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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

Before writing your Request for Proposal (RFP), you should prepare a list of possible outsourcing providers. The list need not include the entire universe of companies providing the service, but should be a compilation of those companies that appear to have the greatest synergy with your organization.

The Request for Proposal

Taking care to be clear and specific when drawing up the RFP will make the selection process smoother and more efficient. It can also help control costs associated with the outsourcing initiative.

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:
  1. Response Requirements: to whom, how, and when the response is required.
  2. General Background Information: a profile of your company; general statement of your reasons for seeking an outsourcing partner; procurement policies (if any).
  3. 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.
  4. Requirements of Selected Provider: specific duties required of the provider; deliverables required; anticipated outcome and performance standards.
  5. 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.
  6. General and Specific Contractual Conditions: often the RFP will provide a draft contract and ask the candidate to respond to the various points included.
  7. Evaluation and Award Process: time-frame, procedures and criteria for evaluating the proposals and for making the contract award.

Finding the Right Outsourcing Partner

A large part of the success of an outsourcing initiative lies in choosing the right outsourcing provider.

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

In evaluating the financial ramifications of outsourcing a business process, organizations often employ a simple Straight Dollar methodology, comparing the bids of each outsourcing provider, then comparing the winning bid to the straight costs of performing the process internally.

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

You will improve the chances of selecting the right outsourcing partner for your firm if you avoid the following:
  • 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.

Phase 3: Designing the Outsourcing Contract and Other Documents