Usual reasons why sole sourcing takes place

Once outsourcing has been accepted as a serious method of improving performance, the client’s management team must work out how best to investigate this option and they must do so in circumstances requiring a high level of security. In all probability they will deem it an essential first step to talk to at least one trustworthy individual who can shed some light on the subject.

The auditor’s involvement

Quite naturally, many organizations have approached the contact partner at their auditors to fill this role. Apart from knowing the client’s business very well, an audit partner may be working for a firm that is a potential service provider or supplies outsourcing consultancy advice. If the auditing firm does provide either of these services, the client may hope that they can gain access to valuable information without divulging their identity.

In making this assumption, client management will have reasoned that the partner concerned will not want to lose the audit and will therefore not risk directly involving any other part of the firm until the client gives permission to do so. In addition, knowledge that the auditing firm cannot be both auditor and service provider for the finance function may have convinced some managers that an approach to the audit partner will be totally risk free.

Whatever the logic behind the approach, a significant number of outsourcing arrangements for both IT and finance have started with the introduction of the audit partner, and some of them have become sole sourcing deals with other parts of the partner’s firm. There is no suggestion of wrongdoing here. Few audit partners will want to lose an important audit, but once a partner has exhausted his or her pot of knowledge, it is natural for that partner to point out that experts exist in other parts of the firm. A meeting of interested parties is arranged, after which, events take their natural course.

From the major accountancy-based firms’ point of view, the potential rewards from being an outsourcing service provider are massive for both IT and finance when compared to what can be obtained from auditing. For that reason, many of these firms have already taken a decision at the highest level to give up the audit if necessary, if an outsourcing opportunity should arise.

An organization that begins sole sourcing discussions with its audit firm prior to talking to anyone else can put itself at a disadvantage, even where the finance function is not a candidate for initial outsourcing. The potential client must accept that it will be difficult for any other bidders to be equally briefed without going to a great deal of effort and without passing out even more sensitive information than would otherwise be necessary. The client may be prepared to do this, or may decide that it does not matter if the audit firm does have more information than the other potential service providers. Unfortunately and for obvious reasons, the other service providers will see themselves at a considerable disadvantage in this arrangement.

Approaching just one service provider

Many organizations contemplating outsourcing a major function take ’the bull by the horns’ and as a first step, contact what they take to be the most likely service provider. Naturally, they explain that, as yet, outsourcing is just one of many options and in order to take the matter further they would like to know what information the provider needs in order to put a price on meeting a specified service level. The provider reacts by stating that it would need to understand not only the transaction details but also how the various processes fit into the client’s overall strategy and the real level of service that is required for the medium and long term. The provider will argue, with every justification, that this is best done by a series of exploratory meetings with the senior and middle managers, during which time the detail necessary to make a bid will be extracted.

In many sole sourcing arrangements the client’s original idea behind talking to the service provider was to obtain the basic information necessary to produce a Request for Proposal (RFP). The provider’s insistence that it will be necessary to talk at length with the client’s middle management before any meaningful estimate of service and costs could be made, appears to have typically resulted in the following line of thought.

• We know our business is complex, therefore this service provider is correct, it will obviously need time studying transaction details and talking to our staff – we could not expect it or any other provider to make a bid based simply on an RFP.

• Ideally, we do not want to give sensitive information of this type to any outside organization, so we certainly must not give it to more than one.

• If we give the service provider the amount of detail necessary to make a sensible bid, how can we do it without also giving it a good idea of what the service currently costs?

• If we cannot disguise what the current service costs are, then that surely removes much of the reason for trying to create a competition.

• We want to delay upsetting the staff for as long as possible, why create a long period of unrest for nothing if we eventually decide not to outsource. We can, therefore, really only achieve our aim of pursuing the outsourcing option but not upsetting the staff by dealing with one provider on a very careful step-by-step basis.

Every organization contemplating outsourcing should accept that it starts from a disadvantageous position when compared to the service providers it will be negotiating with. Even if it has previous outsourcing experience available, it may not have outsourced the function in question before. Compared to that, the service provider will have a great deal of information on what constitutes best practice for that function.

A service provider that has been operating for a number of years may have worked with hundreds of clients carrying out the same function. Inevitably each new assignment adds to the collective wisdom of the provider. In addition, the top providers will seek out best practice information on a regular basis by way of benchmarking and other exercises. In this way they will almost always be able to find existing ’ evidence’ allowing them to make an indicative bid, based almost entirely on the potential client’s transaction information.

Not having the same level of best practice information means that the client organization will not be able to estimate the real value of a bid made on a sole sourcing basis. If such a bid offers the client a 20 per cent saving, it may disguise the fact that the provider is able to provide the service at less than half the client’s current cost and is making a substantial profit. In a competitive situation, a serious bidder could not be certain of the level of other bids and consequently would be inclined to keep the price as low as possible. It is likely, therefore, that the client would have obtained significantly greater savings from a competitive situation.

Organizations start from a similarly disadvantaged position in all commercial dealings with specialist suppliers, but overcome this situation by creating competition for the work to be carried out. The problem with outsourcing is that it appears to be very difficult to create the necessary competition without risking staff disruption and giving too many people sensitive information.