Strategic Sourcing  Not Just Procurement Anymore

Five steps to help your company decide whether or not outsourcing is the right move

Five steps to help your company decide whether or not outsourcing is the right move

Procurement organizations, traditionally chartered with volume purchasing, are increasingly being asked to develop sourcing strategies. In the information technology (IT) realm, the number of players and their varying degrees of expertise complicate the strategy. Even masters of the competitive procurement process are challenged by the simple question, Should I outsource?

Why is it so hard to figure out? Because the number of variables that need to be addressed increase exponentially when a company transitions from buying a product or a commoditized service to a full-fledged managed offering. The roles and responsibilities between consumer and supplier change because the company is no longer the buffer between its suppliers and internal business consumers. The suppliers necessarily develop direct relationships with the suppliers — for better or worse. In addition to the standard evaluation criteria of price, technology and management, business risk is now added.

This risk can be mitigated through thorough due diligence and careful management. Even before talking to providers, it is imperative that a company should do some homework about what it has and what it needs.

Step 1: Define Services

The first step in determining whether to outsource is determining what services your company is looking to outsource — not just in name but using full-service descriptions that include expected service level agreements (SLAs). Keep the following in mind when creating services:

  • Using common service definitions
    * Business requirements
    * Functional requirements
    * Technical requirements

  • Separating commodity and highly customized services

  • Quantifying the cost of service delivery today

  • Highlighting opportunities for complimentary services

The goal is to ensure that the defined services fully support the company's requirements for scalability, reliability, security and performance. To accomplish this, it is possible that a company needs to review and synthesize internal service and cost information.

Once there is a solid description of the service under consideration, determine how well the current organization provides those services and what it would cost a third party to provide the same services. One of the biggest pitfalls of outsourcing return on investment analyses is that they compare similar services at different service levels; two areas that are often overlooked but have notable financial impact are the differences in response and repair times.

Once this Step has been concluded, it is possible to move on to Step 2 with that information in hand.

Step 2: Feasibility of Outsourcing

Before moving on to procurement, determine who the potential players are, their strengths and weaknesses, and their likely ability to meet the requirements that were crystallized in Step 1.

Many organizations jump straight into a request for proposal (RFP) without assessing whether or not it is the vehicle that best meets the company's objectives. The table below is designed to guide a company as it determines whether it needs a request for information (RFI), RFP or request for quotation (RFQ). Choosing the right vehicle drastically reduces the time required to get to the final answer. Once it has been determined what request will best provide the company with the information for which it has been looking, it is time to move on to Step 3.

Step 3: Writing the Request for X (RFX)

In this step, the following tasks need to be performed: Having already spent time defining the services and required service levels, focus on getting the information necessary to equitably compare providers — not just get information from them.

  • Create a detailed RFX, incorporating the key evaluation criteria, requirements and SLAs. There should be separate sections for:
    * Instructions
    * Company information
    * Service requirements
    * Pricing
    * References
    * A contract for services (not generic boilerplate, but one that has been customized for the services needed)

  • Create a balanced scorecard for the efficient analysis and assessment of the RFX responses. Spreadsheets work well for this and allow each response to be scored against the key evaluation criteria. Compute the score.

  • Create a pricing response booklet that clearly lays out what your company will have to have pay for the totality of the services. Vendors need to make sure that all costs are included in the pricing workbooks.

Now it is time to issue the RFX. Remember, when deciding on how much time to give vendors to respond, be reasonable — not generous. Also, be sure to remain the key driver in the process: If your company feels uncomfortable providing additional information or meeting with vendors before receiving their proposals, don't do it.

Step 4: Analyzing RFX Responses

Objective: Provide direct vendor-to-vendor/solution-to-solution comparisons for each of the respondent's proposals.

Evaluation scorecards will guide this Step of the process. There are two sets of evaluations that should be completed: price, and everything else. The pricing analysis should be a comparison of the pricing workbooks that were included as part of the RFX. The balanced scorecard should cover everything else. Some of the evaluation headlines should include:

  • Financial viability over the long term

  • Merit of technical solution

  • Costs and unit pricing

  • Future technical and services roadmap

  • Experience providing the services required

  • Customer reference interviews

  • Compliance against the evaluation criteria established in Step 3.

During the analysis phase, ensure that the proposals are clear and that each vendor complies with the requirements of the RFX. Where responses are missing information or require verification, reach back out to the vendor(s) in question to fill in the blanks.

Note: When evaluating the RFX responses, don't forget to include the current internal solution as an option. The evaluation may indicate that the best solution doesn't involve any outsourcing at all.

Upon conclusion of this step you will have an analysis document that provides complete vendor/solution comparisons so that recommendations can be developed for the leading vendor(s) and can be used for the implementation of a solution.

Step 5: Negotiate Contracts

If the analysis concludes in a recommendation to outsource, start from the contract that the vendor submitted. This will reduce the amount of time it takes to successfully come to agreement on key legal and business terms and conditions. Areas of focus during this step should include:

  • Draft a framework for further defining comprehensive service level agreements and ensuring that the SLA metrics outlined in the RFX are completely understood and agreed to by the vendor, as well as represented in the contract(s).

  • Merit of technical solution

  • Ensure that all requirements outlined in both the RFX and accepted by the vendor in the response are captured within the contract terms.

  • Set vendor expectations with respect to contract term, periodic rate reviews, early termination provisions and discontinuance without cause clauses.

  • Build in key stakeholder-specific requirements (e.g., billing formats, account management, SLA reporting as well as any others).

  • Work with legal and procurement teams to conclude an agreement for the specified services.

Upon conclusion of this step of the process, you should have a signature-ready contract, allowing your company to move forward with the solution.

Answering the question, Should I outsource? may not have an immediately obvious answer, but when you follow the five steps outlined above, it will allow you to make a fact-based strategic decision.

About the Author: Shally Bansal Stanley is the managing director at Acumen Solutions, a management and technology consulting firm based in Vienna, Va.