Analyzing Risk
Last month we covered the planning phase and learned that clear outsourcing objectives are necessary for what is to follow–setting the parameters, collecting appropriate information for the analysis, formulating a request for proposal (RFP), evaluating proposal responses, analyzing and resolving trade-off issues, and negotiating a sound contract.
This article summarizes some of the key considerations in the next phase. The goals of this phase are to develop a detailed analysis so you can determine the current costs for the function you are planning to outsource, analyze the risks, and prepare an RFP.
The biggest challenge is to develop both costs and service requirements in light of expected technological and business change (which may be interrelated) over the expected life of the outsourcing arrangement. Forecasting the future is always difficult and often inaccurate, but still necessary.
First, analyze the costs of your personnel, hardware and software. Don’t forget to consider data conversion and other transition issues. Some costs may be “hidden” in user budgets, so try to identify all costs.
The relevant requirements in outsourcing represent future costs. Without a good idea of future needs and the costs of meeting those needs, it is difficult to outsource effectively and efficiently.
Now, estimate your administration costs. It may cost more to administer an outsourcing arrangement than it may cost to administer the same function internally. Remember these costs vary with the size and complexity of the function to be outsourced and with the nature of the governance arrangements necessary to manage the relationship.
Once you have estimated all your costs, determine your position on who will bear each cost–your organization or the outsourcing vendor.
It is important to carefully define service requirements with sufficient depth to make them measurable. Make these requirements as detailed and measurable as possible. Stating requirements in terms of the performance of your organization and tying vendor compensation to your business performance can be a powerful way of aligning the vendor’s objectives with your objectives.
Risk Analysis
Next, estimate the benefits of outsourcing. You do this by performing a risk analysis, which identifies, analyzes, and prioritizes risks. Outsourcing involves the usual risks of information systems projects and operations plus the risks of doing the work through a vendor. Size, complexity, the need for flexibility, and newness to could raise the costs and risks of managing an outsourcing relationship. A risk analysis provides the foundation for risk management throughout the life of an outsourcing arrangement. Consider how you might eliminate or reduce these risks. Also consider the costs of risk management over the life of the outsourcing arrangement. Determine whether the risks change the feasibility of outsourcing.
After you have performed the above analyses; develop a Request for Proposal (RFP) to gather information about and from vendors. Tell the vendors everything they need to know about the services and functions in scope so the providers can effectively respond. Require the vendors to respond to everything that you need to know to make a sound decision. Give each vendor the opportunity to present the proposal in person and answer questions. Share all questions and your answers with all vendors. Emphasize an open, competitive, win-win attitude from the outset.
Be clear and complete in the RFP; you get what you ask for and no more. Keep the process simple, fair, and open, but rigorous and competitive.
Evaluating Vendors
Evaluate vendor responses, consider trade-offs, decide whether outsourcing is still desirable, and, if it is, proceed to contract negotiations with one or more vendors.
Encourage vendor competition throughout the process. Foster competition between vendors from the initial contact through contract signing. Taking two contenders into the next phase, negotiation, is a way to promote competition longer, but may not be manageable in all situations.
Don’t let a vendor short circuit the disciplined outsourcing evaluation and decision-making process by going directly to senior management or user managers for quick decisions. Set deadlines and enforce them; otherwise, you and the vendors will likely waste a lot of time and money.
Require full disclosure from the vendors. Check vendor references. Hint: Ask each vendor to provide customer contacts with which they have less than an excellent relationship and check them too. A vendor without a few unhappy customers is a myth. It can tell you a lot to know how a vendor appropriately or inappropriately handled an unhappy customer.
Begin now to define the relationship management process that you will implement if the decision is made to outsource. How the relationship is managed is a key determinant of success. The relationship foundation is set in place early in the process.
Lessons from the Outsourcing Primer:
- Don’t let a vendor short circuit the disciplined outsourcing evaluation.
- Encourage competition throughout all phases.
- Perform a risk analysis to determine the benefits and ways of reducing the risks of outsourcing or not outsourcing.
- Define service levels so they are measurable, meaningful, and relevant.
- Define the relationship management process as early as possible.
- Promote a win-win attitude and trust from the outset while keeping the process rigorous, disciplined and competitive.
