Choosing a Service Provider -- Cautionary Tales

A colleague confided in me recently that he believed the reason his former employer (a successful 20-year company) was no longer in business was due to a critical misstep on a single major transaction. The team became enamored with doing a major deal with a very large and well-known company. It was the "deal of a lifetime" for the team. In their rush to get the business signed, the sales team overlooked some critical warning signs:

1) The client couldn't clearly define their requirements or their business objectives up front

2) The service provider team members weren't allowed to ask questions or voice concerns because it would "slow the process down".

3) Service Provider hubris did not allow them to admit that they couldn't deliver what the client was requesting.

4) The client lacked a strong leader in place to manage the multiple team members who wanted to change requirements after the deal was done.

5) This client would have more than doubled the business of the company, straining a team to serve the new client at the expense of their current clients -- or to grow more rapidly than was reasonable.

Both sides erred in going through with the deal -- neither did the proper due diligence on each other before rushing to "ink a deal". Neither side was clear on the requirements. But, when it became apparent that the service provider couldn't deliver as anticipated, there were plenty of people lining up to assign blame for the disaster.

For some companies, this may have been a small blip in the scheme of things -- some heads would roll, everyone would have learned a valuable lesson, and life would go on. Tragically, this company was not strong enough to withstand such a severe beating, or such demands on its team and infrastructure. Less than two years later, the company no longer existed.

The conversation came full circle a few days later when I talked with another friend whose company is struggling to sell services and maintain delivery standards to its current clients. It has chosen not to spend the time or money to ensure a strong foundation in its current services, but instead, is rushing to expand its services into new areas, in a desperate attempt to increase revenues in a difficult market. Time will tell if they are successful in this endeavor.

I provide these two stories as a followup to my previous posts on selecting service providers. I will leave you with several cautionary thoughts.

1) When deciding to outsource, proper due diligence is required on any service provider -- even the larger ones. Just because a service provider is large and well-established in one area of service, doesn't mean that it can provide great service outside its comfort zone or in a new line of business.

2) Just because the salesman or Executive says they can do it, doesn't mean they can actually deliver. Take the time to talk to the team to understand their level of comfort and expertise in doing the work you are requesting. Talking to the team members can be revealing.

3) If you are considering a service provider for whom you will be more than 50% of their business, you should proceed with extreme caution -- if at all.

4) If your team has not defined its strategy and requirements and you lack a strong leader to manage the relationship, this will mean a difficult time for you, and could produce disastrous results for the service provider.

I am sure there is much more to the two stories I have related, but the lessons are clear -- when outsourcing a critical function, do your homework, investigate your potential partner, and take the time to do it right.

Defining Service Provider Selection Criteria

A few weeks ago, I listened as a client described a failed outsourcing project and the difficult situation they were in as a result. They had not defined their business needs and selection criteria carefully before determining which provider to negotiate with. Their selection was based upon personal relationships, past bad experiences, and some marketing hype. They ended up trying to strike a deal with a provider that not only could not meet their needs, but they didn't find that out until they were well into negotiations. They cancelled the transaction, which cost them hundreds of thousand of dollars in consulting and legal fees, and put themselves in a very precarious position operationally. I wish I could say that this situation is unusual, but unfortunately, I have seen it many times in my consulting career.

Determining selection criteria before deciding who you want to invite to the outsourcing negotiations table is not rocket science. In fact, it is such a seemingly mundane task, that most people just skip it. The problem is that in a company where outsourcing is being considered, there are multiple forces at work -- people making decisions based on internal, unspoken criteria or old prejudices, or perhaps making recommendations that will scuttle the deal for personal reasons. So taking the time to identify your goals and business needs, and the objective criteria by which your team will make a decision, can help take the decision out of the realm of the emotional and into the realm of practical, business decisions.

One way to approach this is to develop your selection criteria as a team, and then jointly rank and weight these so that you can assign value to each of the criteria you will use to evaluate the providers. For example, you may have both price and technical solution as part of your evaluation criteria, but which one is more important? Are you willing to pay more for a better technical solution or capabilities? Or is cost the most important criteria? You may have difficulty making these decisions, but it is far better to make these decisions up front before you embark on service provider identification.
Your business and sourcing strategy drives the selection criteria, which will drive the identification and selection of the provider. If you choose your list of providers before you have completed these strategy steps and have internal agreement, you will most likely find, in retrospect, that you have omitted some very good candidates, and included a few that clearly don’t match up.

Once you have your selection criteria identified, ranked and rated, you may want to identify any criteria that are minimum requirements or showstoppers. If there are criteria that the provider must meet in order to bid on your deal, you can save yourself time by making these criteria the first pass at selection. For example, if your company can only do business with companies that are based in a particular geography or that are of a certain size, then these criteria become an automatic disqualifier if they are not met.
You should investigate each of the companies on the potential provider list to ensure they meet your basic criteria before you engage with them. This is an activity you can have your internal team perform, or you can procure the services of an external advisor to help you with this activity. You don’t need to take a service provider through a proposal process to find out that it doesn’t meet the basic qualifications for selection.

While you are working on this initial task, it is important to take another kind of internal survey: are there any providers on there that your company, for whatever reason, cannot or will not do business with? This is sometimes a bit of a challenge, but the usual place to start here is with the executive committee. There may be some strong opinions on that team about who they want to do business with, but the real question to ask is -- if this provider gives us the best proposal is there anything that would prevent us from signing a deal with them? If you uncover anything significant and cannot get it resolved, it is best to omit this provider from your list. Neither you nor the provider have time to work on something that is futile.

Provider Selection -- How To Choose the Right One

Provider selection is perhaps the most important decision to be made in the course of a services outsourcing initiative, and also one of the most difficult. And there usually isn’t just one service provider that can deliver your services. There are usually several or perhaps dozens of highly qualified firms that can meet your needs, and your job is identify the one you want to do business with.

In these difficult economic times, clients are finding that there is tremendous competition for every sourcing opportunity they identify. With the dozens of companies vying for your business on even the smallest transaction, how do you pick the right service provider from the crowd?

I suggest that your business strategy should be the primary driver of service provider selection. Without a clear business and sourcing strategy, it is difficult, if not impossible, to select a provider that can meet your requirements. It is also easy to focus in on only one dimension of selection criteria, for example, cost, and dismiss or overlook other critical criteria for selection. Many clients these days are overlooking quality and business strategy and going straight for the easiest option -- picking the cheapest solution. This is a tempting, but short term and potentially disastrous view of sourcing. Let's discuss some of the other ways to address service provider seletion.

What parts of strategy are important to define?

Some companies focus on relationship and choose providers because they have worked with them before or because an executive in the organization has a strong relationship with the organization. Perhaps the company feels that the provider does not have the best qualifications, but they fall into the “it’s the devil we know” trap. Some fall in love with the sales team, and make their selection based on marketing ability and rapport. Others focus only on technical qualifications, and overlook the critical dimension of relationship and cultural fit.

Your selection can be made easier if your strategy and vision have been carefully defined, your team is able to communicate this information to the service providers, and you take care to review and verify that the provider not only can do what they say (ie. Have the documented capability and track record), but that they will do what they say (i.e. they are willing to accept risk of performance and put their promises and marketing blitzes in the contract).

Before you start to consider what service provider to invite to the table, make sure you are very clear on the following items:

- Business strategy
- Scope of sourcing
- Personnel and benefits goals
- Operational and Technical goals and objectives
- Degree of transformation required
- Definition of desired relationship model
-- Collaborative or tactical
- Future vision
- Service Delivery Model and approach
-- ( single or multi-source)
-- ( onshore or offshore)
-- (strategic sourcing or tactical sourcing/staff augmentation)


Your strategy will help you determine the both the number of providers selected, the characteristics of the providers selected and ultimately, the winning provider or providers. If your strategy calls for a multi-sourced or best of breed solution, you will need to select a different set of providers than if you are looking for a single source to provide all services. If your strategy calls for a innovation in technology, you will want to identify providers with that particular skill set and track record. WIthout a clear strategy, you are likely to send mixed messages to the provider community, making your task more difficult and increasing the likelihood that you may choose a provider totally unsuited for the task.

In my next blog, I will talk about how to build your selection criteria.

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