Tuesday, July 28, 2009

The Truth About Strategic Sourcing Initiatives

Surely, lessons are to be learned from the collective years and billions of dollars spent pursuing the path to sourcing. But how do you filter through the "mountain of wisdom"and conflicting advice that screams at you from the dozens of websites and from sourcing advisors and service providers? Keep in mind these basic truths about sourcing transactions as you proceed.
Here's the first one to consider:

Truth #1 --There is never enough time.

The sourcing initiative work will definitely expand to fill the available time. Your team, if not experienced, will waste valuable time on things that are not important. If you are not clear and focused, your internal approval, decision making and evaluation processes, will bog the process down.

What is a reasonable amount of time and what should we expect?

That depends upon a lot of factors:
  • How many functions are you sourcing?
  • How well organized and documented is your current environment?
  • What will be the availability of your key team members?
  • What is your team member's ability to make decisions of this type?
The procurement approach will also have some impact on your timeline. If your internal processes dictate a full competitive process with half a dozen service providers and you are still working out requirements -- it's going to take a while.

If you have clear objectives and a well-defined scope, and if you have the leeway to go to two leading providers and ask for their standard offerings – you'll complete the process much faster. Several excellent service providers offer standardized sourcing services for things such as network or desktop services. Both sides benefit from this standardized approach: the costs are lower because the service provider pursuit costs are less and the provider can optimize and standardize the operations across multiple clients. With this approach, you get a standard, cost-effective service in less time.

So what is the answer?

Let's compare this to a full-scope, "have someone do it all " IT sourcing transaction. For a full scope sourcing transaction (such as one encompassing all HR functions or all IT functions) you can expect to spend about 6 months reaching an agreement. And it really won’t matter much whether the effort is competitive or sole source -- all the same steps must be completed. Sometimes with a sole source effort, you can actually spend more time. You might want to consider that it could take as long as 8-10 months -- and then the transition starts. Transitions usually require a minimum of 6-8 weeks, and by then you are probably through your budget year.

But let's say the scope of your deal is focused on only one or two services. If, for example, you are going to outsource your IT Help Desk and Desktop services, and if you are willing to accept standard services from a service provider and cut through the long competitive process, you may be able to get it done in a matter of 3-4 months or less. You might transition in one month and start getting savings in about 6 months. Certainly, this is achievable, and there are some very reputable firms offering this kind of standardized service. To achieve this timeline, however, However, you must be willing not to “mess with the model” and accept the standard services. Otherwise you are back into a customized transaction mode, which will extend your time and costs.

Let’s just tell the team they have to get the whole thing done in six months.

Before you set up hard and fast timelines, it is best to consult with your team and any advisors you have hired. A good project leader will establish the scope, objectives and key parameters of the deal, and will provide a reasonable estimate of the time needed to do a proper job, including getting the required approvals and sidestepping risks to meet the deadline.

Keep in mind, however, that if your advisor is overly optimistic about how long the transaction will take, you have a right to be concerned as to whether the advisor knows what he is doing. Find someone who does. There are few shortcuts for a full scope, customized sourcing agreement.

If you opt for the "fast path" or "speed-sourcing", realize that numerous compromises will have to be made, there will be little or no customization -- and sometimes, much of the detail will have to be worked out post-contract. If you are okay with that, then go for it. But remember your decision later when the details are a bit fuzzy, and you and the service provider will have to start working through those issues as they come up. Not always the ideal situation..

So if forcing a team to get a deal done by some unreasonable deadline is a good way to ensure a bad deal – are you recommending a leisurely stroll down sourcing lane?

Taking reasonable time is good. Dawdling or trying to achieve perfection is not so good. Time changes environments, people, and market forces. You will eed change control processes to handle changes that take place over the term. Pick a good service provider that matches your needs. Get a solid agreement in place -- one that has flexibility to accommodate change and move forward with it. It will never be perfect. Do the best you can in the time available, but once you start, get on with it. There was an old maxim in the early days of sourcing - "time kills deals" -- and that still holds true today.

So what do you recommend?

Find some experienced folks to work on your side, and give your team adequate time to put together an agreement that will work for both sides, in other words, one that is supportable and that will stand the test of time. A hastily thrown together or poorly thought-out sourcing agreement is worse than a bad marriage -- it will be hell on a daily basis, and it will cost you a pretty penny to get out of. The savings you anticipated will disappear faster than your teenage son in your newly restored 1965 Mustang.

Truth #2 Cost Savings Can be Elusive.

A full-scope sourcing transaction, with its technical complexities and decision making is challenging and time-consuming. It is unlikely you'll be able to negotiate an agreement and achieve cost savings in the same year --especially if you are just now starting to think about it. You might be able to source some components in a short time frame, like Help Desk and Desktop or your ERP system. Even if you get a transaction completed in a single calendar year, the savings are unlikely to show up until the second year, and then, only if you manage the agreement properly.

Of course, you can always “financially engineer” the deal, meaning that you actually take savings in the first year and pay the service provider to spread the costs out over the term of the agreement. But be sure to look at the economics of getting a "loan" from the service provider.

How can we deal with transition charges?

No matter how you slice it, you will have transition charges to pay the service provider for getting started: for moving resources, buying new equipment, and so forth. You can choose to pay these up front or upon completion of key milestones. Or you can finance it over the term of the deal. But the costs will still be there and will impact your overall business case.

When will we know how much savings is possible?

The best way to determine potential savings is to establish your current baseline. You can start by setting up a pro-forma business case before you get the service providers involved. To do that, you will need a very good financial base case which includes all your costs to deliver the service – not an optimistic, feel-good model, but a realistic model that accounts for overhead costs, and shadow organizations and resources. It is advisable to get someone outside the organization to help with this model. An outside advisor can bring a third party perspective to the development of a solid baseline that is comparable to the deal you are about to consider.

Next, work with an advisor who can provide you with market data around the costs of the services you are about to source. There are firms that can help you with this, but be sure to examine the extent and quality of their data. The resulting model will provide an idea of where you are headed, and the savings potential even before you get the bids back. But remember that as you go through the deal and change things, customizing them for your company or adding new services, you will change your costs and savings. The only way to know what you are going to save is to see the final deal from the service provider. Strategic sourcing is not like buying a car, it is more like building a house, in that your costs will not be apparent until the last nail is hammered.

You will have a second look at the business case after the bids are in and the team has completed its analysis and normalizations. Don’t ask for this on the first day the bids arrive. Let the team do its analysis. Give it a couple of weeks if you have multiple service providers involved. You will have a good feel for the business case then. Remember, this could be 2 to 3 months after your team starts working on the deal. Numbers given any sooner are not really valid or solid enough to be used in decision-making. And remember, final numbers and savings projections will be available only when the negotiations are over.

We’ve heard that the cost savings promised often don’t materialize.

The reason most savings never materialize has little to do with the service provider or the original business case – and everything to do with how well you manage the agreement, control demand from your business entities, and collaborate with the service provider. The business case is as good as the paper it is written on for that moment in time. The business case helps support your decision to do the deal and with whom, but it cannot promise actual savings — that part is up to you. It is critical to remember that your environment will change over time, technologies will come and go, and your needs will go up and perhaps down. Through all of this, it is imperative that you keep watch over the arrangement-- manage the change and demand inherent in the environment to ensure you are receiving the benefits you agreed to (in other words -not what you expect, but what you signed up for).

Remember that you need a solid base from which to measure the value of the agreement, and you should plan on managing the contract to ensure that the value of the agreement is realized.

Truth #3 – Complex Deals Require Experience to Pull Off
One of the most difficult things to accept about complex sourcing transactions, is that the first half dozen you work on are learning experiences. The experience necessary to complete a successful transaction is not easily acquired.Most people make mistakes on their first few transactions, some of them serious and potentially costly.

We should be able to get our internal team to do this along with their other responsibilities.

Possibly. If you have an experienced sourcing professional on staff that heads your sourcing office, and that person does not also have a half dozen other transactions he or she is working on, you might be in luck. If you have staff available to work on the deal who know your internal environment, understand the objectives, can make decisions, and who are available full time to work on this project -- stop reading and get your team in gear.

We can’t afford consultants and we have lots of really smart people on our side – this is just like any procurement, right?

If this is the first time you have attempted to outsource anything bigger than a software development project, you need professional help. Consider that your team will be negotiating with service provider pursuit teams who've eaten this stuff for lunch every day for twenty years. Going it alone could be very painful.

But not all professional help is created equal. It's a bit like choosing a doctor to perform a difficult surgery. Find someone who has a broad base of experience, not just one or two deals. When choosing an advisor, make sure you interview the team that will be working on your project, not just the sales team or executives. Unfortunately, there are many individuals who can claim to have worked on "dozens of transactions", but their contribution to each one was minor. Advisors who have crafted deal structures, negotiated service levels and managed agreements are typically the best choice.
Good help doesn’t have to cost you a fortune. The sourcing market is mature, and there are many good professionals available who have done many deals and understand how to put complex transactions together. They don't all work for the big consultancies.
Get good help and follow their advice. Then, hopefully, you will never realize first-hand how much money, time and misery this can save.

Truth #4 – It’s Not Over Till its Over

Once we finish the deal, and the service provider takes over, we can just turn our attention elsewhere and not worry about that part of the business anymore.

Definitely not. There are oceans of wisdom here. Ask any CIO or CFO a few years into a sourcing contract. Ask them what they wish they'd done differently. They will most likely tell you they wish they'd focused less on getting every last penny out of the service provider during negotiations and more on managing the deal after it was done.
Advisors and experienced outsourcing professionals will tell you that you need to manage the deal in order to make it succesful. We will tell you that it’s a lot more critical than that. If you don’t plan on putting at least one seasoned professional in place to manage the relationship, the contract and delivery after the deal is done, you should just take your money and drop it out the top floor of your office building on a windy day. It’s just that straightforward. Manage it or lose it. Every day.

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