In our capacity as counsel to Global 1000 companies in sourcing transactions, we are frequently asked whether we recommend use of a third-party outsourcing advisor. The answer to that question is generally “Yes, by all means,” especially if the transaction is outside the norm for that entity and entails new components that are beyond the expertise of the existing in-house staff.
The reasons you should hire a third-party outsourcing advisor are threefold: expertise, bandwidth, and politics. While not based on any formal study, our consistent experience is that hiring a third-party outsourcing advisor will materially contribute to the development, structuring and execution of a complex transaction and its long-term success.
One reason to hire an outsourcing consultant is the expertise they bring to the table. Simply put, they make it their business to know the market, the suppliers and their capabilities, the subtle and sometimes not so subtle differences between offshore sourcing destinations, and transaction structures. Additionally, they each have their own methodology that they develop and employ in the assessment and execution phases of a transaction. Of course, it is up to each customer to determine which outsourcing advisor they think will work best within their organization and which methodology best suits their needs — if they need an outsourcing advisor.
Indeed, given the increasing acceptance of outsourcing in large corporations, many have created executive level strategic “sourcing” or “transformation” officers and corresponding support organizations. At the upper end, many of these officers and their staff have many of the attributes of a sourcing advisory firm and can conceive and execute the most complex transactions with the same degree of success as a competent outsourcing advisor.
Beware though of the perception that sufficient expertise exists within such an office. Sometimes these offices are staffed with contracts or procurement personnel that function quite competently in the routine contract administration or acquisition phase; however, they are often not as familiar with the market, the pricing mechanisms, the service delivery structures and the players as is a true outsourcing advisor. Of course, companies should leverage their internal resources to the maximum extent possible, particularly in today’s challenging economic times. However, this should be done with a frank and objective assessment of the capabilities their internal resources offer when deciding whether to hire an outsourcing advisor and how to best deploy their capabilities.
Experienced legal counsel can often help in one or more of these areas; however, legal counsel’s role is just that — to manage and execute the legal components of the transaction. Counsel experienced in the sourcing arena can and should give you their advice on many business issues based on their experience with similar transactions, but one must bear in mind that it is not a lawyer’s primary business to be expert in, for example, the differing costs of labor in Manila and Bangalore.
There is inevitably some overlap in the expertise brought to the table and in the activities conducted by a law firm and an outsourcing advisor; however, that can easily be minimized by cooperation and open communication between the respective firms. If all is going well, the two firms clearly define their respective roles and then work together in an independent but complimentary manner, all with a view to minimizing expense and optimizing the structure and execution of the transaction.
Another reason to utilize an outsourcing advisor is that they will be able to provide raw manpower for execution of the transaction. As anyone who has participated in a large sourcing transaction knows, there is often a huge time commitment required to gather and analyze all of the relevant information, identify/communicate with and assess potential suppliers and then negotiate the transaction (particularly if dual negotiations are employed). Under the best of circumstances, this is a full-time job for what can be a sizable group of personnel.
It is difficult, in these days of ever-scarcer resources, to borrow personnel from other areas within the organization for a full-time commitment of several weeks, if not months, for your transaction. Particularly when the transaction may be a one-time endeavor and may also not be the most popular transaction internally, it may be difficult to get personnel and their managers to “volunteer” for this duty (especially if their position is at risk). While using outside resources does not come without a cost, it may certainly be preferable to poor execution, missed deadlines, and incomplete or sloppy work product that is only going to disadvantage the customer during the term of the agreement.
Another subtle but profound reason for using an outsourcing advisor is to help develop and maintain internal support for the transaction. Customers should have a clear vision of their goals for the transaction at the beginning of the process. While different organizations will sometimes call these different things (e.g., mission statement, guiding principles, etc.), having executive support for what the organization is attempting to accomplish is a valuable tool in executing the transaction.
An outsourcing advisor can bring an independent view to the process of developing these goals and can validate or invalidate assumptions that, without their expertise, may have been accepted without question. Indeed, the best outsourcing advisor will recommend against an outsourcing transaction or, at least, significantly impact the initial view of its scope and execution. Politically, this independent view can then be leveraged by the corporate champion of the transaction as a validation of their business case.
As an added benefit, during execution of the transaction, stakeholders sometimes engage in protecting their turf and their people, rather than in a dispassionate execution of the mission statement. Hiring a skilled outsourcing advisor should be helpful in identifying, dealing with and perhaps even creating a buffer against individuals that may (sometimes without even realizing it) be working to benefit their own department or people, rather than in the overall best interests of the organization. This is not to say that the transaction can simply “be turned over to the advisors” and they will then serve as a teflon-coated magic carpet for the transaction. They can, however, provide material assistance in establishing the goals for the transaction, staying on point throughout the process and, depending on the institution and the personalities involved, possibly assist with the internal politics that often arise any time an organization attempts to significantly restructure itself.
Given our current strong economic headwinds and resulting increased focus on justifying third-party expenditures, one also has to justify the costs of employing a third-party outsourcing advisor in sourcing transactions. While the commoditization of the bottom end of the market causes an increasing percentage of outsourcing transactions to be less risky (and therefore decreases the need for a third-party outsourcing advisor), large and complex transactions that transform significant portions of an enterprise can have a huge impact on the success or failure of the sourcing initiative and the enterprise as a whole. If the transaction is important enough, skimping by with overworked and cross purposed in-house personnel just for the sake of saving what may be a rounding error over the life of the transaction may not be worth the risk.
Moreover, over-spending on a large scale sourcing initiative may “bake in” unnecessary costs and expenses that could have been avoided if the transaction had been executed correctly in the first instance. Of course, any third-party expenditure has to be weighed against the value of the services provided, but in the long run, having the right resources on the front end of a transaction may both materially increase its chances of success and significantly reduce the total dollars spent on the initiative.
The point is not that a complex sourcing transaction cannot be accomplished in-house — quite the contrary. The point is that without a sufficient number of truly competent sourcing professionals (whether from the inside or outside of the organization), the costs of the transaction and its ultimate success may be less than what the customer would have desired for one of its most critical and complex corporate endeavors.