Possible Courses of Action

Like any organization decision, outsourcing is not immune to risks and requires effective management from the outset of the outsourcing evaluation through the life of the contractual relationship with a vendor. There are fifteen critically important factors for a successful outsourcing and they are as followed:

1. Define the objectives.

Outsourcing must be done carefully, systematically, and with clear explicit goals in mind. Outsourcing can turn out to be a double-edged sword when companies rush into it without fully understanding what they hope to gain, and finding themselves mired in a contractual battle with the vendor over service standards that are not up to the organization’s expectations.

2. Outsource for the right reasons.

Organizations should outsource for the right reasons such as to assess outsourcing’s potential tactical and strategic benefits and not just to delegate the work to outside vendors. These reasons are stated under the Background.

3. Answer key questions.

An organization should evaluate how the functions being outsourced are fitted into the company. As part of the outsourcing evaluation, organizations should answer key questions such as:
· What are our core competencies?
· What are the goals we want to achieve through outsourcing?
· Can we fix ourselves internally before considering outsourcing?

4. Use a methodical approach.

The decision whether to outsource is a process involving voluminous steps and phases such as identifying requirements; preparing a request for proposal (RFP); examining proposals; evaluating vendors; negotiating contracts; and lastly, implementing the outsourcing. The various phases are as followed:

· Planning Phase. The objectives, scope and feasibility of the outsourcing idea are defined and effort is planned in terms of time, budget and resources required.

· Analysis Phase. Baselines or constraints are determined. Functions to be outsourced and functions that will remain in-house are also clarified. The RFP is developed and responses from vendors are compiled and analysed. A vendor is then chosen to helm the outsourcing.

· Design Phase. Negotiations are set in motion with the vendor and a contract is developed and signed.

· Implementation Phase. The transfer from in-house provision of services to the vendor is made.

· Operations Phase. Outsourcing relationship with the vendor is managed and any changes that occur in the relationship are negotiated and implemented accordingly.

· Termination Phase. At the end of the contractual agreement, a decision is made whether to negotiate a new contract with the same vendor, a new vendor, or to bring the function back inside the organization.

5. Consider all stakeholders.

An organization that has made the decision to outsource would have prognosticated the impact outsourcing will have on the stakeholders, who include stockholders, customers, suppliers, and employees.

6. Get the right people involved.

Prior to the evaluation process, persons must be identified who will helm the leadership responsibility, perform the analysis and make the decisions. The people involved should be dependent on what is to be outsourced and the circumstances surrounding the outsourcing decision. The team should include representatives from user areas that will be directly affected by the outsourcing under consideration. Their views may be critical for setting the scope and for assessing risks.

7. Understand the vendors.

Managers should not be misled by what other companies are paying as the ultimate price paid is often subjective between organizations and is set in actual negotiations related to specific requirements. After short-listing a handful of potential vendors, better pricing and service agreements can be negotiated between them and a deal is struck based on the best final offer.

8. Realize that outsourcing is not "All or Nothing".

Total outsourcing transfers most equipments, staff and responsibility for delivery of services to a vendor. It is a major endeavour and no organization should do it without significant thought as these deals often span across long periods, usually more than five years. This is not to say that total outsourcing should never be contemplated, but that it should not be undertaken lightly.

9. Choose the right relationship with vendors.

Market relationships, where contract duration with vendors are relatively short, cost the least and are relevant for work that is simple and straightforward. Intermediate relationships are those that must remain amicable until a major phase of work is completed. They cost more and are relevant for work that is more complex with substantial benefits. Partnerships-like relationships cost the most and are only relevant when benefits of a close relationship are substantial. Choosing the wrong relationship could results in excess costs or failures.

10. Negotiate a sound contract.

There are various critical components of a good outsourcing agreement. Some of the important contract considerations are:

· Terms of the agreement. The contract should stipulate that a renewal of contract only occurs if a renewal notice is sent.

· Minimum service levels. The contract should specify the services to be provided meticulously. Examples include establishing minimum service levels and identifying any subsidiary services to be provided.

· Ownership and confidentiality of data. The contract should specify that the client retains ownership of the data it submits to the vendor and should be kept strictly confidential.

· Warranty. The services provided by the vendor should be warranted as defined in the agreement and should accommodate a specified increase in requirements.

· Exhibits. Exhibits should be given considerable notice as in a complex transaction, the first drafts of outsourcing contracts usually contain incomplete exhibits.

· Incentives. Chew over the idea of providing incentives for vendors to perform. Examples include guaranteed savings, profitability index and shared benefits/risks.

· Disclaimers. Disclaimers are inevitable in a contract but ensure that a disclaimer does not void the warranty and indemnity sections.

· Bankruptcy. The contract should consider the possibility that either one party may go bankrupt as it entirely changes the outsourcing situation and obligations.

· Force Majeure (Acts of God). Under these provisions, vendors are excused from performance, limited to between 30 to 60 days, if it experiences certain conditions.

· Anticipating change. Contracts should provide for both good and bad times of the economy and accommodate a fluctuation of demand that require an adjustment in services.

11. Use performance incentives and penalties.

Reward incentives such as bonuses when the vendor exceeds expectations and charge penalties when performances do not make the mark. Ensure that incentives of the individual managers are consistent with the overall goals and with each others’.

12. Establish a relationship management structure and processes as part of the contract.

A formal relationship management structure, typically in the form of joint management teams with responsibilities in various aspects of the relationship, should be established to link the client and vendor. Each team has clearly defined goals to fulfil. Identification, resolution and expeditious escalation of issues should be a key responsibility of each team.

13. Use objective performance criteria.

Successful outsourcing relationships focus on results. A properly defined performance criterion must be objective, quantifiable, and collectable at a reasonable cost and should be metrics which can be benchmarked against the performance of other organizations.

14. Emphasize the development of the people responsible for relationship management.

Individuals responsible for managing the outsourcing relationship should receive specific training on how to do the job, which includes a complete understanding of business goals of the contract, specific performance criteria agreed upon, individual roles, responsibilities, authority and reporting structure. Although being experts in their fields, vendor personnel also require specific, ongoing training on the client’s business and its goals. This way, they develop the needed sensitivity to issues regarding the client’s needs.

15. Manage the people issues.

Communication is one of the most important aspects to evaluate outsourcing. It often requires more effort than anticipated, but it is critical to a successful evaluation process. Various forms of communications, like newsletters and organization-wide meetings, help ensure that the right message is sent. Keeping employees informed in every step of the outsourcing process and working out a deal perceived as fair for them is important as they are ultimately the ones that carry out the work. Those who feel that they have been mistreated have the power to bring systems down.

Sunday, January 18, 2009