The process of choosing a viable vendor from the thousands on the market can be chaotic. And for companies that aren’t faced with outsourcing issues every day, a lack of knowledge on the protocol for selecting and integrating an outsourcer can lead to problems.
Having been through several of these projects as the external analysis consultant for Amoco Business Services, (now BP-Amoco Accounting Services), experience leads our company to believe that a defined process should be used to evaluate outsourcing opportunities. Outsourcing a function can sometimes be an emotional subject because of personal and cultural issues involved. But the evaluation process is a project much like any other. If a company maps out the venture and sticks to the route, a successful decision will be made.
The Amoco Common Process is used for all projects at BP-Amoco Business Services, which does transactional-related accounting activities for BP-Amoco from their offices in Tulsa, Okla. Projects are approached in five stages: define, appraise, select, implement and operate.
Each stage has steps or deliverables involved and at the conclusion of each stage a decision is made, or what Amoco calls the go/no-go gate. During the initiation process “gatekeepers” are chosen. And these “keepers” are consulted at the end of each stage to ensure that the project is headed in the right direction and whether or not to move to the next stage. Using this review process eliminates the potential of delivering a decision that doesn’t meet Amoco’s needs or expectations in the end. It also helps everyone stay in sync throughout the lifetime of the project.
This process was used in Amoco’s decision to outsource a portion of the accounts payable function (audit and payment of freight invoices). The evaluation began in October 1997 and the vendor, Strategic Technologies Incorporated (STI) out of New Jersey, took over the function in April 1998. Here is an idea of how the deal went from stage to stage.
The Define Stage
In the define stage there are several things that must be clearly understood before moving to the next.
- First a company must understand the scope of the project and its ultimate objective. Amoco’s scope in this particular outsourcing arrangement was to focus on domestic outbound truck and rail shipments. The main objective was to reduce costs. But Amoco also wanted to help the operating units run more efficiently by providing detailed shipment-level information. Detailed information about carrier selection and shipping routes would assist our operating units in making better business decisions.
- Consider alternatives to outsourcing. A company shouldn’t consider outsourcing a process because it is broken. Remember that a business will end up paying a premium to outsource an inefficient process, so fix the process first, and then contemplate outsourcing.
- Identify as many viable vendors as possible. This increases a corporation’s odds of finding the right one. There were multiple service providers for this particular area of outsourcing. The field was narrowed down to three candidates after talking to a logistics consultant.
- Identify and obtain access to the needed resources for each stage of the project. Look ahead at least two stages and begin identifying team members for each stage. The critical skills required for each stage will vary somewhat but the “define” stage is the time to begin getting those people identified and on board.
- Identify how the evaluation of bid responses will be done using five or six key factors. STI was chosen because of a combination of several considerations: cost savings, ease of access to data, IT capabilities, ease of transition and intangibles, such as attitude and interest.
- Determine how to score each category and what weight to place on each criterion.
- It is imperative to have subject matter experts on the project team; people who really understand the process. After the project team receives concurrence from the gatekeeper that the scope and objectives are understood and the evaluation criteria and resources are agreed on, the team moves forward.
The Appraise Stage
- Prepare the request for proposal. Make it clear and comprehensive and include a well-defined scope of services and the business requirements. Amoco includes a template for the vendor to follow so that both sides ensure that an apples-to-apples comparison is made. If the outsourcer doesn’t follow it the first time have them do it again. If they want the business they will.
- Schedule follow-up sessions to get to know the vendors and clarify any questions regarding their response. This is a great opportunity to get information that is needed to assign a score in the “intangible” criterion. Some people relate an outsourcing relationship to a marriage. Put in those terms, you go through the courtship and wedding with the sales team and you wake up the next morning with the operations people. Amoco gets the vendor’s operations people involved in these sessions since they are the people our company will be living with once the sales team moves on.
- Begin diligent research on each vendor. Make sure the vendor is financially stable. Find out about pending mergers or takeovers that could impact their abilities to provide services. Amoco even talks to the vendor’s current clients to find out what insights they can provide. A defined set of questions should be used for each interview to develop a consistent picture.
- Examine the evaluations based on the criteria agreed to in the define stage and build the necessary business case. When entering a multi-year agreement, don’t overlook expected changes to the business over the life of the contract. Since Amoco expects significant growth within the next two to five years the contract with STI was only two years. At the end of the contract the relationship will be reevaluated.
- Once again, having subject matter experts on the team is critical to this stage. A company needs to make sure it hasn’t overlooked any critical components of the process being outsourced. Experts also help identify any parts of the process the vendor might overlook.
- After presenting the recommendation to the “gatekeeper,” a company may or may not want to continue to the select stage. In one of the process evaluations our team did, it was recommended that we not move forward because our total cost of ownership would have gone up significantly using any one of the vendors. But for the arrangement with STI, our team estimated Amoco would save between $2 to $3 million. Don’t waste time and resources proceeding to the next stage if it doesn’t make sense.
The Select Stage
- Negotiate the deal or contract. Make sure the right people are involved in this process. Amoco puts a premium on negotiation skills. We involve our legal advisors, and the economics people also support the negotiations. The numbers may change as the final deal moves into place. Understand the implications of the new cost.
- Develop the performance metrics you’ll expect the vendor to meet on an on-going basis. They need to be realistic and acceptable to both parties. They also need to be readily measurable. There’s no point in setting metrics that are hard to quantify. You may also want to consider building penalties or liquidated damages into the contract. It helps put some teeth in the performance metrics if there is a cost of non-performance attached to them. No rewards or penalties were built into the contract with STI. Looking back it may have been a good idea. The contract did however have a way for either side to get out of the contract after 60 days of first notification.
- Clearly spell out how “new” work is initiated under the contract. Know what the conditions are for a change of scope and who approves the change. Also know who approaches the vendor with the request and who will pay for it if approved. Amoco spells this out clearly during this stage to avoid headaches further down the line.
- Begin building the transition plan. Identify the resources needed to complete the transition and determine the exit strategy should the relationship deteriorate for some reason. Again, in our contract with STI, either side could terminate the contract with 60 days notice.
The Implementation Stage
- A company will need its process experts involved in this stage along with some of the customer’s operations people. Amoco makes sure that the new process meets their requirements as well.
- The vendor will probably want to manage the transition, but a company needs to have strong project management skills on its team. It’s the team’s project and it will feel the brunt of a transition that doesn’t go smoothly.
- Make sure transition milestones and accountabilities are clearly defined. It’s tough to work through the implementation without having dedicated resources. Making the implementation work using 20 to 50 percent of a large group of people’s time is difficult and less effective than having 100 percent of a smaller group of people’s time.
- Maintain constant communication with all parties involved.
- Clearly define the scope and don’t deviate from it. A common pitfall during implementation is scope creep. This occurs when someone (most likely a company’s customers) wants to add additional services to the prescribed tasks. Expanding the scope during implementation will probably be a nightmare.
The Operate Stage
- It is now time to make the operation as seamless as possible. This is a not a “set it” and “forget it” scenario. A company needs to maintain resources that are dedicated to managing the outsourcing relationship as long as it is in operation. However, relationship management is a different skill set than was required for most of the previous stages. The resources dedicated to this stage may not be the same ones employed earlier.
- Have regular performance reviews. Remember that a company gets what it measures. If a company has poorly designed metrics it’s likely to get inadequate business results. Amoco reviews STI quarterly. It is usually a one-day meeting at a convenient location. Amoco’s accounting services personnel meet with STI operational personnel and go over internal operation issues and performance measures. Then representatives from Amoco’s operations organizations come in and give feedback to the STI people.
- Open and honest communication among all parties is critical to success. Including the customers in the performance review process is a useful communication’s tool.
Avoiding Buyer and Seller Disconnects
- Vendors know that customers don’t like to hear “we don’t” or “we can’t.” Customers need to recognize that this may lead vendors to overstate their capabilities. Interview their current customers to be sure this doesn’t happen.
- The vendor knows that it can increase their profit margin by taking over an inefficient process and then fixing it once the function is in its control. Do everything you can do to fix the process before pursuing an outsourcing venture.
- The vendor will want to manage the transition. Make sure there are strong project management skills on the project team.
- A well-defined process can ensure the results you want.
The relationship between Amoco and STI is a strong one, but even though a lot of time and energy was put into the process there were still operational issues that had to be worked out. Looking back, our team probably could have devoted even more time to the define and appraise stages. These two phases are the most important of the five and the better the quality of work done during these stages the better outcome a company will have.