During 14 Years in senior procurement roles, most of them dealing with managed services and outsources, I have worked with every variant of service provision, ranging from PFI (Private Financing Initiative) through managed services, shared services BPO (Business Process Outsource), transactional outsource and IT Service outsource to Full Scale Megadeal IT Outsource of the largest scale. Whilst there are differences in scope and scale there are a few common factors, which really need to be obsessively dealt with. All of them are common sense and all are about being an intelligent, balanced and fair customer. Strangely however common sense seems often to go out of the window during the outsourcing process.
I can summarize these factors as:
Make sure you set up the outsource with your eyes open and with extreme care
Make sure you manage the outsourcer throughout the period of the contract.
Prepare for exit at the start of the contract and continue to prepare throughout the period of the outsource
Exit, renew or retender with care and consideration.
When setting out to outsource, test and be clear that you are ready. Ensure you know what it is you do now. What are the assets on your estate, how much are they worth, how old and “off the pace” and what problems do they cause and what would you do to fix them and how much would it cost. The same goes for software. How many licences do you have, how are they deployed and importantly can an outsourcer take on the management of them or does this need further negotiation. I can almost guarantee that however many licences you think you have – you will have many more and they will be worth much more than you estimated. I can also almost guarantee that some of them will be the wrong type, for the wrong user community and using the wrong volume licence key. Look at your 3rd party contracts and see whether they can be assigned, novated or used by another party. Have copies of them to hand ready for any due diligence activity. Also try to figure out how well negotiated they are and how they could be improved by an efficient outsourcer’s procurement team – or not. Again you will almost certainly need to re-negotiate them – so make sure you do it before you are caught in the trap and lose all of the leverage you have.
Understand your current performance and whether it meets your users’ needs. Understand the gaps in your performance and how much it is likely to cost to close them. Look at your service levels and the Service Level Agreements you have in place. Do they cover all of your services and are they commercial (or are they simply based on how loud you shout). If they are not commercial make them so otherwise a bidder will simply make up a price loaded with enough contingency in case of arguments
Above all understand your current cost of providing the service
When you start the always lengthy contract negotiations think in plain English and make sure you and your team understand why you are agreeing to a position or are putting in place a specific clause. Document the reason behind it as afterwards it will otherwise just be a clause and not an enabler.
Identify your experts and work hard to keep them. They will have this knowledge and it is valuable
Once your outsource agreement is signed there is a tendency to sigh with relief, relax and leave the outsourcer to it. My experience is that if you don’t manage your supplier, after a short time whilst they will try to get sensible answers from you, in the vacuum you leave them, they will manage themselves and shortly after they will start to manage you! It is important that you do manage your service provider, act intelligently, and answer their questions promptly and unambiguously.
During the term of the outsource, maintain the knowledge and understanding of the team that negotiated your contract and why you agreed a decision. Keep hold of your key staff and use your Business Analysts intelligently to give direction to the supplier. Some clients TUPE across their Business Analysts with the rest of the IT Team. My strong advice is don’t!
Continue to gather and maintain knowledge about your estate and how it runs. Understand and monitor your technology roadmaps and make sure your outsourcer understands them too. Keep tabs on the software you or the outsourcer has bought and deployed or at least make sure they do. It is very easy for that to get out of sight and a margined outsourcer is not incentivized to harvest software when someone leaves - they prefer to buy new and get both revenue and margin. Make sure they are tracking and logging your assets, both Hardware and Software and at all times they know that you are properly licenced and can prove it. As I mentioned before if you don’t you will run into trouble and you will have a pile of licences you do not need but may be paying maintenance or subscriptions on.
Monitor and streamline the fault response, ticketing and fix processes so that your service is restored as quickly as possible and you learn from any fault and prevent them happening again.
Benchmark the service costs and performance and know the gaps between your experience and others. If your service is simple and uses the supplier’s natural processes you shouldn’t be paying more.
Watch your supplier closely to make sure they are making money, viable and strong in your line of business, although clearly not too much money.
The contract will inevitably end and it can happen for several reasons; natural end of term, change of circumstance or ownership, supplier financial failure, material breach or a natural parting of the ways. You need to be ready for exit, however it occurs, whether you are renewing, re-tendering or bringing the work back in-house.
Understand your contracts - and the suppliers’ contracts and how your suppliers are behaving. Understand any lock in or balloon payments to suppliers, including tier 2 suppliers and cost them into the business case or you will have a shock later. Identify your key people – work out who holds the knowledge and experience of how your services are configured and how the systems fit together – monitor their likely destinations and work very hard to retain those you really need going forward, otherwise you will end up paying the new outsourcer to straighten it out or even worse the exiting one.
Make sure your applications are documented, you have access to the source code and the supporting narratives of those applications and the product keys, proof of purchase and know your assets, PCs, Servers, S/W Licenses, their age and any servers, applications and operating systems.
Make sure you have put in place an effective exit plan – and have tested it (agree it before you sign the contract). The best example of this I have seen was when the service provider had to deliver the exit documentation, asset lists, contract information, service documentation, applications information and infrastructure diagrams at the end of every year of the contract. This ensured that the information was there, the provider was managing the estate and in the event of a fall out with the supplier, you have everything you need to continue.
One final point on transparency and cost control.
Many clients, because of the cost of service transfer or just the opportunity that arises, build financial engineering into their arrangement, often selling the assets to the outsourcer or gaining a financial consideration for awarding the service and paying that back over part or all of the term in the form of additional layers of margin, premium pricing of resources, an uplifted service price or even high priced consultancy. Often that is accompanied by an “all in one price” that is very hard to unpick to any detail. Either of the above and particularly the combination makes it very difficult to work out the true price of service, benchmark with peers compare with current market pricing or negotiate a simple and understandable price book. My strong advice is do not take on financial engineering but if you do then make sure you know exactly how it falls to ground and the effect of it. Make sure you can peel it back when benchmarking or market testing and when negotiating a new price book park the financial engineering and negotiate on raw costs. Also be clear when the need for financial engineering ends i.e. the loan is paid off and the price can return to a natural actual cost plus margin. It is my experience that this is not always clear nor is it always signalled. The last thing you need is additional fog.
As I said at the beginning all of this is common sense. However I have seen every point in action and believe me it is much easier to avoid than fix.