Inside Sourcing newsletters \ What? Why Would I Involve Anyone but the Stakeholders?: A Guide to Assuring Success in Major Outsourcing Deals
You've spent months developing a sourcing strategy, conducting an RFP, negotiating a contract, and transitioning to a new supplier. It was a long and arduous road, but totally worth it right? After all, you got the supplier's A-team on board, captured all the cost savings you expected, and earned a nice bonus in the process. Heck, service was stellar too, right up until the first change order. Six months and 147 change orders later you're sitting in your boss's office explaining why that promising project turned into such a catastrophe, and struggling to articulate how you'll make sure it will never, ever happen again.
Sound familiar? In a time when about a quarter of all outsourcing deals fail and roughly half do not deliver their projected value, oftentimes underperforming by as much as 30% to 40%, it likely does. In fact, the example above was a real life illustration with details removed to avoid embarrassing anybody. Excessive change orders in cases like this not only point to poor contract quality generally, but in all likelihood also to an inadequate strategy, dubious supplier selection methodology, and sloppy oversight. In other words, the process broke down. More import than the failure, however, is figuring out what can be done to prevent it from reoccurring. How do procurement professionals proactively set themselves up for success?
A proven practice that I have implemented where I work is to have a team of non-advocates review the sourcing strategy and RFx documents to help assure first time quality and comprehensiveness before anything is released to bidders. We call this a "red team" review. Since our most experienced professionals cannot participate in every procurement effort, it's a way of institutionalizing best practices while leveraging their time most effectively.
Here's how it works: The idea is to have folks who are outsourcing, legal, financial, and technology experts but who were not involved in development of a particular RFx put on their "supplier hat," go through the materials, and look for risks, errors, and omissions. Clearly we could hire a consultant to do that, but have found that it is far better (and more cost effective) to leverage internal expertise that knows our business needs, processes, and supply base well. We generally want the RFx to be about 90% complete before going through this quality review and then make necessary adjustments while finalizing the documents. Typical defects (in no particular order) detected and corrected through this process include:
RFx documents misaligned with sourcing strategy, hence unlikely to achieve desired outcome
RFx schedule unrealistic or risky
SOW requirements not fully defined or aligned with business needs
SOW requirements overly restrict supplier's ability to improve processes or deliver innovation
SLAs, SLOs, and metrics missing, excessive, or not measurable
RFx incomplete or not following required processes
RFx elements out of context (e.g., pricing requirements or legal Terms buried in SOW)
Contract award decision criteria inappropriate, unclear, or undefined
RFx sections interrelating sub-optimally (e.g., SOW not properly aligned with Pricing)
Terms inappropriate for the RFx type (e.g., IT security requirements missing from a BPO RFP)
Deal misalignment (e.g., "utility" structure when innovation is required)
Transition plan inadequate or overly risky (e.g., "big bang" enterprise-wide versus site by site)
Inappropriate risk transfer amongst the parties (e.g., limitation of liability, indemnification)
Retained organization/supplier governance seen as an afterthought
To elaborate, the red team review provides an independent, non-advocate evaluation of a high-value (in our case anything greater than ~ $10M) or high-risk (e.g., external "cloud" hosting) procurement activities to reduce risk and provide more surety of outcome. The team is comprised of subject matter experts who are tasked with reviewing the strategy, process, bid list, and RFx documentation before materials are released to potential suppliers. Team membership should be cross-functional, drawing upon experts from multiple organizations or business units, not just the affected group(s) to assure diversity of perspective and experience. While participation on these teams helps build a skill base across the company, hence can be a fantastic development activity, the majority of members should already have extensive outsourcing experience, company, process, and industry knowledge.
While everyone should look at all aspects of the RFx holistically, technical personnel tend to focus on the sourcing strategy, SOW, SLAs/SLOs/OLAs/metrics, bid evaluation criteria, business Terms, transition requirements, supplier governance, retained organization, and how risks can best be mitigated. Financial personnel pay the most attention to pricing schema, volume forecasts, asset ownership, and identifying any elements that may unduly transfer risk amongst the parties. Procurement personnel focus on market capabilities, bid list, legal Terms, governance, corporate social responsibility issues, ethical procurement standards, and the overall bid evaluation process. Human resources folks pay close attention to the handling of affected personnel, pension/benefits, communication, branding, press releases, and community relations.
Oftentimes it takes three to five days to complete the process, particularly for larger, more complex, or riskier procurements. It's important to give everyone at least a week to review all the documentation ahead of time so that they can come prepared and use the meeting time effectively, though the size, scope, and complexity of the deal may require more preparation time. The meeting should be scheduled in advance and conducted face-to-face whenever possible. It should be led by the RFx team leader, with all primary players in attendance to ask questions of the subject matter experts and take notes. Kick off the meeting by presenting the strategy, goals, and objectives of the procurement action and then lead red team members through the highlights of the documents soliciting feedback for each section. While the red team acts as an advisory board, not an approval body, all identified findings and risks must be dispositioned before finalizing and releasing the RFx.
At a high level, the process looks like this:
While a red team/non-advocate review process cannot guarantee success, it goes a long way toward improving the likely outcome and reducing the risk of complex procurements. Further, it assures documentation and promulgation of best practices across the company, assuring that you will not need to have that uncomfortable, oftentimes career-limiting "I can't believe we did that" meeting with your boss or internal customers. While it takes a bit longer to future proof the RFx, improvements in first time quality and contract value are more than worth it. In this fashion we grow our process maturity and employee capabilities while measurably improving outcomes from the procurement process.
Lawrence develops IT strategies for an aerospace company where he gets to play with billions of dollars of other people's money and make really important decisions. A member of the SIG University advisory board, he advances thought leadership in strategic sourcing, benchmarking, and supplier innovation as a frequent speaker at industry conferences. He has saved his company more than $1.8B by architecting sourcing strategies, designing full sourcing lifecycle management processes and tools, conducting procurements, negotiating with suppliers, and benchmarking resultant contracts. He mentors strategic sourcing and procurement professionals both inside and outside his organization.