The five steps to managing a successful outsourcing contract #outsourcing #contract-management
By: Royston Morgan
Tags: Outsourcing, Sourcing, Management

Introduction

The jury is still out as to whether outsourcing can deliver measurable business improvement and better-cost performance. Many outsource deals fail to live up to the grand promises made in the press releases and back sourcing or early closure of deals is becoming an increasing trend. Having said this there are key principles that if followed can greatly increase the chances of success of the whole process.

1.0 Scope the demand

There must be clear scoping of the demand and what is being put to the market. This needs to be on the basis of knowledge of what and how the service is being carried out now and how much is being paid for it. Outsourcing on the basis of lack of understanding or frustration is the poorest reason and almost certainly will lead to poor decisions and no benefit. It is best practice to fully assess the current service as provided even to the extent of allowing the internal organisation to prepare an ‘internal’ bid for the service. 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 the profit to be made by the outsource vendor should you go to market without assessing the current cost structure.

2.0 Clarify the objectives

Within the objectives for the outsourcing there must be consistency and reasonableness of demands — cost reduction, as a key aim coupled with a demand to increase service may be inconsistent. Sign off and 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 that cost reduction or technology refresh are key objectives the response can be tailored to precise needs. We should be aware that objectives can change over time and the original case for an outsource can be undermined by events. Revisiting the rationale 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 rationale 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 this for years and when this is done will move onto the next. The customer side on the other hand may have not done this before or the team carrying out the supplier proposal evaluation may be completely new compared to the last time 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.

A point that is often missed is to plan the capacities of the customer team that will be creating then managing the outsource process. In a large bid the job is full-time and often key members of the customer bid team will also have a day job to contend with — don’t forget this (or holidays etc.) 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 time schedules.

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 general response and can be used as a test for possible solutions and to pre-select candidates for the bid. Usually there is no bid price given by the suppliers — nor should we 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 hundreds and even millions of pounds therefore before starting the whole circus make sure that you intend to place the business. Ensure you are being realistic and take care that the quality and clarity in the RFP promotes conformance in the proposals received to ensure comparability. I always favour a clear template approach that forces answers in a clear structured way and allow/force suppliers to put all the waffle in the attached appendices.

4.0 Set up a competitive bidding process

You need to decide on sole source versus competitive sourcing towards the market. Sole sourcing is usually suggested (by the vendor) if there is a history between the companies and there is a time constraint — but there are significant downsides. Loss of leverage, not being able to compare alternatives, less aggressive pricing, and a sole source could have other 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 a true competition. It is my view that a competitive bid process has a better chance of realising cost savings, suppliers can come with more innovative proposals that the in-house supplier — although a well managed internal bid can address this problem. The process can actually be quicker as the client can drive the competitive process — by a strict time based approach to the process for example. But on the other side competitive bidding is more resource intensive, for the supplier as well as the client and this has to be planned for. Be careful about inviting a supplier to the party just to act as a market testing benchmark when the intention is really 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, this is business, 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 — avoid laying down all sorts of preconditions about how the service is to be delivered — that’s the suppliers job in the proposal. I have seen in several RFP’ s detailed specifications of what packages to use and how precisely the service is to be delivered — effectively closing off all innovative solutions that may have been available from the vendor.

An important part is carrying out a well-managed and transparent process

In negotiation avoid short-cuts and set specific goals — and ensure they are delivered. Evaluate, clarify and frame negotiations to keep competition alive. Document all discussions and carry out frequent self-assessment and use a term sheet, this helps drive and track the discussion and allows apples to apples comparison — over time the term sheet can evolve into a contract. Good note taking then transference to the final document of the substantive requirement and agreements made during the discussion is important. Do not leave anything out of the agreement that important to you that was discussed and agreed elsewhere — if it is not in the agreement it does not count.

Partnership rhetoric will appear at some time in the discussions especially from the vendor side. Unfortunately partnership usually means giving all the risks to the vendor from the customer side or closing off competition from the vendor side (sole sourcing). On the positive side partnership can be invoked to get over tricky points and put them off until later stages in the negotiation — however as we point out with clients some things should never be put off until after the contract is signed. Partnership should be based on performance and strict business principles not 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.

5.0 Set up a well executed 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 contracting the rules of engagement will state that suppliers who circumvent the process automatically disqualify themselves. Some vendors are good at getting around the formal process to the senior management and exploiting this to short-circuit the tender process. We all know of ‘golf course’ deals that cut through a bid process and enable vendors to return to the customer team informing them they ‘know’ the requirements of senior management. Keep talking to vendors and meet frequently to discuss the proposals — the more open and interactive the better the eventual outcome. Ask for alternative proposals reordering or cherry pick ideas from several contenders to shape the deal you want.

Communicate internally at an early stage and keep your own people up to speed at all times. Don’t imagine for a minute that you can hold discussions in camera and keep an outsource negotiation secret. We cover this aspect in more detail elsewhere but bring staff on board at an early time can generally increase chances of success. Indeed the staff to vendor fit is a key success criteria for the whole business success of the process so informing must take place as early as practicable. Last but not least when the deal is done do the deal — as quickly as possible begin to execute the agreement. We have heard of examples where the transference can take many years to actually take place and this is a disaster for all concerned. In one recent experience of mine the time lag from acceptance of the bid to actual project start was two years and by then so much had moved on the original requirements were invalid and we had to effectively renegotiate.

Dr Royston Morgan