Today's cost-cutting environment pits some executives against the cost of retaining a consultant for advice in structuring an outsourcing agreement. Often perceived to be a high-cost item or an action that essentially prolongs the time before the buyer can realize financial benefits from the outsourcing initiative, outsourcing advisory services frequently end up on the chopping block.
Such thinking results from the traditional mentality of "buy the pencil at the lowest cost." That is an ill-fated approach, since an outsourcing arrangement can provide advice and deep insight as well as cost reduction.
"If I had it to do over again, I would change the way we..." is the lament of many executives who structure their outsourcing arrangements without an advisory firm's assistance. The figure below illustrates the results from 78 relationships we studied within Outsourcing Center's 2003 Editor's Choice Awards (now Outsourcing Excellence Award) process.
Clearly, there is a direct correlation between the success achieved in an outsourcing relationship and having used consultants.
We spoke with six of the 78 buyer executives in the study to determine the benefits and results of their having used consultants to structure their outsourcing relationships.
Outsourcing Center: What did your outsourcing consultant do that you could not have done as well in house?
Mr. A. Lou Whitley, manager, HR Service Center, Edison International: "The world actually passes you by about every three months in this field of outsourcing, and you need to hire someone who is current with it to help you. I used to go through trial and error with bits and pieces of HR functions before. But now that I've done a deal using a consulting firm, never again would I do this without expert help - even on a renewal. From a cost standpoint, they were invaluable to me for the Request for Proposal (RFP), the implementation details, and the negotiation of the contract."
Ms. Anne Lloyd Davies, CIO, Simon & Schuster, Inc.: "Our consulting firm helped us figure out how to state the requirements for the RFP. It was a difficult RFP to put together because we were in a shared services environment at the time. So it was a gigantic effort to scope everything. We had to identify all the applications in the RFP. It turned out that we had 65 applications running; we had to figure out what they all were and whether we even needed all of them and then put it together into an RFP that made sense. We also had to scope it for the data center, help desk, desktop, and network requirements as well. We worked on that for about six months with the consulting firm, and it would have taken far longer without them."
Mr. Jake Farkas, director, Trinity Industries, Inc.: "The consulting firm helped us with provider selection. They have a very robust process to identify BPO providers and obviously know the marketplace. We did not have the requisite resources within our company to do this. They did a really good job of understanding our requirements and were able to do a preliminary selection for us to identify the right providers to consider for the initial cut of four. They also made us very much aware that we were going into a long-term relationship and how important it was to make sure we had the right partner."
Outsourcing Center: How did the consultant assist you in your go/no-go decision for outsourcing?
Ms. Jennifer Heffernan, CIO, Bank of Queensland: "We formed a project team of our staff, but we used the consultants' particular methodology and process for the analysis of whether to outsource. The firm was selected for its expertise and experience in the number of deals it had done in the financial services industry."
Ms. Kathy Honda, manager, Business Development & Planning, The Queen's Medical Center: "We made an internal assessment about whether to outsource our IT area; then the consulting firm helped us determine the feasibility of that. We did not go through an RFP process because we had pretty much decided on a provider, based on prior recommendations. But we used the consulting firm to help us validate that the provider was the right choice for us. They were extremely knowledgeable in assisting us through that process."
Mr. Farkas: "It's very important, if you haven't outsourced before, to have a third party shepherd you through the process. There is no way we would have achieved success without our consultants' help. They put a process in place to help us do the feasibility study objectively. They helped us determine the risks associated with what we were planning, and they introduced us to the concept of business process outsourcing.
Outsourcing Center: Besides help with the RFP and provider selection, in what other ways did you benefit from using a consultant?
Mr. Jim Landry, executive director - Technology Lifecycle Management, Anthem Insurance Companies, Inc.: "They also helped design and negotiate the contract that governs our relationship. That was a key success factor, and that governance structure is the major reason our relationship and contract have stood the test of time."
Ms. Honda: "I agree. It's very important to make sure you have a good governance structure, good service level metrics, and a good account manager."
Ms. Davies: "Our consulting firm was with us through the contract negotiations. They were experts and knew exactly what to ask for in the negotiations. They were very detailed and thorough; the benefit of that is that it let our staff focus on larger issues, and the nitty-gritty details were tidied up without my having to be immersed in them. Then we were able to go through the bids with the consultants' eyes seeing the providers' weaknesses; we couldn't have done that ourselves or, at least, it would have taken a lot longer. The other thing is that they advised us to use a law firm that had a specialty practice in outsourcing. The law firm we chose has been on both sides of the fence, doing contracts for providers as well as buyers. They knew the kind of contract to put together, depending on which provider we chose."
Mr. Farkas: "A key to our success in the transition was due to our consultants' advice pertaining to communications. They helped us understand the importance of communicating with our employees throughout the entire process; so we communicated from day one, when we started the feasibility study about whether it made sense to outsource or not. When we signed the outsourcing agreement, the communication became a lot broader and deeper. We actually communicated with the entire enterprise as we went through this process. Our consultants had explained that it was important for all of our people to understand this initiative and set the right expectations for what was going on."
Ms. Heffernan: "Our consultants are helping us determine how to measure return on investment. In the first year, that measurement was against our budget, which was set with regard to having decided to outsource that year. Now, we will measure those benefits going forward, with the budget taking into account that the outsourcing agreement and improvements are in place. We are also looking to the consultants to determine how to measure the overall success of the relationship."
What is the value of advice? If an outsourcing consultant warns of danger zones as a buyer steps into uncharted territory, the advice is invaluable. If the advice ties up dangling loose ends, gathers and analyzes relevant input from the right sources, and prevents costly mistakes, the value is easy to measure. If the consultant provides a systematic way of making things predictable and understanding implications of decisions, the value of advice is far more than its price.
Lessons from the Outsourcing Journal
- An outsourcing advisory firm's value includes crucial expertise in designing an effective RFP, service levels, pricing components, and other contractual elements.
- An advisory firm has daily insight into the marketplace and can provide valuable advice on strategic and cultural fit of potential providers.
- An advisory firm knows the pitfalls of outsourcing relationships and can construct an implementation/transition phase that comes in on time and on budget.