Top five tips for an outsourcing deal made in heaven

March 9th, 2010

Top five tips for an outsourcing deal made in heavenWhen an outsourcing deal collapses the fallout on both sides can be very painful – and if it ends up going to court it could potentially take years to resolve and cost millions. So getting a strong foundation to any project is vital.

Here Nick Pantlin, partner at London law firm Herbert Smith, and Martyn Hart, chairman of the National Outsourcing Association, share their tips with silicon.com on how other organisations can avoid problems with projects from the beginning.

Does the contract look too good to be true?
Businesses should be on their guard if one supplier promises the earth while other vendors are being far more cautious.

Hart said: “You need five or so suppliers for a good procurement and to listen to what they’re telling you.

“If four of them are saying the job is going to take four years and the other is saying it is going to take six months, then that is an area you should look at.”

Similarly Hart said that if one bidder offers a specification that is totally different to what is being offered by other suppliers then that one bidder’s spec needs closer examination.

Get a second opinion early on
Spotting holes in a supplier’s promises or an over-optimistic deadline becomes much easier if a business brings in a third party to review bids early in the decision process.

Pantlin said: “Get those peer review processes set up with suppliers at an early stage. Ensure there is that verification process before any key tender responses go in, particularly for critical projects.”

Hart said: “You can have a technical review carried out independently or by another part of the company but then you have got to remember that politics can come into it.”

Be open to failure
Often it will be in the interest of staff on both the customer and supplier side to talk up the benefits of a deal and play down any drawbacks.

Hart said: “If you are receiving these bids you are not going to get people from the suppliers coming to you saying ‘I have got to win this because the commission structure means that otherwise I’ll be out’.

“Also within a customer’s organisation someone’s career might depend on achieving things that this service or product is going to deliver, they are having to sell it internally and their reputation and jobs rely on it.

“You get a problem that both of these parties are very positive about the solution – they don’t want to see failure.”

Pantlin said suppliers also need to be aware of this: “Beware any culture that you may have that is ‘we have got to win the bids at all costs and worry about the consequences later’. Check the incentivisation models on your bid leads.”

Strengthen your early agreements with suppliers
Pantlin said that businesses need to work with suppliers to identify and plan for any problems that might arise with the outsourcing contract long before the final contract is signed.

He said that during the early days of a relationship between a customer and a supplier there was a danger that both the customer’s and the supplier’s interests will not be sufficiently protected by the non-binding letters of intent that both parties sign up to.

“You have the pressure of a very long lead time between the initial RFP [request for proposal – the initial tender request sent out by a business] going out and the final contract being signed – which can be anything from six to 18 months.

“There’s pressure to get something signed before the main contract, just make sure your letter of intent is robust enough.

“Firstly make sure that it’s binding and secondly that it’s robust enough to cover the consequences if things go wrong.”

Pantlin said that because of the length of time it takes to sign the final contract that customers need to make sure there are interim agreements on mechanisms that will be triggered should problems arise with the deal, how problems will be escalated if they arise and what losses are recoverable to the customer.

Spread your bets
Although it can be costly if there is real uncertainty over which supplier will deliver the best service then sometimes it pays to pick more than one to deliver the initial stage of the contract.

Hart said: “Once you have picked a supplier, the others go away and you can’t recover that lost time.

“If there is real doubt big organisations will often have a stage one of the contract in which they will pay two suppliers to deliver.

“Unfortunately that’s a way the public sector can’t go, once they’ve picked a supplier they are stuck with them until something goes horribly wrong.

“From the private sector they can be much more flexible so they can run two things in parallel.”

Author: Nick Heath

Source: www.silicon.com

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Entry Filed under: Why Outsource?