Sunday, November 8, 2009

Trend Watch - Speed Sourcing

The Trend of Faster Outsourcing Transactions

Speed Sourcing – also known as Fast Track, Sourcing Lite, and various other monikers – is the latest talk in sourcing circles these days. As advertised, it is a way to go from identifying service providers to contract in three to four months. For anyone who has completed a strategic sourcing transaction, this sounds like a compelling value proposition. But what should you know about this process before you jump in?

Traditional sourcing transactions are labor-intensive initiatives that require significant attention to detail, as well as collaboration and documentation. Today’s economic climate is driving a strong push for shorter, more efficient processes. This “shortcut” approach appears to offer a compelling argument to CIOs who are pressed to cut costs and get savings rapidly.

Let’s take a closer look. What is Speed Sourcing, really? Is it a completely new approach that holds promise for revolutionizing the sourcing world, and is this something you should be considering for your company? Will it actually help you begin sourcing more efficiently?

To answer these questions, we’ll look briefly at the history of sourcing and today’s sourcing market. Then we’ll explore tips for fast tracking the sourcing process.

A Quick History of Outsourcing

The traditional sourcing advisories – primarily begun by advisors with a Service Provider background – developed complex, paper-based, labor-intensive processes to source services. The impetus to make the process complex came from the past lessons learned. Because the first wave of sourcing transactions were done, literally, on the back of a napkin, often there were no service levels and few detailed and documented requirements. As a result, there was frequently much dissatisfaction, confusion and concern over “what did we buy” after the deal was concluded.

The sourcing advisory industry was born of an effort to bring clarity to the process and to even the stakes so that the client was well represented at the negotiations table. Initially, Service Providers took great offense to this service. Although most providers liked the way business had been done in the past and didn’t want to change, they eventually became aware of the advantages of having well-prepared clients. Service providers soon became accustomed to the value the sourcing advisors brought to the table, and they ultimately acknowledged the benefits of being in a deal where the client was represented by knowledgeable individuals, presented clearly defined requirements, and followed a process that promised to deliver a signed agreement. Some service providers avoided the game, preferring to do business the old-fashioned way – finding their deals through relationships and working them one-on-one with the clients – but as the sourcing market matured, this approach became less and less the norm. Sourcing Advisory firms prospered.

In the early days of sourcing, transactions tended to be large and complex. With a typical six-month transaction, several advisors and a law firm traveled to the client site each day and the transaction costs could easily reach half a million dollars. Each service provider also spent at least that much or more pursuing a large deal. In the days of mega deals, this kind of support was critical, and the savings achieved justified the overhead.

Today’s Outsourcing Market

Outsourcing today has moved from the mega-deal space, where billions of dollars in spend were transferred to a third party, to smaller deals in the range of $5 million to $10 million per year. With smaller deals, clients have more choices and often a more confusing array of choices. The number of service providers has proliferated since just ten years ago, despite the recent wave of consolidations. Literally hundreds of, and by one count more than 1000, companies are selling outsourcing services in the areas of information technology (IT), human resources (HR) and finance and accounting (F&A). Sourcing advisory expertise has also multiplied. Whereas just a few years ago, sourcing advisory firms were turning away business for lack of bandwidth, today literally dozens of sourcing advisory firms are competing for the clients’ business.

Clients are insisting on more cost-effective approaches to sourcing transactions. They are capping the costs of doing a transaction and pushing to get the deal done faster to realize the savings. Similarly, with smaller deals, more competition, and a difficult economy, sourcing advisory firms have responded with fixed-price pricing models, and, in an attempt to be more efficient, they have attempted to squeeze the timeline down and eliminate steps. To respond to market demand, firms have embraced this new approach and labeled it "fast track,” “sourcing lite” or “speed sourcing”.

When Can You Fast Track?

Under the following circumstances, the fast-track process may work well for you:
  • Your team is relatively experienced at sourcing
  • You have already developed your strategy.
  • You have a clear vision of your requirements.
  • You are sourcing standard administrative services, such as desktop support, help desk, payroll, or invoice processing and do not need customized services.
If your organization is inexperienced at sourcing or if you have not reached internal consensus on scope or strategy, the fast path will be problematic. For those clients who are interested in sourcing complex infrastructure or applications services, realize that these services do not lend themselves well to the fast track approach because they require extensive collaboration, knowledge transfer, and due diligence with the service provider to forge the deal. Rushing through a complex business transaction, or leaving critical steps until after the deal is signed, often results in significant problems later. It isn’t just a matter of “cleanup.” Omitting critical steps before contract signing is a good way to guarantee a new contract negotiation activity 12 to18 months into the deal.

Tips for Optimizing the Process

If you want to take a process and optimize it to reduce the costs, let’s explore some basic tips:
  • Eliminate unnecessary or redundant steps
  • Automate as much of the work as possible
  • Reduce the cost of the associated labor
  • Don't start until the strategy is defined
What kinds of steps can be compressed or eliminated?

A number of steps are critical to arriving at a valid sourcing arrangement. Eliminating critical steps or delaying them until after the deal is completed will dramatically increase the risks of the deal on both sides. If the risk is shifted to the provider, the costs will go up for the base charges. If the risks are shifted to the client, the service may suffer, and the “out-of-scope or retained” costs will go up. Steps that are often suggested for deferment are due diligence, data validation, detailed requirements, and the details around service requirements and service metrics.

If these steps are deferred during the transaction process, the up-front process is certainly a lot simpler and faster. The issue is that these steps are difficult to complete satisfactorily after the deal is done, and if they are, there will typically be adjustments to the pricing and the service delivery.

Two other steps that often come under scrutiny are the request for proposal (RFP) development phase and the proposal response phase. Most advisory firms and many companies already have templates for requirements, and these can be used as a starting point for the development of requirements. Your team can review and customize these templates with the advisors guidance, so you do not need to start from scratch. However, this process can typically take several weeks, depending on the availability of your team and your starting point. If you have not solidified your scope and strategy before you start writing the RFP, you will spend another several weeks getting these items clarified before you can start writing the RFP.

 Here are a few key areas that can be eliminated or optimized.
  • Eliminate the Request for Information (RFI). If you are comfortable with your requirements and are ready to select and identify a few providers who can deliver those requirements, the RFI step can be completely eliminated. To help you shave several weeks from the process, a competent advisor can help match service providers’ capabilities to your requirements without your having to issue an RFI.
  • Eliminate Site Visits. A week or more can be shaved from the project schedule, and considerable expenses can be saved if you skip this step. If you are working with experienced, reputable service providers, you should not need to send your entire team to visit their site. Site visits are always carefully orchestrated, mostly by marketing and sales people who do not necessarily represent the service you will be receiving or the team you will be working with. If you really need to do the site visit, schedule this trip after you have eliminated all but the one or two providers you want to work with, or think about combining the onsite visit with the review of the bidders’ proposals. Instead of having the providers come to you for the bid reviews, your team can go to their site.
  • Optimize Onsite Due Diligence. Do not eliminate due diligence, but do optimize it. Managing multiple providers onsite is logistically difficult and can extend the length of due diligence if not carefully coordinated and orchestrated. The biggest time waster in due diligence is data gathering. Perhaps the biggest difficulty in data collection is simply a delay or lack of focus on the part of the people collecting, organizing and reviewing the data. To streamline, the client can start data collection in the early stages of the sourcing initiative, and provide all data to the bidders through online mechanisms. A carefully managed, well-documented due diligence will provide clarity and remove risks from the bids, and can be completed with one or two providers in one to two weeks, depending on scope. If your sourcing requirements include the takeover of resources, facilities or people, you may not be able to avoid some onsite due diligence, but you can optimize it by planning carefully and doing advance work. Eliminate any delay in getting the data to the service providers, and you will reduce costs and save time in the process. Require your sourcing advisor to provide your team with data collection requirements early in the process and request early input from your service providers. Dedicate a small team of people to the task. Begin early and organize.
What are tips for automating the process?

There are many tools available to automate parts of the process — from the data collection to development of the RFP. Also, realize that most advisory firms have already developed templates as a starting point for the development of requirements, which can save you a lot of up front time in this effort. In sharing and customizing documents, make use of collaboration tools to optimize your team’s efforts. If your advisory firm does not have a set of tools to optimize the process, you should use your own. Running a complex strategic sourcing initiative on paper is not only antiquated, but time consuming and expensive. Also consider the logistics of allowing external parties to access the information.
How can you reduce the costs of advisory labor?

If an advisory firm wants to reduce the costs of advisory services and to maintain its margins, one of the easiest ways to do it is to implement a pyramid model. Putting experienced people on your transaction will certainly be best for you, but it is not a good model for the advisory firm. So putting two or three inexperienced and inexpensive people with one part-time experienced person on your deal will reduce the overall costs of doing the transaction, but it will not necessarily improve the outcome. To reduce the costs of advisory labor, negotiate a fixed price per day or week, and try to get fewer but more experienced people on the deal. You can investigate some of the smaller advisory firms or individuals who have a lower overhead and more experienced people. Plan to use advisors in an advisory capacity, not in a staff augmentation role. Have your team do the heavy lifting, and use the experienced advisor to help you navigate the difficult stuff.

How Can Strategy Affect Costs?

A clearly defined, business connected strategy, coupled with strong communications and executive leadership, is the best way to eliminate false starts, delays, and costly mistakes.  We strongly recommend that clients not rush into a transaction until they have completed this critial step in the process. 

What Not to Eliminate

Shortcutting the initial processes of defining your objectives and requirements only pushes those activities out until the negotiations. When work that the internal team could have been done upfront is pushed into contract negotiations, expensive lawyers and consultants generally do a lot of the work. Unless you have someone on your team who has made a career out of negotiating this type of deal, we do not recommend going it alone in negotiations, but utilizing external resources effectively is the best way to contain costs.
  • Do not omit interaction with the service provider if you are unfamiliar with this organization. 
  • Do not omit specifics around service levels. It is easy to espouse that this can be handled post contract, but the experience of advisors and of many CIOs who have gone down this path is that there is no leverage to get the service levels defined after the deal is already complete.
  • Do not develop a high-level, open-ended contract unless you plan to establish a strong governance team and are contracting for pay-as–you-go or time-and-materials services.
  • Do not agree to negotiate with multiple providers if you haven’t established a baseline for negotiations, including a clear definition of requirements, performance objectives, and roles and responsibilities. If you proceed without this baseline, you will be guaranteed to waste time and expend large amount of resources and costs.
Concluding Remarks

 If you choose to do a speed-sourcing project, make sure you have done all your homework. In other words, make sure you have carefully defined your strategies, scope and objectives up front. Take only logical, low-risk shortcuts, and do not assume that work you skip on the front end need not be done eventually.

In a speed-sourcing example noted in CIO magazine in May 2009, the detailed proposal request (RFP) – which includes the definition of requirements and the clarification of client objectives – was eliminated and replaced with what could be called an RFI. Where there is little up-front definition, service providers generally respond with marketing materials and little specificity or pricing. In these instances, the real work of defining responsibilities, determining service levels, and getting pricing begins at “negotiation.” Essentially, all the work that would have been done up front by the client team to solidify its requirements and objectives with an RFP is skipped and then worked through during negotiations with one or more service providers.

 Even in fast-track or speed-sourcing deals, adequate up-front work is key. Addressing critical issues for the first time with a provider across the table is a very risky proposition and one that will potentially elongate the process.

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