Daily Archives: January 20, 2009

A Great Guide to Outsourcing Risk Management, Part I

Not that long ago, SourcingMag.com published a great six part series, authored by Alsbridge on managing risk in outsourcing that covered a best-practice approach to reducing your outsourcing risk that is a must-read for anyone considering outsourcing as part of their procurement function, even if (and especially if) it is just the tactical part. Although the article, and the series, focusses primarily on the aspects of IT outsourcing, the reality is that tactical improvements primarily originate from automation and better systems, so you really need to understand the IT trade-offs before you can make an educated and informed decision.

It’s also important to remember that the reality is that even though there is little to be saved on tactical process automation or improvement relative to what can be saved from a well executed strategic sourcing event on a high-dollar category, the reality is that a botched automation of your tactical procurement processes, especially as part of an outsourcing project, can cost you dearly as your team will have to spend all their time fixing the mess … and the opportunity cost of doing such is phenomenal. Moreover, if your systems are not aligned, you’ll never capture all of the savings that your expert sourcerors negotiate. (There’s a reason that most companies capture less than 50% of negotiated cost savings … and that reason is inadequate systems and poor monitoring.) Thus, before you outsource any aspect of your procurement operation, which you should consider doing if an outsourcing provider can offer you better technologies and processes at a lower cost of operation, it’s important that you understand what you are going to outsource, how you’re going to get a return on your investment, and how you’re going to manage the outsourcing project to make sure the savings materialize. In other words, before you embark on a procurement outsourcing project, you need a good strategy.

Where Do You Start?

Start by identifying all of the potential failure points in your plan, determining the probability of failure and the associated cost if a failure occurs, and then develop risk mitigating plans for those risks that have more than a slight chance of occurrence or a high recovery cost. Then you can move on to your search for a service provider partner.

So How Do You Select The Right Service Provider?

Do some research, starting with the industry leading blogs (like Sourcing Innovation) and the free resource sites (like the SI Resource Site) available to you to identify potential providers. Then embark upon an RFX project to help you identify the provider who can meet your needs at the best price point.

Make sure the RFP completely spells out what you want to outsource; the processes you want followed; the people, process, and system interactions you desire; the change management processes that you follow; the frequency with which you inspect system updates and innovation; current process cycle times; and the cycle-time and cost reductions you are expecting; the service levels you require; and the degree of year-over-year improvements that are expected from your service provider. It’s important that the RFP spells out everything the vendor needs to know, otherwise, they won’t be able to put their best foot forward and will have difficulty being successful. It’s not up to them to fret the details, it’s up to you. Penalty clause or not, it’s still your mess to clean up if your vendors don’t get paid the right amount on time or, even worse, they all get overpaid by 10% and you have to fight for refunds and it’s still your liability if financial statements are wrong because the provider screwed up. If you can prove complete ignorance and best-effort to insure financial statement accuracy, you might escape jail, but that will be of little consolation if the resulting fines bankrupt your company and you’re out on your ass without a job. The simple fact of the matter is that the more detail you can provide in your RFP, the better a potential partner can determine whether or not they can provide the solution you need and how much it will likely cost to do so. And if you don’t know how to put together a good RFP, you can always Get Help from an expert. Once the RFPs are in, you start with the evaluation, which is the subject of Part II of our series.