Many clients pose costs and savings questions to me when they have decided to embark on a large-scale outsourcing agreement:
Can we outsource our IT services this year and ensure we achieve our savings targets for the last quarter?
Lets' talk a little about the realities of outsourcing.
A full-scope sourcing transaction, with its technical complexities and decision-making is challenging and time-consuming to negotiate. It is unlikely you’ll be able to complete a contract negotiations, a full transition and achieve cost savings in the same year -- especially if you are just now starting to think about it. You might be able to source some components in a short time frame, such as Help Desk and Desktop, or your ERP system. But even if you complete a sourcing agreement in a single calendar year, the savings are unlikely to show up until the second year, and then, only if you manage the arrangement properly.
Speed Sourcing – also known as Fast Track, Sourcing Lite, and various other monikers – is the latest talk in sourcing circles. In an attempt to address the downturn in the sourcing advisory business, consultancies have been attempting to find ways to "stay in the game". As advertised, it is a way to go from identifying service providers to contract in three to four months.
A colleague confided in me recently that he believed the reason his former employer (a successful 20-year company) was no longer in business, was due to a critical misstep on a single major transaction. The team became enamored with doing a major deal with a very large and well-known company. It was the "deal of a lifetime" for the team. In their rush to get the business signed, the sales team overlooked some critical warning signs:
1) The client couldn't clearly define their requirements or their business objectives up front.
2) The service provider team members weren't allowed to ask questions or voice concerns because it would "slow the process down".
3) Service Provider hubris did not allow them to admit that they couldn't deliver what the client was requesting.
Picking the Right Service Provider -- Art or Science?
Provider selection is perhaps the most important decision to be made in the course of a services outsourcing initiative, and also one of the most difficult. And there usually isn’t just one service provider that can deliver your services. There are usually several or perhaps dozens of highly qualified firms that can meet your needs, and your job is to identify the one with which you want to do business.
In these difficult economic times, clients are finding that there is tremendous competition for every sourcing opportunity they identify. With dozens of companies vying for your business on even the smallest transaction, how do you pick the right service provider from the crowd?
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A few weeks ago, I listened as a client described a failed outsourcing project and the difficult situation they were in as a result. They had not defined their business needs and selection criteria carefully before determining which provider to negotiate with. Their selection was based upon personal relationships, past bad experiences, and some marketing hype. They ended up trying to strike a deal with a provider that not only could not meet their needs, but they didn't find that out until they were well into negotiations. They cancelled the transaction, which cost them hundreds of thousand of dollars in consulting and legal fees, and put themselves in a very precarious position operationally. I wish I could say that this situation is unusual, but unfortunately, I have seen it many times in my consulting career.
Determining selection criteria before deciding who you want to invite to the outsourcing negotiations table is not rocket science. In fact, it is such a seemingly mundane task, that most people just skip it.
Many people in outsourcing situations want to rush to the answer. Service Providers are anxious to know if they have won the deal, and the client is dying to know what the price will be. Plenty of other pressures encourage teams to rush through the early stages of the outsourcing transaction process. Sometimes, steps are skipped or compressed, sometimes decisions are deferred until “later” -- usually meaning “after the contract is signed”. This is certainly an easier and faster way to get through a transaction, and a tempting one. But like shortcutting the design and engineering of an automobile, you are likely to have lots of recalls, customer dissatisfaction, some accidents and bad press as a result.
Skimping on the initial processes of defining your objectives and requirements only pushes those activities out until the negotiations-- after you have received the pricing and eliminated the competition. When work that the internal team could have been done upfront is pushed into contract negotiations, expensive lawyers and consultants generally do a lot of the work. If you push the critical decisions and discussions until after the deal is signed, you are most likely looking at pricing increases, unmet service needs, and a serious disconnect between performance expectations and service delivery. Not doing an adequate job of understanding your strategy, and your current environment can set you up for buying the wrong set of services, too much or too little service, or choosing the wrong provider. And getting it wrong doesn't just result in headaches -- it can be a serious blow to the bottom line.
Here are a few things you should never omit when negotiating with a potential service provider:
In general, if you want to optimize a process and reduce the costs, there are several ways to do this:
• Eliminate unnecessary or redundant steps
• Automate as much of the work as possible
• Reduce the cost of the associated labor
In particular, these are the same options you have with the outsourcing process.
What kinds of steps can be compressed or eliminated from the outsourcing process?
A number of steps are critical to arriving at a valid sourcing arrangement. Eliminating critical steps or delaying them until after the deal is completed will dramatically increase the risks of the deal on both sides. If the risk is shifted to the provider, the costs will go up for the base charges. If the risks are shifted to the client, the service may suffer, and the “out-of-scope or retained” costs will go up.
Steps that are often suggested for deferment are due diligence, data validation, detailed requirements, and the details around service requirements and service metrics. If these steps are deferred during the transaction process, the up-front process is certainly a lot simpler and faster. The issue is that these steps are difficult to complete satisfactorily after the deal is done, and if they are, there will typically be adjustments to the pricing and the service delivery.
My company recently bid on a project to assist a client recover from an unsuccessful technology implementation -- they had spent millions of dollars on a third party system, including the fees paid to the integrator, software licenses and hardware purchases. The system was supposed to result in better efficiencies, reduced time to deliver and the ability to handle a great workload.
After the implementation, however, little changed in the organization and its processes. The users in the departments changed their work patterns only minimally. Most of the work continued to be manual -- they just added a few steps to interface with the system as necessary. In essence, the company had spent millions of dollars and the results were far from satisfactory: workload for the users had become more difficult and the promised savings and efficiencies had not materialized. That isn't what they had in mind when they installed the new state of the art system, but somehow the end users, the integrator and the IT department that hired them neglected to go about the difficult business of change management. But this article is not about a failure to do effective change management. It is about getting to the heart of what you really need to consider when selecting a service provider to do a critical project.
At a recent meeting of the Denver Association for Corporate Growth (ACG), we heard Sean Menke, CEO of Frontier Airlines talk about how the company dealt with the financial crisis that caused them to enter Chapter 11 and the path they took to emerge in October 2009 as the lowest cost, most profitable airline in the industry. The story was inspiring not just for the fact that they emerged as a healthy company, but because of the way they went about it. Communications, change management and employee involvement were the key success factors in this brilliant turnaround.
What does this have to do with outsourcing?
WillowTree is pleased to announce its new partnership with Interfacing Technologies, a BPM solutions provider. Following an evaluation of other leading BPM software, WillowTree selected Interfacing's Enterprise Process Center®(EPC) as the enabling technology for a client project in the Environmental Services industry. "We were very selective when we evaluated these tools because any software that we leave with a client creates a direct tie-back to our firm," explains Kathryn Douglass, Managing Partner at WillowTree. "We chose the EPC because, not only does it meet the client requirements, but we felt that it represents us well and will serve as a positive reminder of the engagement."
Some time ago, I listened to a client talk about a failed outsourcing project and describe the difficult situation they were in as a result. It seems that they had not defined their business needs and selection criteria carefully before determining which provider to negotiate with. Their selection was based upon personal relationships, past bad experiences, and marketing hype. They ended up trying to strike a deal with a provider that not only could not meet their needs, but who significantly raised the price during negotiations. They cancelled the transaction, which cost them hundreds of thousand of dollars in consulting and legal fees, and put themselves in a very precarious position operationally. I wish I could say that this situation is unusual, but unfortunately, I have seen it many times in my consulting career.
Building selection criteria before deciding who you want to invite to the outsourcing negotiations table is not rocket science. In fact, it is such a seemingly mundane task, that most people just skip it. The problem is that in a company where outsourcing is being considered, there are multiple forces at work -- people making decisions based on internal, unspoken criteria or old prejudices, or perhaps making recommendations that will scuttle the deal for personal reasons. So taking the time to identify your goals and business needs, and the objective criteria by which your team will make a decision, can help take the decision out of the realm of the emotional and into the realm of practical, business decisions.
Negotiations, some say, happen when you least expect it. We say negotiation is not an event, but a process. The negotiations process start the moment you engage with the Service Provider candidates. Each step of the outsourcing process brings a subtle, yet important aspect of negotiation into play.
To understand this better, let's relate it to something we understand a bit better.
You walk into a dealership and say “I want to buy a car” [The Pre-Bid Announcement]. The salesman says “what kind of car are you looking for?” [The Pre-Bid Conference]. At this point, if you have done your homework, you are fully capable of describing your requirements precisely, “I need an all-terrain vehicle that gets 30 miles to the gallon, seats 6 adults comfortably and has room for a two dogs, and a ski rack”. [The RFP]. You may even be able to identify the make and model you are seeking – “I want a Jeep Grand Cherokee Overland, with GPS, Sun/Sound option and leather seats [The RFQ]. You will quickly be shown the most expensive Jeep Grand Cherokee on the lot, and you will start discussing price from there.