How to Prevent the Outsourcing Procurement Process From Breaking Down

There is little doubt that the suitability and integrity of an organization's sourcing requirements is critical to identifying and selecting an outsourcing service provider aligned with the company's business strategy and that minimizes operational and financial risk over the life of the sourcing relationship.

Research finds that when organizations struggle to develop sourcing specifications, one or more of the following conditions typically exist:

* Lack of traction within the team assigned responsibility for drafting the document

* Poorly defined client/provider roles and responsibilities Lack of clarity around statements of work and resource baselines

* Misaligned service level metrics and measurements

* Application of inappropriate pricing frameworks

* Increased exposure to operational and financial risk

* Susceptibility to unforeseen "time traps" that occur late in the procurement process

When organizations don't execute the correct procurement steps in the right sequence, there is significant risk that the procurement development process will break down and/or the sourcing requirements developed will not achieve expected benefits. So what procurement steps and sequence should organizations consider in developing their sourcing requirements?

Step 1: Retained Authorities

Procurement development is a multi-step process that starts with a clear and unambiguous definition of retained authorities.

Retained authorities, also referred to as "The Keys to the Kingdom," represent client responsibilities that are rarely, if ever, outsourced to third parties. Organizations must define in specific terms what will be sourced to third-party providers and what will be retained by the client organization.

Retained authorities draw boundaries around the work to be done and identify critical integration points between the parties. Knowing what work will be done by which party and the "hand-offs" between those parties creates a solid foundation on which consistent, high-quality IT service delivery and management can be achieved across the enterprise.

Step 2: Statements of Work (SOW)

Statements of work are based on and aligned with the retained authorities identified in step one. They define the specific work to be done and delineate the roles and responsibilities of each service provider as they relate to the client's service tower requirements. Statements of work consist of "provider shall" statements covering both tower specific and cross-functional requirements by IT process across the enterprise.

To be "contract ready," statements of work must be supported by operationally relevant resource baselines.

Step 3: Resource Baselines

If SOWs define "what" work needs to be done, resource baselines define "how much" work needs to be done over a specific time frame. Each service tower has its own set of unique characteristics and attributes that must be thoroughly inventoried as part of the procurement development process and incorporated into an organization's sourcing requirements.

Application portfolios must be assessed in terms of application size, relative complexity, platform and environment, programming language, number of interfaces, and support requirements. An organization's hardware and software infrastructure must be accounted for in the form of detailed hardware, software and communications inventories. The number of end-user workstations including desktops, laptops, mailboxes, personal digital assistants, and other mobile communications/computing devices need to be identified in sufficient detail to establish the service baseline for the proposed end-user client environment.

By quantifying the client environment in terms of transactions, MIPS, or millions instructions per second, capacity, desktops, seats, IMACS, calls, and incidents, resource baselines enable providers to size the proposed scope of work described in the SOWs and to reduce the amount of uncertainty and risk in their solution as it relates to client service requirements.

Step 4: Service Level Metrics

Sound statements of work and an accurate resource baseline supports the definition of how provider performance will be measured and monitored over time through service level agreements (SLAs).

Each service level metric should have a clear definition and explanation of how the measurement will be calculated and be aligned with how the client organization interprets various levels of criticality in their business. This typically means including different "expected" and "minimum" service performance values for each class of service or asset being measured.

Finally, SLA documents should address other key performance parameters including allocation of the "At Risk Percentage" across various metrics, the effective date that measurements will begin, any reduction in performance through defined "transition" or "burn-in" periods as well as what percentage of the provider's fees are at risk if performance levels are not met and/or maintained through SLA reporting periods.

Defining what the organization wants in terms of service performance is fundamental to a provider's ability to develop and price their proposed solution to meet client requirements.

Step 5: Pricing Structures

Applying the appropriate pricing structure and framework as part of a client's sourcing requirement is essential to the organization's ability to realize expected benefits and manage financial risk over the contract.

Regardless of the pricing structure decided upon, pricing itself can be used as a tool to align the provider and client organizations along a number of fundamental issues including: clear allocation of risk between the parties; cost transparency for key drivers within the resource baseline; predictability of pricing in support of the client's budgeting process; flexibility that allows the client to effectively manage small changes in volume with predetermined pricing and at the same time clearly define thresholds when contract renegotiations are required due to fundamental changes in the economic model underlying the contract.

In summary, while there is always a chance that the procurement development process within a client organization can break down, experience suggests that following a multi-step process and defined sequence can mitigate the risk of that occurring. The process starts with a clear and unambiguous understanding of what will be sourced and what will be retained by the client. Based on those retained authorities, statements of work can be drafted that define the specific work to be done and for which resource baselines can be developed. Resource baselines define how much of the work there is to do and enable the client to determine the performance standards by which service providers will be measured. Finally, only through an integration of all of these elements can the client organization address what pricing framework and structure is most appropriate to ensure that strategic sourcing objectives are met and financial risk is appropriately managed.

Source: Michael L. Thompson, Alsbridge

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