Managing an Outsourcing Initiative-2
Originally published: January 2011
Phase 2 – Analysis and Selection of the Outsourcing Vendor
This is the second in a series of articles outlining a multi-step approach to achieving a successful outsourcing implementation. “Managing an Outsourcing Initiative – Phase 1” appeared in the December 2010 issue of the Credit-to-Cash Advisor.
Phase 2 of managing an outsourcing initiative involves preparing and delivering a request for proposal (RFP), and selecting and evaluating potential vendors.
Selecting Potential Outsourcing Partners
The Request for Proposal
The RFP should provide a complete picture of every aspect of the business function to be outsourced. Vagueness only results in providers submitting proposals based on assumptions about deliverables rather than specifics. This not only complicates and prolongs the proposal selection process, it could result in increased costs over the life of the outsourcing agreement.
A well-written RFP contains seven basic elements:
- Response Requirements: to whom, how, and when the response is required.
- General Background Information: a profile of your company; general statement of your reasons for seeking an outsourcing partner; procurement policies (if any).
- Scope of Project: details that will help the potential partner provide a proposal and fee quotation, including the size and length of the project; specific deliverables required, anticipated results; technical and pricing requirements; sample Agreement.
- Requirements of Selected Provider: specific duties required of the provider; deliverables required; anticipated outcome and performance standards.
- Requirements for Proposal Contents: most RFPs include an outline of the sections required in the proposal and/or the actual questions to be answered. The more specific you make this section, the easier it will be for each candidate to respond with information important to you. And, the more specific your requirements, the easier it will be for you to compare the candidates.
- General and Specific Contractual Conditions: often the RFP will provide a draft contract and ask the candidate to respond to the various points included.
- Evaluation and Award Process: time-frame, procedures and criteria for evaluating the proposals and for making the contract award.
Finding the Right Outsourcing Partner
In the ideal relationship, both the organization and outsourcing provider share a similar vision and contribute equally to the success of the project. The right partner can help the outsourcer define realistic expectations and articulate the benefits of moving the process outside.
Finding an outsourcing partner that can share your vision and merge seamlessly into your organization’s culture requires significant, up-front effort. Your RFP process should include meetings with your short-list of providers in order to achieve a complete understanding of the scope of the project, and to fully discuss the specifics the processes and procedures.
During this portion of the selection process, tough questions need to be asked:
- Is there strategic synergy between the two organizations? Can you work together to achieve a high level of benefits for both firms?
- Is there good “chemistry” between your organization and the provider? Are your corporate cultures compatible?
- Is there clarity of purpose? Are the goals and benefits explicit and clear?
- Does the relationship reduce the level of risk for your organization? Is the vendor financially viable?
- Does each party benefit fairly from the relationship? Is this a “win-win” situation?
- Does the outsourcing provider have in place a management team capable of delivering best in class services?
- Does the outsourcing provider have the technology environment needed to support world-class service? Is there a strategy in place for maintaining state-of-the-art technology and the updated skills to operate it?
- Can the outsourcing provider leverage industry experience to devise improved solutions?
Determining the Financial Benefits of Outsourcing
This method fails to consider the true impact of outsourcing. Instead, more sophisticated methods of evaluation like the impact on cash flow, or on efficiency (Return on Equity and Return on Assets) and value creation (Total Business Return and Economic Value) will provide a complete picture of the potential benefits the provider and/or the outsourcing strategy can bring.
Outsourcing Selection Risks
- Not including enough resources with the appropriate skill sets required to effectively manage the vendor selection process.
- Missing good candidates by not beginning the selection process with enough potential providers.
- Not involving a variety of perspectives in the selection process.
- Using a poorly developed RFP.
- Not performing business and financial due diligence on potential providers.