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Guidelines For IT Management: Planning for Offshore Outsourcing

Everest Group has prepared a white paper on the appropriate use of sole source outsourcing. This is an excerpt from that white paper. In Part 1, we discuss why and how to sole source. Part 2 covers a brief history, then discusses how sole source approaches can derail. To read the full text of the white paper, click here.

Although a poorly managed sole source approach can fail to meet the buyer's expectations, organizations that take time to develop and lead a thoughtful approach can attain the desired benefits of a sole source approach. Five factors create a successful sole source approach to outsourcing. Several of these factors are important in multi-supplier approaches, too, but you should take additional importance and increased opportunity in a sole source situation.

1. Develop the Relationship

The significant costs associated with entering into an outsourcing relationship dictate that the buyer and supplier nurture and maintain a healthy relationship that will endure. A healthy relationship displays many attributes, including:

• Mutual respect
• Desire to align interests as best as possible
• Commitment and ability to work out differences
• Trust in the other party's intentions

In short, in an outsourcing context, suppliers should be much more than mere vendors. Accordingly, one objective of a sole source approach should be to advance the relationship as much as possible; this is an especially rich opportunity in a sole source situation because the buyer and supplier can spend increased amounts of time together.

For example, a sole source situation provides an opportunity to foster intensive collaboration between the buyer and supplier, with the buyer seeking a solution based upon real insight from the supplier - not an "off-the-shelf" solution. These customized solutions demand mutual transparency and information exchange between the buyer and supplier. Through these interactions, the relationship grows with the buyer gaining more trust in the single supplier and seeking that supplier's insights. In a sole source situation, both parties can arrange the available time and design the process used to develop the solution to provide opportunities to strengthen the relationship beyond what is possible in a multi-supplier approach.

Additionally, the approach to negotiations provides an opportunity to lay the foundation for an enduring relationship. The parties should adopt a solution development and negotiation philosophy that builds a relationship between supplier and buyer, versus a positional-based spec and bid process that tends to agitate differences. Using an "interest-based" approach to negotiating helps focus the relationship on the most important principles and identify common interests, which increases the chance that the relationship will endure over time. The ability of a buyer and supplier to work more closely together in a sole source approach often better facilitates this process than would a multi-supplier outsourcing approach.

2. Engage Senior Leadership

Senior executives from both buyer and supplier must view the engagement as a broad problem-solving endeavor versus a mere review and supplier evaluation. Successful sole sourcing is built upon trust and goodwill. While rank-and-file employees might carry the day-to-day activities between buyer and supplier, sole sourcing relies more extensively on trust at the highest levels of the organizations.

This is important for several reasons. Specific solutions often are highly tailored to the individual buyer's needs, including the actual services delivered and the commercial terms of the arrangement. As a result, these decisions require not only the authority and buy-in from the highest levels of both the supplier and buyer - but also meaningful engagement in the details of the agreement. The natural tendency of senior management to delegate the accountability for the process to lower levels within the organization often spells trouble.

Also, without senior management setting a strong course and accepting accountability for the decisions, lower-level managers tend to evolve sole sourcing processes into an unending benchmarking exercise "to see if we are getting a fair deal." This typically leads to murky conclusions that do not reflect the limits of benchmarking and a breakdown in the much-needed trust between the two organizations.

3. Involve the Board

Different companies have different internal governance guidelines for reporting programs of particular sizes, scope, or impact. Depending on the size and impact of the transaction, the Board of Directors might need to be informed and educated about the outsourcing project in order to understand, agree to, and, if necessary, sign off on the sole source approach. Preferably, this should be done at the earliest stages of the process.

It is often not enough to have senior executive knowledge and buy-in for a sole source arrangement to work. Such acceptance must permeate to the board level due to the significant economic impact under consideration.

By their very nature, sole source approaches are easy to criticize for lacking options - ranging from supplier to scope, solutions, and pricing. These approaches may also be criticized internally for lack of objectivity, appearing that the organization not only eschewed an outside opinion but relied solely on preconceived needs and expectations in determining the outcome of the solution remedy. In short, a sole source approach often appears to offer only one choice. However, this conclusion does not acknowledge the intense time and concerted effort that can be spent with a single supplier designing a solution tailored to a buyer's specific needs. Such customization typically works through a range of alternative solutions to identify which creates the greatest mutual benefit.

Many Boards of Directors have limited experience with sole sourcing approaches. Therefore, when a Board is presented for the first time with a sole source situation for which it has little to no background, the typical reaction is to question the legitimacy of the approach. Concerns can range from whether management considered all options to whether it is the most cost-effective solution for the buyer organization. This typically results in additional fact gathering and potential redesign of the process to attain proposals from additional suppliers.

The inevitable impact is the buyer must invest additional time, effort, and resources in the outsourcing procurement process. While the Board might eventually come to the same conclusion it was originally presented (i.e., that sole sourcing is a viable approach for the given situation), quite frequently the buyer spends more time and money than if the organization had pursued a multi-vendor approach.

Avoid this outcome by taking any proposed sole source approach to the Board early in the process or before the process begins to attain buy-in and provide an opportunity for the Board to influence - or at least feel integrally involved in - the design of the process.

4. Compare to Ensure Value

The parties must adopt a sophisticated external comparative analysis process to ensure fairness of value sharing. It is essential that the buyer be intimately involved in the development and on-going refinement of the scope of the services to be delivered. To do so, the buyer must know what it is seeking from the supplier's services, and how such services will help the buyer achieve its goals. Working in tandem, both buyer and supplier must confer on and set specific targets for the supplier, which require the buyer to complete analyses that would not be required if the buyer had alternative solutions for comparison.

By comparing each component of the potential solution, the supplier is effectively continuing to "compete" for the deal. The possibility of pulling some or all of the services out of the scope of the agreement provides tension to ensure the supplier provides the best possible solution at a fair price. The buyer must set out unequivocally from the beginning that if goals are not achieved, the process may become multi-supplier at any time.

5. Be Specific - More Specific Than Seems Necessary

The buyer must specify the process by which the problem-solving, analysis, and solution evaluation are to take place. This requires the buyer to take ownership of the engagement process with the goal of setting specific milestones and end goals. This allows the buyer to maintain control of the decision and problem-solving involved in reaching the deal, thereby avoiding having a deal on the table with significant questions surrounding the validity and competitiveness of the solution. Additionally, the buyer's objective in specifying the process is to build a framework by which both parties will be aware of prescribed milestones and goals, and ultimately realize when they have achieved a fair deal - with its defined tenets.

In addition to setting the timing and objectives for the process, buyers should set guidelines for the level of detail for the scope and metrics used to measure the success of the relationship. Although most companies believe that they provide these inputs to the supplier, they often don't give them the level of detail and thought that is actually required.

The scope targets must define which processes are indeed in-scope. This should be the buyer's decision, although the supplier can offer alternatives through appropriate mechanisms. Additionally, the buyer must dictate the level of precision the supplier must use to establish its roles and responsibilities in the outsourced process for the proposed pricing. For example, requiring a supplier to develop a responsibility matrix for the proposed solution can help quickly delineate the critical responsibilities of both the buyer and supplier, thereby allowing the buyer to understand which activities it would retain or lose and the financial impact of each.

Additionally, the buyer must insist that the supplier's proposal detail the metrics used to measure the success of the proposed solution. Forcing the two parties to discuss and agree upon the specific metrics provides clarity that bypasses any pleasant, but non-accountable rhetoric.

A sole source approach will not be the best solution for every organization; however, it can be a viable approach in the right situation. Buyers must weigh many factors, including the supplier's ability to meet the buyer's specific needs - either with an off-the-shelf service or a custom-tailored solution. Other factors include existence and strength of current relationships, the scope of the required services, the ability of the supplier to adapt and provide new services over time, and acceptance of sole sourcing across the organization.

Lessons from the Outsourcing Journal:

• If the buyer selects a sole source approach, the chance of success is increased by
  1. Using the sole source environment to begin building or deepening the buyer-supplier relationship
  2. Engaging senior leadership
  3. Involving the Board early in the process
  4. Comparing the supplier's solution to external measures
  5. Being specific about what is expected of the supplier during the process
• Carefully designing and executing a sole source process can capture the desired benefits:
  1. A more streamlined process to contract signing
  2. A quicker realization of benefits
  3. A stronger relationship

Publish Date: December 2003

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Copyright © 2003 - Everest Partners, L.P.

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