Selecting an Outsourcing Provider—Art or Science?
Many companies base their outsourcing provider selection on only one aspect of the outsourcing relationship. Some decide on a perception of cultural fit and on the rapport and relationship developed during the sales cycle between the company's senior management and the outsource provider's sales representative and executive team. A number of companies drive their selection process via a checklist-driven, skill-matching process that attempts to find and select the best fit, while other companies select their provider based solely or primarily on price. With many different aspects to consider, how can a company ensure they have made the right choice in selecting an outsourcing provider?
- Defining the Problem
- Where to Begin
- Key Success Factors
- Selection Process
Defining the Problem
As there are many different categories of outsourcing services (see Outsourcing 101 A Primer), there are also many outsourcing providers. Some providers only provide a single outsourcing service, while others provide many services, of which outsourcing is just one offering. For example, a US-based, consulting firm might provide IT consulting services in the US and Europe, on-site data center or IT infrastructure outsourcing in the US, and application software outsourcing from India or South Africa. On the other hand, an Indian-based application software outsourcing provider might also offer technical call center services and on-site consulting services in the US and Europe.
Today, there are literally thousands of outsourcing providers scattered around the globe looking to serve companies everywhere, with a primary focus on the US and European markets. The multitude of different outsourcing providers, each with their own message or business proposition makes the selection process very confusing and somewhat overwhelming. Many companies, especially small to midsize companies, do not have any experience with outsourcing. They typically have few or no available resources to research the market and have a lot to lose from a failed outsourcing effort. On the other hand, a successful outsourcing relationship can yield tremendous benefits, significant cost savings, and allow the company to spend more of its energy focusing on its core competencies.
Where to Begin: Creating the Outsourcing Vision
As with any major effort, it is best to begin with the end in mind. A company should have a clear vision of where it wants to end up in its outsourcing or offshoring effort. If the company doesn't know what results it wants to achieve, it risks being pulled in a specific direction for the wrong reasons—be it price, relationship, or technology. In many cases, both the company and the prospective outsourcer are only looking at cost as the primary decision criteria. Although this might seem like an obvious and mutually beneficial path, it is not necessarily the best path, especially if the selected provider can't deliver the needed service, or worse, goes out of business.
How should a company get started? Research the web, read books, and hire a consultant. This is a place where investing in professional help from a consultant can be a very wise and cost effective decision. To help create this outsourcing/offshoring vision, a consultant can help a company answer many questions such as
How does outsourcing relate to your business objectives?
What is your core competence?
What activities are not core to your business?
What is your outsourcing strategy?
Do you envision outsourcing or offshoring? Or both?
Will you use an outsourcing provider? Or setup your own captive facility?
From an outsourcing perspective, what is your anticipated future state in 3 to 5 years?
What is the mix of onshore to offshore in the future?
What tasks are performed onshore versus offshore? Application software? Call center support? Back-office activities such as accounts payable or payroll?
Will you select a single vendor (i.e., a suite provider)?
Will you select multiple vendors (i.e., best of breed)?
The essence or result of the answers to these questions is that the company begins to define its overall outsourcing and offshoring vision and strategy.
Key Success Factors: Tactical Planning and Preparation
After crafting the vision, but before actually embarking upon a selection process, a company should develop its tactical plan for moving forward. Planning and preparation are critical to the overall success of an outsourcing selection process. Companies should go through the following steps as they prepare for the selection process:
- Conduct an organization readiness assessment
- Decide what specifically should be outsourced
- Decide what is needed from the relationship
- Decide what is wanted from the outsourcing provider
1. Conduct an organization readiness assessment
The goal is to assess the company's readiness for change and determine the organizational gaps that need to be closed to ensure a successful transition to the new arrangement. The assessment, which is a major input to determine the profile of the ideal outsourcing partner, should evaluate people, process, technology, and risk:
- People—What skills exist today and what skills are lacking? When will next generation skills be required? Does the company have strong middle management and project management resources? How effective is project management? What is the company's culture as it relates to using third parties for support? Does the company tend to build everything on its own, or does it purchase everything it needs from vendors?
- Process—How good are the current processes? Are they ad hoc or are they repeatable? Does everyone adhere to the processes? Can they be replicated in an offshore environment, or will new processes need to be developed? What about metrics? Do they exist? Are they comprehensive? Can they serve as the basis for the service level agreements (SLA)?
- Technology—Is the company a technology follower or leader? What specific technology skills are required? What new skills are needed?
- Risk profile—What is management's appetite for risk? Are they looking for steady, guaranteed, predictable results, or do they want to stretch and try new methods and processes? Are they willing to trade off significant cost savings in exchange for increased possibilities of pain? How adaptable is the company's management? The risk profile is directly impacted by the answers to the people, process, and technology questions.
2. Decide what specifically should be outsourced
Many companies only outsource a portion of their non-core functions or only part of their software development or information technology (IT) infrastructure. A company may decide to outsource accounting functions first, human resources functions second, and IT functions third. Alternatively, they may elect to start in a pilot mode by outsourcing portions from each of the above three areas at the same time and then expand into more complete outsourcing a year or two down the road. It quickly becomes obvious that companies need to decide which functions and what portion of the function they wish to outsource. By way of example, companies who only wish to outsource a portion of their application software have the following common choices:
- Legacy application maintenance—the easiest and most common choice for initial phase
- New application development— the least risk choice
- Reengineer a legacy application and migrate it to a new technology platform—a common choice so that the application can be moved onto the web
- Port an existing application to a new database or platform—a common choice among software companies
3. Decide what is needed from the relationship
This is an iterative effort. Crafting the future state for technology, for example, will impact the process and people components. As the company refines the type of outsourcing relationship that it desires, it will better understand the skills, capabilities, and strengths that it is looking for from its outsourcing provider.
Companies should determine whether they are looking to outsource a specific one-time project such as the development of a new software application or the creation of a new marketing campaign, or whether they are looking for a long-term partnership intended to accomplish multiple tasks or projects. In other words, do they want to do complete outsourcing or shared-sourcing? Unless the company is outsourcing everything in a particular department or process (such as payroll), the company will have to determine the mix of skills and work-assignments that will reside with the company versus the skills and work-assignments that will reside with the outsourcing provider. In the software application arena, it is common to see the company maintain the business analyst and technical architecture roles while the outsourcer provides the programmers, quality assurance, and documentation roles. Other considerations or choices to be made include whether to
- Obtain flexible capacity versus full-time supplementation or extension of the existing team
- Transfer existing employees to the outsourcer versus new employees provided by the outsourcer
- Obtain legacy skills versus new technology skills
- Obtain mainline or core skills and tasks versus unique or seldom-required skills and tasks
4. Decide what is wanted from the outsourcing provider
Companies need to decide what is important to them. Is the company absolutely driven by the lowest cost? Or by the least risk? Or by the highest quality? What are the relative weightings of the importance of each of these factors as it relates to the selection criteria? If the company is selecting an outsourcing partner or setting up a captive facility in an offshore location, what region or country is the most desirable? Why is that region desirable? The company should not only look at price but it should also look at criteria areas such as employee education, employee attrition, language capability, and technical skills. The company should decide what size provider it is looking for, which is part of the risk profile. Should the company select a large, global provider and risk being a "small fish in a big pond", or focus on smaller providers where the company can have a more influential partnership, but in the long-term, vendor viability risks may be somewhat higher? The company needs to decide whether it wants to go with a best-of-breed approach, or select providers who offer a suite of services.
Finally, companies must decide which outsourcing model they wish to engage. There are several ways that a company can utilize an outsourcing provider to supplement or support them. Among them are the following alternatives:
- Specific Project Model
- Supplemental Model
- Onsite Model
- Offsite Model
See The Many Flavors of Application Software Outsourcing for a detailed explanation of these models. All of the above factors need to be considered and addressed before preparing and issuing an RFP to outsourcing providers.
After a company has determined its outsourcing strategy, developed its tactical plan, selected one or more business functions to outsource, and determined what type of outsourcing provider it wishes to engage, it is time to begin the selection process.
Companies familiar with TEC's software evaluation centers may want to use TEC's Outsourcing Evaluation Center (www.outsourcingevaluation.com) to assist with this part of the process. As mentioned above, it is also a good idea to hire an experienced outsourcing consultant, as most companies will need help from someone who has "been there, done that".
The following RFP process is a proven and successful path that many companies have followed:
- Develop a list of selection criteria (based on the completed tactical plan)
- Rank the primary criteria based on importance
- Create a list of 10 to 12 outsourcing providers
- Research the vendors, and determine their capabilities
- Map provider capabilities against the selection criteria
- Narrow list to 4 to 6 providers
- Develop the request for proposal (RFP) and statement of work (SOW)
- Issue RFP and SOW to the list of 4 to 6 vendors
- Evaluate RFP responses, and rank vendors
- Perform initial due diligence and reference checks, and update rankings
- Invite 2 to 3 finalists to conduct on-site proposal presentations
- Perform additional due diligence, as needed
- Select outsourcing provider
- Negotiate terms and finalize contract
Assuming the company has gone through the vision and tactical planning stages in a quality manner, any of the 4 to 6 providers on their shortlist should be a good choice. As a result, their probability of success is significantly increased.
- Companies need to begin by creating their vision for outsourcing as the step that drives all of the tactical decisions that follow.
- Before evaluating outsourcing providers, companies should first evaluate themselves to determine their readiness, and decide what they want to outsource, and how they want to approach the many outsourcing alternatives.
- Companies should determine which type of outsourcing model they wish to implement and what is needed from their outsourcing relationship.
- Companies should follow a structured process and make sure to look at all angles of the selection process including people, technology, process, domain knowledge, industry knowledge, culture, client satisfaction, and price.
- Before creating the initial list of providers, companies should decide whether they want to be a "small fish in a big pond or a big fish in a small pond".
- Companies should take into account the market strategy of a provider to determine if the provider is a suite provider or a best-of-breed provider and to determine how the provider's strategy fits with the company's outsourcing strategy.
- A company should not embark upon a structured RFP selection process until after it has completed all of the above recommendations.
About the Author
A.B. Maynard has over twenty years of technology, industry, management consulting, and application software experience. He is an experienced executive with leadership experience in the software industry, Big 4 Consulting and Fortune 1000 industrial companies where he gained extensive experience in outsourcing, IT Services, enterprise software solutions and performance metrics.
A.B. has recently led projects to select offshore outsourcing providers, negotiate outsourcing contracts, transition to outsourcing relationships, establish and run program management offices, define, and implement metrics, and drive continuous improvement. A.B. has also developed marketing programs and go-to-market strategies for consulting and outsourcing providers.
A.B. serves as the outsourcing specialist for Technology Evaluation Centers, and is president of Agilocity Consulting, a firm dedicated to helping companies improve their performance and profitability through the intelligent use of technology, outsourcing, and offshoring.
A.B. has an MBA from Villanova University, and a Bachelor of Industrial Engineering from Georgia Tech. He can be reached at email@example.com.