Other reasons for taking the sole sourcing route

Some substantial outsourcing arrangements have started on a small scale, possibly with an IT facilities management contract and then graduated to a full outsourcing as a natural result of the provider doing a good job.

Other outsourcings have resulted from consultancy assignments where because the consultant’s people detailed the advantages and the path to follow to outsourcing, and because the consultancy was also an outsourcing service provider, it appeared neither fair nor logical to involve competitors. This has been particularly true where the opportunity for a joint venture between the two parties has been isolated.

Many organizations that have chosen the sole sourcing route will nevertheless claim that they had gone through a competitive process by asking a number of service providers to make general presentations. However, a ’beauty parade’ of service providers which does not result in competitive bids because the client is reluctant to give all the service providers the necessary information, cannot really create the correct level of competition.

Some organizations have confused themselves by believing that because they find the function difficult to bring under control, then it must be too complex to explain in an RFP. The irony is that the service providers usually only require the most basic of transaction details in order to submit a bid, because they base their calculations on best practice and their own past experience of what is involved in the client’s transactions and processes.

The service provider obtains many advantages from being chosen in a sole sourcing arrangement, including saving the significant costs involved in a competition. The benefits are such that given any opportunity for a non-competitive business deal, the provider will make every effort and excuse to get in quickly to talk to the potential client’s staff. They know that if they get in and are able to stay in for any length of time, the less likely it is that the client will want to go through the same exercise with anyone else.

Sometimes the client’s management starts off with a great deal of faith in one provider and readily adopts the view that they either outsource to this provider or they don’t outsource at all. However, even then they should not discard the competitive process altogether because they may be approaching this ideal provider at a point in time when it has little or no reason to offer anything but the smallest margin. This can happen when they have a surfeit of work in the outsourcing area or where they are under extreme pressure to meet targets for other clients.

However logical the sole sourcing approach may appear at the time, there must be a risk that the client finishes up paying a higher price than it would have done if it had created real competition.

The client may not have told the provider what the service was currently costing and did not provide any information on staffing levels. The client may hope that as a result the provider will have to keep its price as low as possible to be sure of offering an improvement on the current situation. There are two main snags with this reasoning. The first is that, once two or three of the client’s middle management have been interviewed for as little as 15 minutes, there is a very strong chance that the provider will have a good idea of the staffing levels, even though no individual manager will remember giving anything away. The second is that the provider will make its own estimates based on best practice information and will still do so even if it has been given the costs and staffing levels to start off with.

Once the provider has studied the client’s transaction details plus any reporting analysis-work that is also part of the arrangement, it will compare this against what it believes is possible after it has re-engineered the service and has completed any other necessary changes. Typically, it will separate the cost of new systems and other transition costs for these to be paid when necessary by the client. It could be argued that these transition costs would most likely be lower if real competition played a part.

The share of the anticipated savings that the providers offer the client will depend on a number of factors, including how important they value the client in question, how much they need the work and has competitive the situation is. For that reason a client who only deals with one provider is unlikely to save as much as one who has created real competition amongst several providers. If, for example, the provider not facing competition can see that costs have been outstripping inflation and then is able to get confirmation that this factor is the main reason for outsourcing, there is no reason to offer a competitive price. It may be sufficient, in terms of winning the business, to offer a constant price for each of, say, five years at more or less the client’s current cost level.