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Identifying and selecting the right outsourcing partner

29 Comments · Business outsourcing

Step 1. Appoint a vendor selection team (VST)
There is far more to choosing an outsourcing vendor than there is to choosing a new supplier. Unlike the buyer-supplier relationship, the business process outsourcing (BPO) buyer-vendor relationship involves a customized service, detailed agreement on service levels, and a strategically oriented long-term contract.

Given our contention that a robust BPO relationship is strategic in nature, the BPO buyer and provider must have shared interests in key objectives and values.

The relationship between BPO buyer and vendor will be more intimate than a standard buyer-supplier relationship. In general, BPO buyer-vendor relationships are characterized by regular senior management meetings and sharing of otherwise confidential information.

Therefore, harmony among each firm’s predominant management styles is a key prerequisite to success.

A new team, or at least a new team charter, should be developed for the vendor selection process.

We call this new team the vendor selection team (VST). Shows the VST’s relationship to the other BPO project teams.

Organizations may elect to keep the BAT intact for the vendor selection process or they may elect to develop a new team.

Many firms decide no empower and charter a new team to manage vendor identification, selection, and development to introduce fresh ideas and to provide a clear endpoint to the BPO analysis team (BAT’s) efforts.

It is recommended that, whether a wholly new team is established to manage this phase of the BPO Life Cycle or not, the organization should consciously select and develop one or, at most, a few individuals who will serve as the organization’s BPO champions.

One or more of these identified champions should be derived from members of the BAT. The BPO champions will be in change of developing and deepening the outsourcing relationship over the long term.

Experience has shown that it is better to have the BPO champion emerge from the vendor identification and selection team than to bring one in later to manage the ongoing relationship.

The VST should draw from the business areas that will be affected by the BPO project. Key staff members for the VST should include the following:

? Senior management
? Legal staff with contract expertise
? Technical staff and information systems analysts
? End users
? Financial staff

Consulting firms are available to help the VST with defining statements at work, evaluating internal needs, negotiating, evaluating vendor performance, and providing quality assurance.

Although these services represent additional outsourcing costs, they can enable the organization to reduce outsourcing risks, accomplish goals, and select the right BPO partner.

As with any formally chartered team within the organization, the VST should establish a regular meeting schedule and set clear goals and objectives.

As shown in below, one task for the VST is to establish minimum standards or qualifications for potential vendors. Establishing qualifications is the next step in the vendor selection process.

Sample VST Charter
Purpose: To undertake a process of identifying and selecting a vendor to provide outsourcing services in the area identified by the BPO Analysis Team.

1. To develop a list of qualifications that the BPO vendor will minimally require.
2. To identify a long list of potential vendors.
3. To gather information and evaluate the long list of vendors.
4. To develop an request for proposal (RFP) and evaluate proposals from the long list of vendors.
5. To select a short list of vendors.
6. To select a final vendor candidate and evaluate its ability to meet the performance goals indicated in the RFP.

1. To complete the long list in 30 days.
2. To gather information and evaluate long-list vendors in 30 days.
3. To develop the RFP in 15 days.
4. To solicit and review vendor proposals in 60 days.
5. To review short-list candidates in 30 days.
6. To select a vendor within 6 months.

Step 2. Establish qualifications
Similar to searching for a new manager or key executive, it is imperative for the business process outsourcing (BPO) buyer to establish minimum qualifications for a BPO vendor. These qualifications may include standard items such as experience, price, and location.

The qualification list may also include more strategic items such as the vendor’s organizational culture, decision-making style, and reputation. According to extensive research into the needs of outsourcing buyers, the qualifications most often sought in a vendor are as follows:

? Quality
? Performance history
? Warranties and claims policies
? Facilities and capacity
? Geographic
? Technical capability

Customer service is another factor organizations may want to consider. This factor becomes more important the deeper and more strategic the relationship is intended to become.

Deeper relationships will require more interorganizational communications and transactions and will be easier to manage it the vendor has a reputation for and knowledge of how to provide good customer service.

BPO buyers must maintain a customer mindset during this phase of the BPO Life Cycle. A partner mindset in the BPO buyer should emerge only after the vendor has been selected and the contracting process has begun.

By maintaining a customer mindset during the vendor selection phase, the BPO buyer avoids giving away too much too soon. In the partnership development stage of a BPO relationship, mutual compromise and cooperation is expected.

During the vendor selection phase, the buyer is interested in deriving as much value as possible from the vendor and should not be making concessions on any of the provisions it has established as necessary for the project.

It is important to maintain a customer mindset to motivate the vendors to work hard to demonstrate their capabilities to meet the project needs as they are. Compromise and cooperation will come later.

Process expertise is another relevant consideration for any outsourcing project. The consideration is lessened the further from the core the outsourced process is. Processes that are close to the outsourcing organization’s core competence should never be outsourced to an inexperienced vendor.

Data sharing is a part of nearly every outsourcing relationship. Given that data sharing between the various commercial databases can be difficult, the technology platform of the vendor should be a qualification.

If vendors do not have a system that is easily compatible with the buyer’s existing system, they will be responsible for demonstrating how that handle can be overcome.

Understanding the emphasis of a vendor’s business, or what drives their revenue, is essential in choosing an appropriate vendor.

For example, large vendor companies are usually looking for extremely large contracts. Smaller contracts negotiated with large vendor firms are not likely to receive the same quality of treatment as larger contracts.

One of the main areas BPO buyers should look for with a vendor is industry specialization.

Any vendor, other than the major consultancies, that claims to specialize in several outsourcing service areas should be treated with caution.

Having a large base of multifunctional outsourcing expertise is rare, not to mention expensive to maintain.

Many vendor companies will make the claim that the skills from outsourcing a function in one industry transfer to another.

This may be the case; however, in general, if the vendor is not an expert in the field, it will not know about the hidden challenges associated with providing services in that industry.

In general, if a vendor has limited experience providing outsourcing services in the BPO buyer’s area of need, selecting that vendor usually leads to unnecessary costs.

Basically, the buyer will be paying for a BPO on-the-job training program. Selecting the BPO vendor that has proven experience in the buyer’s particular industry will save headaches and a considerable amount of rework.

Whatever qualifications are established by the VST, those critical to the buyer organization should be decided at this early stage in the vendor selection process.

At minimum, the requisite qualifications should consider both expected performance levels and strategic fit with the buyer organization.

Many firms also distinguish qualifications between soft and hard issues. Soft issues include cultural and organizational values, mission and vision statements, and organizational history.

Hand issues are more quantitative and are usually associated with performance and productivity.

In addition to this distinction, some firms also use a weight system to distribute the relative importance of each issue over the decision process. An example of a weighting system is provided below.

Step 3. Develop a long list
Launching the business process outsourcing (BPO) vendor search can be intimidating. There are no Yellow Pages or magic oracles to consult when trying to identify qualified vendors.

This is one of the reasons it is important to establish well-defined qualifications. Seeking vendors with specific qualifications versus considering all vendor generalists will make the search process for more efficient.

The vendor selection team’s (VST’s) objective in this step is to build a qualified list of 15 to 20 potential BPO vendors. There are several good places to start the BPO vendor search.

Believe it or not, the Internet is one of the richest sources for identifying BPO candidates. The VST can make headway in vendor identification by using the standard Internet search engines and keyword combinations. For example, if a firm is seeking to outsource its help desk function, its search may include keywords such as:

? Help desk outsourcing
? Help desk vendors
? Outsourcing IT functions

Another technique many organizations use to develop a long list is to search among their current suppliers to see if any are qualified and willing to bid on the BPO project.

This type of relationship is referred to as sole sourcing single sourcing and can be effective based on the experience gained in working together in other business areas.

Nevertheless, sole sourcing may lead to retaining a vendor that is not completely qualified to manage the business process under consideration. It also increases business risk.

If the vendor experiences problems, more of the BPO buyer’s processes will be affected. By searching for and evaluating multiple vendors, BPO buyers will better understand what the marketplace has to offer, are more likely to find the vest vendor for their needs, and will distribute risk over multiple partners.

Many outsourcing magazines and online portals offer unbiased directories specific to outsourcing, such as, Outsourcing Center, the Outsourcing Institute, and FirmBuilder.

These organizations can assist in locating potential vendors. Some BPO buyers may want to consider third-party consultants to help them find vendors that match their requirements.

These companies sometimes offer searches at no cost and often have built a list of vendors from which to choose.

A good way to begin fact finding on the long list of vendor candidates is by visiting their respective Web sites.

Many BPO vendors have extensive detail on their Web sites. In many cases the vendor will include case studies for review and lists of partners, customers, and services offered.

Although this information will undoubtedly reflect positively on the vendor, it can be scanned for indications of the vendor’s fit with the qualifications established by the VST and for strategic fit with the BPO buyer organization.

The long list development process is generally conducted in a semi-clandestine (at least to the outside world) manner.

If the BPO buyer reveals that it is in the market for a BPO vendor, it is not unusual to be overwhelmed with unsolicited proposals. In many cases a new BPO vendor search can generate three or more times the proposals desired.

Step 4. Request for information
After gathering the necessary data to build a long list of 15 to 20 potential business process outsourcing (BPO) vendors, it is time to directly gather information from the candidates.

A common technique to accomplish this is to send a scope of work (SOW) outline and request for information (RFI) to each vendor on the long list. The SOW should contain the broad intention of the outsourcing proposal and the time frame for responding.

The RFI is a questionnaire-type survey intended to establish the level of vendor competence and interest. Organizations should send the RFI to the long list and track each vendor’s interest in the project.

A common method used to make initial contact with long-list vendors is via a phone call to each vendor’s sales department. This call will involve only a high-level discussion about the BPO project.

It is designed to gauge the vendor’s interest level before moving forward with the RFI. If there is interest, specific information should be gathered about where and to whom the RFI should be sent.

The vendor should be informed whether the buying organization would allow an ongoing dialog before the RFI process.

The VST should set a firm deadline for responding to the RFI. After the deadline has passed, the VST will schedule and conduct capabilities interviews with acceptable respondents to determine their respective ability to meet project goals.

Capabilities interviews are usually conducted initially via a telephone conference. Issues that need to be probed during the capabilities interview include:

? What are the vendor’s core capabilities?
? What metrics does the vendor use to evaluate its effectiveness?
? How many clients is the vendor currently serving?
? Does the vendor have unused capacity or will it have to grow to serve new clients?
? Where is the vendor investing its resources?
? How well does the vendor rate with its current customers?
? Does the vendor fit with the buying company’s culture?

During the capabilities assessment, the BPO buyer should determine if each vendor has the skills, technology, and personnel necessary to fulfill the project. A vendor site visit will assist with this determination.

If a site visit is warranted, the VST should meet with vendor management teams and personnel, evaluate their workplace, and observe how they respond to requests and questions.

The long list of 15 to 20 vendors should be reduced by half as a result of the capabilities interviews, leaving 7 to 10 vendors who will advance to the next step. The contending vendors should be informed that they have been selected to receive the formal RFP.

Step 5. Request for proposals
The objective of developing a request for proposal (RFP) is to create a document that details the services, activities, and performance targets required for the BPO project. Beyond that, the RFP is also a sales document designed to interest vendors who can add value to the BPO buyer organization.

RFPs vary in format from organization to organization. At a minimum, the requirements for the BPO project should be clearly communicated to the vendors.

Being detailed in communication of requirements at this stage ensures that initial responses will provide a full and clear picture of the vendor’s ability to meet the needs of the organization. The requirements section of the RFP must reflect the sophistication and experience the vendor will need to complete the proposal successfully.

There are several general guidelines for developing an effective RFP. One of the most important is to be clear about the business process that is slated for outsourcing and the scope of work that will be required from the vendor.

At the same time, RFPs should not be so long and burdensome that same qualified vendors will elect not to respond. Several items that should be included in any RFP are as follows:

? Administrative. This section includes information about the BPO buyer’s company, business priorities, purpose of the RFP, deadlines for response, required format, assessment criteria, and contact information.

? General requirements. This section details expectations regarding the services to be provided, reporting and information sharing, customer service, claims resolution, contract implementation, training, and benchmarks ton fees. For example, a firm that is seeking to outsource its help desk function might have a section including details about the function, as shown below.

? Pricing requirements. This section outlines the expected pricing approach, including goals for net rates and volume discounts.

? Contractual/legal. This section provides details about expected contract terms and conditions, warranties, remedies, and any disclaimers.

RFP Section an Outsourcing Help Desk Processes
• We currently have a 20 FTE help desk operating on a 24/7 schedule.
• Their primary responsibilities are to support 3,000 employees who are located around the world.
• The help desk operation center is located in our Ohio headquarters and provides all help desk support via our toll-free number.
• The applications supported are Microsoft 2000, Novel 6.x, Microsoft Office, and CAD 2.7.
• The help desk employees are also responsible for level-one troubleshooting via the toll-free number.
• The help desk tickets are managed in Helpdesk Pro software, and the average open ticket time is 12 hours.
• The help desk employees have, on average, two years of college and four years of IT experience.
• We do not currently have standard operating procedures.

Generally speaking, the VST should be able to eliminate two or three of the companies after reviewing their bids, because their skills will not be a match with the BPO project needs.

A letter should be sent out immediately to the eliminated vendors. This will leave five to eight vendors in the running that will be evaluated for their potential to become the buyer’s BPO partner.

Step 6. Evaluate the proposals
The proposals that the BPO buyer receives from contending vendors will be extremely comprehensive.

Initial screening of proposals may reveal interesting facts about the vendor. For example, the VST should scan each proposal to determine whether it addresses their organization’s unique needs.

Often, a BPO vendor will cut and paste material from another proposal and simply insert it in the current one. Although this practice is understandable and acceptable to an extent, an excessively cut-and-pasted proposal probably indicates that the vendor has not spent a lot of time thinking about the buyer’s unique needs.

The VST should read the proposal carefully and look for the signs of generic template use. A good BPO vendor must be customer oriented.

The proposal should be directly written for the buyer’s BPO project. Buyers should be wary of vendors that fill their proposals with boilerplate and puffery.

Those vendors that have submitted acceptable proposals should be scheduled for telephone interviews which, at this stage, are generally one-hour in length.

The VST can expect that each of the vendors will suggest a lace-to-face meeting. However, the opportunity to meet with the VST in a formal presentation should be reserved for the short-list candidates only.

Within the teleconference, the BPO vendor should explain in detail its submitted proposal, including addressing the following issues:
? Approach
? Company background
? Experience in the process area
? Strengths
? Availability
? Certifications
? Suggested solution

After the vendor has explained its proposal, the VST should request a submission of tender. The tender is a precise document that spells out exactly what the vendor intends to do and how it intends to establish fees and the invoice schedule. The vendor should also be requested to furnish the following:

? Case studies. Vendors should be able to provide case studies of BPO projects similar to the BPO buyer’s project.

? Copies of résumés. Each vendor will probably send résumés of its best and most highly credentialed personnel. The buyer should ensure that these individuals are the ones who will actually be working on the project should any particular vendor be selected.

? Copies of certifications. BPO vendors often cite industry certifications, such as ISO or Six Sigma. BPO buyers should request copies of these certificates to verify their authenticity.

? List of references. BPO buyers should request at least three positive references and, when possible, one negative reference. It is important that the BPO buyer talk with at least one of the vendor’s customers that experienced a negative result. The objective is to determine how the vendor handled the project when it was failing and why contingently plans did not correct the problems.

? Proof of financial stability. It is not unusual to request that vendors provide documentation showing their financial stability, how many employees they have, how long they have been in business, and the maturity of their facilities.

As with everything else in this process, the VST should establish firm deadlines for the submission of tender. With the vendor proposals and submission of tender information in hand, it is time to narrow the long list down to a short list at candidates.

Step 7. Select a short list
Once the first round of proposal evaluations is complete, the VST should now possess the necessary information to select three to five of the most qualified vendors.

The selected vendors should be contacted directly and invited in for face-to-face formal presentations.

The VST should arrange meetings such that it will meet only one vendor per day. The vendor visits should be scheduled as close together as possible so the VST can compare notes on each vendor while they are still fresh.

In general each presentation should be limited to four hours, and the VST should set the agenda for the meeting and share it with each vendor in advance. At the beginning of the formal presentation, the VST chairperson should communicate the following:

? Inform the vendor that it has made the short list.
? Explain that the vendor has four hours for its presentation.
? Express interest regarding the vendor’s pricing model.
? • Reiterate what the organization is looking for in a BPO vendor.
? Let the vendor know that there will be a final telephone conference to clarify the bid submitted.
? Ask the vendor to submit its best bid no later than the deadline you have established.
? Let the vendor know when the decision will be made.

During the presentation, VST members should book for the following:
? Who has the vendor sent to the meeting?
? Was the presentation developed uniquely or is it canned?
? Does the vendor include contingency plans?
? What performance data does the vendor provide?
? Who are the vendor’s leading clients?
? How well does the vendor team listen to the buyer team?
? Does the vendor’s presentation address issues in the RFP?

Special attention should be paid to the logical architecture outlined in the presentation. Many vendor presentations demonstrate their expertise with technology, but they lack deep understanding of workflows and process improvement opportunities (the logical architecture).

Failure to address the logical architecture of the business process to be outsourced is one of the most obvious signs of a BPO vendor’s lack of maturity in that business process.

After the vendor presentations have been completed, the final review of vendors begins. The VST should review all presentation material in great detail, along with the notes recorded by those who attended the presentations.

Someone within the VST should be recording all questions the team may have because these questions can be answered during scheduled final phone conferences with each vendor.

The final phone conference is the time to clarify all outstanding issues about the vendor’s proposal, service offering, and to discuss the formal presentation. During the phone conference, the BPO buyer should communicate the following:

? Explain to the vendor that it is among the finalists.
? Explain that this will be the final presentation.
? State that final pricing schedules must be articulated.

The vendor should be allowed to ask any questions it may have. The buyer should state that a decision will be made and a BPO vendor will be selected within a defined period (usually two weeks) after the telephone conferences. This helps motivate the vendor into making the best deal possible to win the buyer’s business.

After the telephone conference, the BPO buyer should select two or three vendors for a second face-to-face presentation.

Once this selection has been completed and the vendors have been informed, the meetings should be scheduled as soon as possible. Each vendor should be informed that it has four hours for the final presentation.

Step 8. Select the vendor
Final vendor selection should be completed shortly after the second round of face-to-face presentations.

By now, it is usually clear which vendor has developed a proposal that best meets the needs of the buyer, both short term and long term. If the VST has established its vendor qualifications early on, weighted them appropriately, and observed both the quantitative and qualitative aspects of each vendor, it should be able to reach consensus on the final selection.

It must be stated that the VST may decide in the end that none of the vendors is able to meet the organization’s needs as they have been specified. If that occurs, it is in the interests of the organization to abandon the BPO project.

As stated, one danger associated with initiating a BPO project is the escalation of commitment phenomenon. For many executives and managers, the decision to abandon a project after such a large investment of personal time and other resources is exceedingly difficult.

Nevertheless, sound business decision making sometimes requires firms to cut their losses and move on. In this case, if none of the vendors can meet the organization’s specifications after this systematic selection process has been followed, it would be unwise to attempt to either gerrymander the specifications or allow the vendor to alter its bid to try to force a fit.

If one of the vendors has emerged as the winner of the BPO project bid, there are still several steps to consider before moving on to the contract stage.

For instance, members of the BPO buyer’s staff who are scheduled for transfer to the vendor should meet the new management team before any contracts are signed.

Allowing employees to air their concerns and ask questions may help reduce the feeling among employees that they are being cast aside. Conflicts in style and personalities may emerge in these meetings that could affect the vendor’s performance.

During this precontract stage, the firms should also address issues of terms and conditions of employment, including appropriate compensation if vendor employment is not available or not required.

If any additional training will be required as a result of joining the new organization, it should now be brought to light.

Leaders of the BPO implementation from both parties should discuss the objectives of the new work processes and what the organizations want to achieve.

All members of the new interorganizational work team should understand their personal contribution to the team’s success.

Many problems can be avoided by communicating regularly and vigorously with employees at this early stage of the BPO implementation. Up to this point the rumor mill may have been going full speed and people had no idea who or what to believe.

Another useful exercise in the precontract stage is to make certain that the contract will stand up to the rigors and complexities of the actual operation. A trial period is ideal for making adjustments before the contract becomes final and for judging the likelihood of the partnership breaking down.

In general, this precontract testing period should not be less than 90 days-long enough to allow anything unexpected to arise.

For instance, when Lehman Brothers decided to outsource its IT function to an offshore firm, it spent more than $8 million on 80 separate pilot projects with the various finalists. Remember, the BPO buyer and vendor are attempting to develop a partnership, and there are going to be problems that must be worked through.

The main issue that needs to be addressed after the test period is the unexpected work that has surfaced and haw it will affect the cost model in the vendor’s proposal.

At the same time, the buyer should be cautious about judging the service levels, because new people and processes will improve performance levels over time.

As a result of the new BPO relationship, it is likely that a lot of responsibilities and processes will change in the buyer’s organization. Despite these changes, the BPO buyer should be careful not to allow its corporate identity to change.

Winding up
This part has been designed to help organizations approach the BPO vendor identification and selection process in a systematic way.

Using the systematic approach outlined here does not guarantee a successful outcome, but it should help reduce the risk associated with making a bad vendor selection.

As stated in other contexts in this book, to BPO or not to BPO is a strategic choice, and the risks associated with BPO should not lead to inaction. BPO buyers will not find the perfect BPO vendor no matter how systematic their selection process is.

Nevertheless, if buyers use this systematic approach to vendor selection, they will find a sound alternative that can help the organization achieve its aims.

Outsourcing is not a new phenomenon, although its recent popularity suggests that it is. In reality, companies have been outsourcing business processes for many years, and some generic lessons can be derived from this experience.

The systematic vendor identification and selection process described in this part is a derivation of those lessons and is designed to help BPO buyers accelerate the BPO Life Cycle without compromising rigor.

In the end, following a rigorous process of vendor selection will tell the buyer things about itself that it did not know and will more likely result in selection of a vendor that can become a true strategic partner.

? A systematic vendor selection process can help accelerate the realization of strategic benefits associated with an effective BPO relationship.

? The eight steps of the vendor identification and selection process are (1) appoint a vendor selection team; (2) establish qualifications; (3) develop a long list; (4) distribute the request for information; (5) distribute the request for proposals; (6) evaluate proposals; (7) select a short list; and (8) select a vendor.

? The VST may be made up of BAT members, but it should have a separate and new charter.

? The VST should have one or a few individuals being groomed as BPO champions for the organization.

? Vendor qualifications should include both soft and hard criteria.

? The most often cited qualifications in vendor selection include quality, delivery, performance history, warranties and claims policies, facilities and capacity, geographic location, and technical capability.

? Customer service, process expertise, and data sharing are other key qualifications buyers should look for in the outsourcing vendor.

? Using keywords to search the Internet can launch the BPO vendor search.
? The long list of vendors generally comprises 15 to 20 firms that seem to have the requisite qualifications.
? The request for information (RFI) will help the VST narrow the long list to seven to ten potential vendors.
? The request for proposal (RFP) should provide abundant details about the nature and scope of the project, including information about the buyer firm’s administration, general requirements expected of the vendor, pricing requirements, and details about legal matters.

? Proposal evacuation should include inviting several vendor firms to provide formal presentations to the buyer firm.

? A submission of tender will provide additional details about the vendor, including case studies, résumés of key personnel, copies of certifications, and a list of references.

? The short list will consist of three to five vendors who will be contacted for a telephone conference.

? Based on the telephone conference, two to three vendors will be invited back for a second formal presentation

? Vendor selection should be followed by a precontract period during which the firms become acquainted, and a pilot project may be implemented to test the relationship.


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