If, despite the drawbacks involved in outsourcing, an organization still feels that it is the most appropriate course of action to follow, there are steps that can be taken in order to improve the chances of a successful outcome. The method described in the following pages is intended as an example of good practice which may help to cut down on the risks whilst maximizing the service level and savings to be obtained from an outsourcing arrangement. This step-by-step procedure is a development of one first published in 1996, in Outsourcing the Finance Function by J. Brian Heywood, Accountancy Books Group, Institute of Chartered Accountants for England and Wales.
An organization that ensures that it has all the relevant information before beginning discussions with service providers is likely to save in time and effort and gain in terms of credibility with those it wishes to deal with. When management consultants are brought in to advise on the outsourcing process, the wise client will find that there are fewer costs involved in assigning its own staff to gather the basic information rather than leaving it to the consultants to collect. The information should, therefore, be gathered before consultants get involved.
The information may be divided under a number of headings, as follows. It should be noted that only information which is strictly relevant to the initial discussions needs to be divulged to potential service providers at this stage. The RFP should not contain more information than is required for constructing a bid.
The first and second phases of the process, before the RFPs are sent out, are often not seen as particularly important by the potential client. However, if some thought is given to preparing the ground in advance with the service providers, the final arrangement is likely to be more satisfactory.
The first task is to decide on the providers to be approached. Ideas on finding the organizations are explained in the main body of the book.
If the client feels that it would not be in its best interests to disclose its identity in the short term, then outside facilitators will be needed to make this initial contact. However, in most cases, by dealing with the provider’s senior management and stressing the need for security, the client should find that it is afforded sufficient confidentiality.
It is important to make contact with the provider’s most senior people first to establish ownership. All other things being equal, a ’sales opportunity’ passed down by the CEO is more likely to remain of interest than one that is passed up the management chain. It will be obvious, at this point, that the information given to the providers must be couched in terms that make them keen to compete for the contract.
Another main aim is to establish the suitability of each provider, in order to narrow down the field of competition. Those chosen should represent a good match for the client’s culture, as well as having a thorough understanding of the functions to be outsourced, the technical ability to achieve the desired improvements and a healthy urge to win and perform the work on offer.
The client must therefore realize the importance of the first contact with the provider. In a nutshell, the provider’s initial aims will be to establish how likely the potential client is to eventually outsource; how valuable a client it will be and the degree of competition intended. For their part, the client’s representatives must try to establish the suitability of each provider on the basis of culture match, understanding of the functions to be outsourced, ability to bring about the improvements envisaged and how hungry it is likely to be for the work on offer.
This should illustrate the importance of making advance contact with the providers in order to ’warm them up’ ready to receive the RFP. The client should take pains to reassure each potential provider of the sincerity of its intentions to outsource, its value as a potential client and that the competition for the contract will be fair and open to no more alternative providers than is reasonable.
At this point, the providers will not yet have received the RFP but the client will nevertheless reap the rewards of the work carried out in Step 1. Although they will have been asked to wait for the RFP, the providers will usually have many questions to put to the client before receiving the RFP. Experience would suggest that these questions should be tolerated to some extent and every effort made to develop a warm relationship. A provider is far more likely to have confidence in a client who even during this pre-RFP period is able to answer the questions and back them up with figures. For tactical and competitive reasons, however, it is normally acceptable to give transaction details but not manning levels.
a provider is far more likely to have confidence in a client who even during this pre-RFP period is able to answer the questions and back them up with figures
The typical provider will naturally assume that the potential client who has all the information available ’at its fingertips’ has put substantial thought into the outsourcing process and is, therefore, likely to see it through. A provider who gains respect for the client at an early stage is likely to proceed happily, expecting that this helpful efficiency will continue during the pre-contract and transition periods.
It is never necessary to provide detailed figures to the providers at this stage, so most clients should have few qualms about answering their questions. For example, questions on the extent of the general ledger activities are best answered with annual figures for accounts, cost centres, inter-company transfers, entries and accruals, and the number of cost/profit centres and a description of the reporting process will normally suffice when information on reporting analysis is sought.
This pre-RFP period is not always afforded much thought by the potential client, but if it handles these initial approaches well, then it will have gone a long way towards achieving a good outsourcing arrangement.
It must be remembered that the competition induced by sending out RFPs is in the client’s interest but not necessarily in that of the provider. If the only difference between two prospective clients is that one is offering a sole sourcing arrangement and the other is seeking to pick a provider by means of competitive bids, any provider will choose the former.
Competing for outsourcing work is a costly business, in terms of both time and money. If a potential client is large enough, most providers will still choose to bid even if they do not rate their chances particularly highly. Over time, though, it is likely that the costs involved in bidding will drive providers to reconsider these tactics even when major potential clients are involved. It may be, for example, that competing is only cost effective if the success rate is at least one in three. In that eventuality, it may be decided that competing for any contract with more than one other provider will not make sense, as even if they win as often as the competitors do, on one in three occasions the outsourcing may not go ahead at all.
The ideal number of providers to whom the RFP should be sent is never likely to be more than three or four. By engaging in discussions with a range of available providers in the initial stages, it should prove possible to limit the field to a few suitable ones who are likely to respond to the RFP in the way the client wishes them to.
The RFP should contain a mixture of general and specific information so that the providers can make a bid without recourse to additional sources of information. Bearing in mind the danger of too much information being presented and the fact that an experienced service provider will in theory be able to make a reasonable indicative bid from the transaction details alone, the following has been known to suffice.
The RFP should begin with a brief description of the client organization, including its history, recent trading situation and current ownership. If there is any likelihood of acquisitions or sale of business units with any bearing on the functions to be outsourced, then that should be explained in this section. In addition, details should be given of the process to be followed before approval can be granted for outsourcing. One or two A4 pages should probably suffice for this information.
the RFP should begin with a brief description of the client organization, including its history, recent trading situation and current ownership
This should include a description of the functions to be outsourced, with any additional relevant information such as the age and effectiveness of the systems in use. It will also be worth explaining the triggers that lead to consideration being given to outsourcing in the first instance. From these, the client’s expectations of an outsourcing arrangement may be better understood.
Details should be given of any projects, current and planned, relating to the functions to be outsourced or which may have an indirect effect on these functions.
In some cases, clients ask potential providers to sign confidentiality statements before they receive the RFP. Others may include a confidentiality form with the RFP, with a request that it is completed and returned as soon as possible.
In order to ensure that time is not wasted while providers gather further information from the client, each process must be described accurately and in some detail, but not in so much detail that the provider is held up by the need to plough through unnecessary description. For basic processes, there is unlikely to be a need for more than one to three pages of explanation.
It will be necessary to determine a timetable for the completion of projects to be carried out in the transitional period. This should be fully described in the RFP, ensuring that there is no room for misunderstanding these timings, especially in the case of critical projects.
The outsourcing of a function such as finance or distribution may require new systems to be created by the service provider. Such systems are unlikely to be entirely stand-alone and may require the creation of new interfaces with the systems operating in other functions. The overall IT strategy of the client organization is therefore of great interest to the potential service provider even when a function other than IT is being outsourced.
the overall IT strategy of the client organization is therefore of great interest to the potential service provider even when a function other than IT is being outsourced
One to two pages will probably be required for a detailed description of the client’s overall IT strategy. There should also be some idea given of the progress made towards completion of any current projects, for example, where the client organization is in the process of moving to an ERP solution. If there are any factors in the current IT strategy and policies which may have the effect of setting limits on the actions the provider might wish to carry out in respect of other functions, then these should be explained in detail. A description should also be given of the prevailing standards, to which the provider will be expected to adhere.
It is worth bringing the critical success factors together under one separate heading, although they will probably be detailed elsewhere in the relevant parts of the RFP.
It is vitally important that the transfer of staff is handled properly and according to the relevant regulations. Each party must agree from the start on what share of the responsibility it will be taking. The client should set down its expectations as to when its responsibilities will end, preferably also giving details of its normal redundancy package. Ideally it should set a date, which may or may not be the end of the transition period, after which the provider will take responsibility for redundancies.
A separate heading in the RFP will be required if the client wishes to specify any essential conditions regarding the apportionment of costs during the transitional period.
The RFP should also include the following items.
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If the client will require the service provider to perform any major additional tasks, such as the creation of new systems, these should be described in the RFP in sufficient detail to allow the providers to be able to produce an indicative bid.
Different situations will require different ways of dealing with the question of when or if the providers should take over property or equipment and, at this stage, it may not be necessary to raise the issue.
The providers should be asked how they would deal with unforeseen but nevertheless common problems such as the mid-contract sale of either service provider or client and future acquisitions and divestitures by the client. Often both parties enter an agreement without this issue ever having been aired. Sometimes it is discussed but both parties agree to meet such problems if and when they happen. Experience would suggest that leaving this subject to chance is a mistake when an appropriate clause in the contract will at the minimum provide a framework in which to renegotiate the relevant parts of the arrangement.
The RFP could contain a template, to assist the service providers in composing a response to the RFP that meets the client’s expectations. Otherwise, the desired format and contents of the response should be explained clearly.
The RFP should make it very clear that the decision to outsource will depend on the price quoted and the risks being satisfied.
the RFP should make it very clear that the decision to outsource will depend on the price quoted and the risks being satisfied
The RFP will give a closing date for the submission of responses. However, whilst the bids are being prepared, the client would be best advised to maintain contact with the providers.
It may be that information has been missed out of the RFP, or that certain clauses have been worded badly. A client who talks to the providers as they are evaluating the RFP will be able to spot such problems and clear up any potential misunderstandings before the bids are finally delivered. In addition, it is always worth ensuring that the relationship with the successful service provider is given the best possible start. Contact and assistance at this stage in the proceedings can help to ensure that the eventual agreement begins in an atmosphere of mutual respect and goodwill. The client must, of course, be scrupulously careful to ensure that no help or additional information is given to one provider without also providing the same information to all the others.
This is also a good time to assess the question of culture and chemistry compatibility. Even though contact between client and service provider staff may have been limited, it is still worth beginning an internal dialogue to establish how comfortable the relevant client managers are with the competing providers. If this information is documented at this point it will be of great help later during the short list negotiations stage, to determine which, if any, of the positive and negative views are really justified. Obviously an outsourcing arrangement is going to work much better if the individuals in both organizations are comfortable with each other and their aims are compatible. Some service providers are so sensitive about this that they make a point of telling all potential clients, at least twice during the first contact, how fortunate it is that the two organizations have a perfect culture match.
Ideally, all the providers will have responded to the RFP, having been helped by the efforts of the client to make the process a straightforward one. However, in practice, some bids will be lacking in certain detail. If this is the case, it should be possible to request additional information to fill in the gaps and ensure that the responses can be judged on all the relevant criteria. It is unlikely that any provider will refuse to supply such information, having put in the necessary effort to reach this stage of the proceedings.
In some cases, even at this stage, when it has competitive bids from two, three or more potential service providers on the table, the client is still considering whether to outsource at all. Assuming that the bids suggest that there is something to be gained from doing so, most clients will proceed at least a little further. Where there is any suggestion that a service provider will be able to offer an improved service at a reduction to the current cost, then the client must have a sound justification if it chooses not to follow up this option.
Although it is difficult to argue against the logic of creating a competition, there are dangers if the competing providers are not handled correctly during the bidding process. To start with, it will be natural for the bidders to assume that price is likely to be the key factor. They will know from past experience that it is often the only consideration, whatever the client has previously indicated.
Therefore, if long-term competitive advantage is the real aim it will be necessary to ensure:
that the people evaluating the bids are not overly influenced by the price factor. The important consideration should be ’How will each of these bids affect our competitive situation in each of the years covered by the contract?’
that the quality of the service, long-term competitive advantage and desire to create a successful relationship between the parties are stressed as the key elements at all times when negotiating with the bidders. There are good tactical reasons for playing down the importance of price at this relatively advanced state in the negotiations.
The importance of these two points should not be overlooked. All too often, the short-listed bidders are left with a final impression that cost is everything. In the circumstances there is a tendency for the providers to cut the projected fee a little more because they have already spent a great deal of time on the project. Quite naturally this will affect the quality of service they intend providing. If the emphasis has been too strongly placed on the money issue, the effect on the winning provider may be quite negative. The lasting impression will probably be that they only won the deal because they bid too low, so they will immediately set out to correct the situation. It is worth noting that the person managing the project for the successful provider will be judged first and foremost on the profit produced.
if the emphasis has been too strongly placed on the money issue, the effect on the winning provider may be quite negative