption and service failure. Thus a clear, resilient outsourcing relationship and contract is essential

1.0 Scope the demand

There must be clear scoping of the demand and what is being put to the market. This need to be on the basis of knowledge of what and how the service is being carried out now. And a clear cost structure for the current service. Outsourcing on the basis of poor understanding or frustration is bad and will lead to a poor decision and no benefits. It is best practice to fully assess the current service even allowing the internal organisation to prepare an ‘internal’ bid. This allows a thorough scoping of the service and an accurate benchmark. It will also expose the fat which contributes to high cost in the current ways of working. And you risk giving extra profit to the vendor if you go to market without assessing your current cost structure.

2.0 Clarify the objectives

Within the objectives for the successful outsourcing there must be consistency and reasonableness of demands. For example, cost reduction, as a key aim coupled with a demand to increase service may be inconsistent. We must agree internally why you are doing this and determine what is driving the whole process within the organisation. This is important from the vendor’s perspective as well. If the vendor knows whether cost reduction or technology refresh are key then the response can be tailored.

We should be aware that objectives can change over time and the original case can be undermined by events. Revisiting the rational is an important task during the process. Don’t be driven by the running train. And be prepared to get off if the rationale changes. It makes no sense to go on when the entire rational and benefit case has disappeared.

3.0 Organise for success

First of all vendors to this for a living. Often the vendor sales team have been doing bids for years and when this one is done will move onto the next. The customer on the other hand may have not done this before or the team carrying out the supplier evaluation may be new. It may be several years since the outsource process was run through. It may be very wise to engage a contract consultancy to handle (or mentor) your side of the whole process.

Often missed is the need to plan the capacities of the customer team that will be running the outsource process. A large bid is a fulltime job and key members of the customer team will also have a day job. Don’t forget this as well as holidays and plan capacity well. Plan well, resource well and set realistic time scales. Time pressure can act in the vendor’s favour and allow skipping of important details. Do not be put under pressure by poor capacity planning or too optimistic timescales.

The role of RFI’s and RFP’s effective outsourcing

Just a few words on the differences between the types of bid document commonly encountered during the bid process. A RFI is a high-level document inviting a general response and can be used as a test for possible solutions. And also to pre-select candidates for the bid. Usually we give no indication of the price needed and we should not expect too much detail here.

An RFP invites a formal response and takes longer for the vendor and the customer to evaluate. In a significant bid the costs associated can run very quickly into tens of thousands and even millions of pounds. Therefore before starting the whole circus make sure that you intend to place the business.

Ensure also you are being realistic in what you are asking for. Take care that the quality and clarity in the RFP promotes comparability in the proposals received. A RFP is a significant piece of work and must be of high quality to avoid any ambiguities. I always favour a templated approach that forces answers into a clear structure. Allow suppliers to put all the waffle in the attached appendices if they want.

4.0 Set up a competitive bidding process

You need to decide on sole source versus competitive sourcing towards the market. Sole sourcing can be suggested by an incumbent vendor or internally when there is a time constraint. But there are significant downsides. Loss of leverage, not being able to compare alternatives and less aggressive pricing. Furthermore, a sole source could have high impacts such as the legitimacy of the deal. Last but not least, the process may actually take longer as there is no time pressure that comes from competition.

A competitive bid process has a better chance of realising cost savings. Furthermore, new suppliers can usually come with more innovative proposals that the incumbent. The process can also be quicker as the client can drive the competition by using a strict schedule.

However, competitive bidding is more resource intensive. For the supplier as well as the client and this has to be planned for. Don’t invite a supplier to the party just to act as a market testing benchmark when the intention is to squeeze the in-house supplier. You may do this once but will be pre-qualified out of any future by business by suppliers. In principle be open and prepared to do business with other suppliers it keeps the market healthy.

Be precise, not prescriptive, comprehensive but concise in the way you pose your requirements. Focus on key objectives. We need the ‘what’ not the how. Do not lay down all sorts of preconditions about how the service is to be delivered. That’s the suppliers job in the proposal. I have seen RFP’s with detailed specifications of what packages to use and how the service is to be delivered. This risks closing off all innovative solutions that may have been available from the vendor.

5.0 An effective outsourcing process is a well-managed process

In negotiation avoid shortcuts and set specific goals. Then you ensure they are delivered. Evaluate, clarify and frame negotiations to keep competition alive. Document all discussions and carry out frequent self-assessment. Use a term sheet as this helps drive and track the discussion and allows apples to apples comparison. Over time the term sheet can evolve into a contract. Take good notes then transfer to the final document. Also any agreements made during the discussion is important to include. Do not leave anything out of the agreement that is important that was discussed and agreed elsewhere. If it is not in the final agreement it does not count.

Partnership rhetoric will appear at some time in the discussions especially from the vendor side. Unfortunately, partnership usually means passing all the risks to the vendor or closing off competition from the vendor side. However, partnership can be invoked to get over tricky points and put them off later stages in the negotiation. When they can be fixed as you will have more information. However, some things should never be put off until after the contract is signed. Partnership should be based on performance and strict business principles never waffle.

Never ever let issues that should be solved at negotiation drift into ‘we will solve this later’ discussions. They never are and these can be a source of major conflict later. An old saw from the collective bargaining days is very apposite here. ‘It is better for the negotiation to break down rather than the agreement’. All-important details must be cleared before signing a contract. Never sign until they are or you are courting disaster.

6.0 A good communication process

Manage the up and down communication channels carefully. Make sure no senior management speak to vendors and control vendor access to senior management strictly. You will have to brief senior management about the risks of this issue. In best practice the rules of engagement will state that suppliers who circumvent the process automatically disqualify themselves. Vendors and consultants are good at getting around the formal process to influence senior management. This can short-cut the tender process. We all know of ‘golf course’ deals that cut through a bid process and enable vendors to return to the bid team informing them they ‘know’ the requirements of senior management.

Keep talking to vendors and meet frequently to discuss their proposals. The more open and interactive the discussions the better the eventual outcome. Ask for alternative proposals reordering or cherry pick ideas from several contenders to shape the deal you want.

Keep your people up to speed

Communicate internally and keep your own people up to speed at all times. Don’t imagine for a minute that you can hold discussions in secret and keep an outsource negotiation under wraps. Getting staff on board at an early time will generally increase the chances of outsourcing success. When there is a transfer of staff vendor cultural fit is a key criteria for the whole process so early communication must take place.

Last but not least when the deal is done you do the deal. As soon as you can start the agreement. I have been in a contract where the start-up was delayed by two years and this is was disaster for all concerned.

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