Rushing to Market Becomes a Risky Trend
"We knew we probably should do it, but we didn't have time." That hindsight comment is one we at the Everest Group and Outsourcing Center heard numerous times in our recent survey interviews of current outsourcing relationships. The statement highlights a growing - and disturbing - trend in structuring outsourcing relationships: bypassing the cornerstones of success in structuring an outsourcing relationship.
Driving this trend is an ever-increasing number of companies facing two situations in order to remain competitive:
- A need to employ a strategy of mergers/acquisitions/divestitures in order to grow rapidly; and
- A need to ramp up quickly to implement leading-edge technology (such as wireless access) and/or to quickly consolidate multiple data and systems resulting from mergers/acquisitions.
In both instances, company executives have told us they believe there is no time to conduct the typical request for proposal (RFP). In their haste to quickly go to market with their competitive strategies, they also truncate the supplier selection process and contract negotiations.
It's almost as though they view the RFP process as a recipe that includes some essential ingredients along with some optional ones. They believe they are safe in not using the entire recipe and in changing it to an "instant" version. It's only after the implementation of these "instant" outsourcing deals that they realize their mistake. Taking a look at a couple of slices of these quickly constructed deals clearly highlights the risky results.
The Supplier Gamble Slice
Interviewees who chose to skip the RFP and its associated supplier selection process disclosed to us their reasoning on why they believe they were not gambling with the success of their outsourcing initiatives. As one CIO commented, "We surveyed the market to see who the big players were and who the niche players were, and then we eliminated the players that obviously couldn't meet our growth projections [or other objectives]." In most instances, they did go ahead and do site visits to the suppliers' premises and also spoke with current and past customers of the suppliers. In some instances, they also contacted Gartner or another analyst firm for an opinion on one or more of the suppliers under consideration.
So, you ask, what's wrong with this scenario? After all, site visits and client references are a key element of the RFP's supplier selection process.
The answer is that you must be able to trust your outsourcer and know that this new "partner" is aligned with your company's objectives and business culture. Without this primary building block, the relationship cannot grow and most likely will fail. Both parties must work together to establish a new culture for their alliance, learn how to communicate effectively with each other, and ensure flexibility is in place to deal with inevitable market and technology changes.
"Yes, it took some time," a hospital CIO comments on his organization's RFP and contract negotiation process. "And the suppliers kept chipping away at things. But the important thing is we were able to see how the various suppliers responded during this process. It teaches you a lot about who you are really dealing with. And you really will be able to tell during this process who is there to stay, who will be flexible, who wants you to be successful?and who doesn't."
Not all is black or white in a partnership or alliance. The gray matters are where you find out whether your outsourcer truly has your company's best interests at heart and will dive into a sea of chaos on your behalf, if necessary. Is not testing the waters in early negotiations in comparison with other suppliers a good trade off for speed to market? Is it worth the gamble to wait for chaos to find out how much you can trust your outsourcing alliance?
In a variation on the supplier gamble, CEOs in several industries told us they selected the suppliers for their new initiatives because "we already had a prior relationship with them, licensing their software, so it was a pretty natural fit. We talked to them about what we wanted to do. They pitched their solution, and it fit the needs of what we wanted to try to accomplish." Some even say they worked with the supplier to come up with service level metrics together!
Another survey respondent commented: "We had to transition something very quickly that was failing with a particular supplier. And since we had an existing relationship with another supplier we liked, we chose to give them more responsibilities, based on our prior successful relationship. It just more or less evolved like that."
The possible hazards of these practices are time bombs, set to erode the success of the outsourcing relationship at crucial moments. A better way to do business is to use the RFP process to determine how appropriate the "pitched solution" really is. Does the supplier have the skill sets and expertise to execute the maintenance and support services necessary for the software solution, for instance? Without going out to market, how do you know the "pitched solution" is priced appropriately? Does the supplier have industry expertise and understand the "big picture"?
Last, but not least, the service level metrics are the buyer's protection - a way of ensuring it gets the desired results it is paying for. Allowing the supplier to determine the service levels - most likely in its own favor - obviously defeats the purpose.
The Contract Risk Slice
Further comments during our recent survey indicated an even more serious problem in curtailing or condensing the RFP process. Today's outsourcing buyers are more educated in what it takes to build a win-win relationship and have learned that the starting point is being able to clearly state their goals and objectives. They also know the value of using short-term contracts in order to ensure flexibility for changing business conditions or goals.
Armed with these two facets of knowledge, they believe the practice of not using expert outsourcing consultants to construct the contractual documents is not a high risk. This do-it-yourself model is especially trendy with today's one-year or "evergreen" contracts with built-in annual or quarterly renegotiation on pricing and scope of services.
So, you ask, what's wrong this idea? Simply put, the possibilities for failure are endless. Just consider a few of them, as reported during our recent survey.
- "They are delivering the specified services, but it's not a very good relationship. I think the framework was probably just not there all along. If some of the things we are now trying to put in place would have been done up-front, then it would have probably been an outstanding relationship by now."
- "The challenges in the implementation phase are literally too numerous to mention. We knew what we wanted to do. But the biggest challenge came in trying to define the processes. Once you start adding new levels of automation to a process, it impacts other areas (such as back-office processes). So everybody else has to change all of a sudden, too. You have to rebuild your organization in several areas. You have to spend time up-front defining the workflow."
- [from an insurance company senior vice president] "If I had it to do over again, we would spend more time up-front thinking through all the issues more completely. We had some issues after we were a year into the deal because some of the activities in the process don't occur before a policy is a year old. Those activities were not well thought out. We hadn't spent a lot of time worrying about them because we were so concerned about quick implementation and getting the policies issued. So we had some kinks in the business processes later when we tried to do audits." It's surprising how much time it takes to work out "kinks" after the fact.
- "I wish we had spent more time on the contractual details, making sure everything was clearly defined and all details were measurable. We should have left no stone unturned."
- "You have to think long-term, not incrementally. Your long-range plan to get to where you want to be may involve a series of short-term transitions, but you can't think short-term. Why go down a path with a supplier that can get you to the 80 percent level but no further? Success takes time. Better to do it slow and right than fast and wrong."
- "You have to do enough homework up-front to make sure that you have the right level of resources in place during the transition. Your internal management and employees will be looking to place blame on the outsourcer if there are any failures, and it can take months or years to get beyond that initial reputation of failure."
- "We thought we were very good about stating our goals and objectives, but now two years into the deal we realize that we didn't do a good job on that. We are now having to go back and clearly define terms so that both parties will understand exactly what success looks like and how we will recognize it when it happens. It's not enough to state where you are headed. It must be a metric-oriented description."
- "We took the time up-front to determine our baseline performance metrics across certain service levels. We set that as a standard and then also set an improvement standard. But later on we found out the data we had used for the baseline metrics was bad."
Insuring the Odds for Success Are in Your Favor
Without a doubt, the parties on both sides of a successful outsourcing relationship will tell you their foundation for success was during the RFP process, including the supplier selection methodology and contract negotiations. Equally, those who have suffered the enormous financial and business consequences of failed relationships will tell you their failure was due to a lack of inadequate work in those up-front phases of the RFP process. They truncated the process simply for lack of time.
Everest Group has created a solution to this problem. Using the Everest methodology, the traditional time necessary to conduct the RFP and bid process, supplier evaluation and selection, and contract negotiations is reduced from months (or more than a year in some cases) to just weeks! Everest worked recently with Canadian Imperial Bank of Commerce (CIBC) for example, releasing a comprehensive RFP for human resources services and systems to potential suppliers in January 2001. Contract negotiations were finalized and the winning supplier was selected just eight weeks later. The high-quality agreements, including modules for relationship governance, produced for Everest clients eliminate all of the problems cited earlier in this article (and more).
Success demands more than a vision, and it's not easy to change course mid-flight - especially in a storm. It's a much better plan to use the Everest set of tools crafted specifically to create more value in an outsourcing relationship.
Lessons from the Outsourcing Primer:
- Buyers are in a hurry to outsource so they can implement their competitive strategies. This haste causes them to truncate the supplier selection process and contract negotiations. More often than not, the result is a failed outsourcing relationship.
- Never let the supplier help you set up your metrics.
- Negotiating an RFP lets you learn how the supplier negotiates, deals with problems, and is willing to align its interests with yours. This is valuable information when selecting a long-term business partner.