Selecting a Vendor for Job Outsourcing

Companies both large and small consider IT outsourcing for a variety of reasons. The decisions to outsource range from simple resource constraints to complex issues of competency in legacy development areas like COBOL, Assembler or PL/1. In a rapidly changing world the choice to outsource is often anchored by cost. An outsource vendor may be selected because the company wishes to reduce investment spend while maintaining an ability to keep pace with new technology trends. Whatever the driver, companies spend a great deal of time determining the criteria for their outsourcing strategy. Understanding their own internal topography and making grounded assessments of the firm’s ability and desire to perform the function in-house is the first critical and necessary step. The most common internal assessments fall along four dimensions: criticality of systems, cost to support systems, system structure/health and skills. Once the decision to outsource has been made the task of finding a suitable vendor to perform the function begins.

Outsourcing any facet of a business including IT operations and services is a critical decision. There are literally thousands of outsourcing organizations ready and willing to take money: the objective is to find a partner that best aligns with the company’s strategy. The relationship that is formed must be mutually agreeable and beneficial to each firm involved. Approaching outsourcing with a design of masters and servants is precisely the thing an organization should avoid. To ensure success it is important to form a sourcing team to evaluate potential partners and determine what role each of the partners play.

The decisions that the sourcing team faces are highly contextual and require a broad understanding of business characteristics. Examinations do not end with an evaluation of the outsourcer’s technology capability. Considerations, at a minimum, must be given to: the strategic fit of the vision and mission of the company in evaluation, the financial health of the firm in question, the client lists and satisfaction with the firm, the infrastructure safety soundness and governance at the firm and the proximity and engagement model of the firm. There are, in addition to the contextual issues, a myriad of specific management and technical considerations that the sourcing team will need to address. Almost 90% of outsourcing decisions are made on the basis of cost. Realistically, any decision to outsource must be made on the basis of doing it “better”, “faster” and “cheaper”. With some latitude, the vendor a firm selects should be able to support all three of those objectives. If the outsource decision fails to support even one of them then the decision to outsource should be strongly questioned. A vendor might do something cheaper, but not necessarily better. If degradation in quality is acceptable then this may be a reasonable tradeoff, but typically the decision to outsource should be made on the basis that the vendor can do it better, faster and cheaper. 

In order to make these assessments the sourcing team needs to follow a clear and logical process when searching for potential vendors. At a high level that process typically follows:

· Define the Target – What is it the firm wants to outsource? How much of the business process should be outsourced? How much control of the process does the firm want to retain? These are questions that help shape the scope of the outsource decision. Often firms make conscious decisions to outsource not only the development of an application but also the management and execution of the application once it is in-flight. Firms may even enter into full-service relationships where the vendor and the firm exchange physical resources as part of the outsourcing deal. This integration may be beneficial to firms that do not desire to retain managerial control of transactional processes. As an example a vendor like Pro-Business, a division of ADP, often takes on people from the firm as part of the contract. These payroll administrators who once worked for the firm are invaluable to managing the relationship and often stay on-site and coordinate activities for their previous employer on behalf of Pro Business. Three specific analyses need to be performed at this stage: cost-benefit, risk, and capital investment. At this point the ultimate question to be answered is, “What aspects of the process and how much managerial control need to be maintained in the outsourced environment?” · Write Requirements – Requirement writing ensures specific guard-rails are placed on the decisions a firm makes regarding outsource partners. Typically a lengthy document, this artifact outlines in detail the needs of the business, the scope of the effort in terms of time, money and resources, the risks, issues and assumptions of the decision and the minimum specification hurdles for the vendor. This document is a critical input to the decision making process and should reflect the business case for outsourcing as well as any outcomes from options analysis.

· Develop a Request for Proposal (RFP) – Flowing from the requirements document, the RFP is a solicitation document intended to broadly search for a suitable partner. The objective of the document is to outline the needs of the firm and request proposals for service delivery. The requirements in an RFP are spelled out clearly to avoid solicitations from firms that fall either too far above or below the minimum specifications of the firm. The RFP process can take up to several months and move through multiple rounds in order to ensure all parties bidding on the work are aligned to the objectives of the project.

· Evaluate RFP Submissions and Select a Vendor – At the conclusion of the RFP process, usually triggered by an RFP close date, the sourcing team assembles a short list of approved vendors and begins to perform due diligence exercises to refine the search. Due-diligence can take many forms but typically sourcing teams look at the safety and soundness of the vendor, security and asset protection, insurance, financial strength, integration complexity and flexibility of the vendor to meet current and future requirements. The sourcing team essentially horse-races competing vendors on those criteria that are deemed most critical to the sourcing objective. There are extensive tools and templates for performing due-diligence but no tool or template is a substitute for common sense. Once the vendor’s technical and managerial considerations have been assessed a decision to select the vendor can be made. Legal contracts, accounting standards, asset transfer rights, intellectual property agreements, indemnity papers and other related documents are then summarized in a term sheet and contract which begins the outsource relationship.

Job Outsourcing continued: "Writing the Contract"