Outsourcing was coined to describe the purchasing of products or services that a company previously had performed using their own resources. In the nineties, companies in search of competitiveness looked at outsourcing as a way of reducing personnel headcount along with pension and benefits liability, reducing their costs, and freeing up cash that would have been invested in plant, property or equipment and from investments in raw material inventories. Outsourcing can be a complete activity with the Supplier performing all of the activity or it can be used to supplement internal capability to provide increased capacity or to manage demand fluctuations.
When outsourcing is used to supplement a company’s internal capability it is just like any other purchase of a product or service and the same types of decision tools and agreements may be used. When outsourcing is done to replace the activity previously done by internal resources, the first problem that you encounter is what to do with the people who had been doing the work and the assets that have been used to perform the work and that adds significant complexity to the activity.
In its most complex form, Outsourcing is similar to the acquisition of a business with all the requirements of due diligence. The Service provider may be willing to assume the people and buy the equipment provided that there is a guaranteed return to them in doing so. In some instances they may see a potential for the use of the personnel in supporting other customer. In other instances they may not see the same potential use of the resources for other potential customers and to assume the people and purchase the equipment or facilities will usually require an extended commitment of business to the outsource supplier. In complex outsourcing activities there are numerous issues that must be resolved and a number of pitfalls.
Over the years every time I learned something about outsourcing I captured it as a learning. I thought I would share that list of learnings with my readers.
OUTSOURCING LEARNING’S:
1. No one can fund all development or possess all knowledge. Some form of “outsourcing” will occur in all companies.
2. You can never truly outsource something completely. The need to manage the outsource relationship always remains.
3. There is a knowledge factor in outsourcing - either you gain or lose knowledge. When you send work out, the knowledge flows with the work. When you bring work in, the knowledge flows with the work. The risk is that once the basic knowledge to do the work is lost the competitive advantage from the work is lost.
4. Don't outsource core competencies.
5. Knowledge transference occurs over time. Be careful that your outsource supplier doesn't become your competitor.
6. To maintain control you may need to retain some level of capability internally. Without internal capability you run the risk of losing control of the transaction.
7. You need to be concerned about having the supplier backward integrate into your business. (move up the value chain).
8. You traditionally outsource for knowledge or capacity. If outsourcing is part of a divestment activity you may outsource for a variety of reasons:
Avoiding additional investments;
Get a short term capital infusion;
Belief that the outsource activity can be operated more competitively; or
Belief that demand is diminishing.
9. The best outsourcing involves minimal integration with internal work. Outsourcing that is integral to internal work is difficult to manage due to the complex relationships that exist.
10. Critical to outsourcing is ability to define exactly what is required of the outsource firm.
Review all assumptions critically
View all issues from both the company and outsource supplier perspectives.
12. Critical to success is finding a firm that can understand and meet your needs.
13. Critical to long term success is the ability to measure and manage the relationship over time.
14. Proximity of the outsource partner is important for management.
15. Success in outsourcing requires multi-level relationships between each company where they all operate under the same understanding of the relationship.
16. The more a supplier must integrate their actions with the Customer, the more the supplier must be perceived as an extension of the corporation and be included in or kept informed of actions and plans that will affect them.
17. Senior management must be committed to managing the relationship over time.
18. For each outsourcing activity there has to be advance agreement or understanding on the major goals of the outsourcing activity and the priorities in the event of conflict. Numerous groups or functions may be represented in or be affected by an outsourcing activity. In most cases they will have conflicting goals and priorities. Advance agreement will allow for affected groups to do contingency planning/actions to mitigate the affect it has on them. That agreement will allow presentation of a single position to the Outsource Supplier.
19. A high level review of strategy, direction, commitments proposed, financials, proposed strategy, and establishment of the negotiation team and negotiation plan should occur prior to any discussions with potential "supplier" candidates. Above all else these are negotiations. Initial discussions can and will set expectations that later become difficult to overcome. I also found that later reviews or bringing the team on mid-stream pose difficulty in changing the direction of the activity. As a negotiation, any mid-stream attempt to change position is viewed by the other party as either bargaining in bad faith and can kill a deal, or becomes a lever for the opposition to re-open items that had been previously agreed upon. The initial review should establish the parameters for the negotiation and agreement on the goals and priorities and mid-stream reviews should only be required if the negotiating team needs to go beyond those parameters.
20. A post negotiation review for the purpose of establishing the best way to manage the on-going relationship or to determine what went well and what could have been done better is appropriate. Negotiation is not a single point in time process, it is an on-going activity which occurs as long as the relationship exists. Planning how the relationship and risks will be managed is necessary, especially if you assume major risks or commitments. Anything learned should be captured and shared with future teams, will provide them valuable training.
21. The goal of the team has to be to not just complete the outsourcing activity but to establish a relationship that will meet everyone’s needs over time.
22. The more an outsourcing activity is incorporated into core business operations, the higher the risk.
23. The outsourcing activity must be staffed with individuals who are knowledgeable on what is required and how to best approach the activity. If that isn't done, each activity becomes a learning experience only for those individuals involved and their learning will cost the Company.
24. No two outsourcing activities are the same. Standard templates or checklists to use as a starting point and recommendations based on prior learning’s is the maximum that can be provided. Each outsourcing activity is driven by different motivations and goals and each activity encounters different Supplier motivations and goals.
25. The relationship must be managed to ensure all commitments made by both parties will in fact be delivered. It is also very important that a clear understanding of the relationship (if it is other than business as usual) be understood at all levels in both companies, otherwise while there may be agreement at the top, there may not be the same understandings at the point where the work and most interfaces occur.
26. It is extremely important that the business commit the business and technical resources necessary to properly manage the on-going activity. Many of these activities involve a major change for internal customers of the business and those customers need to be helped through the transition. Also many of these activities, because of their character and/or commitments made, require substantial on-going negotiation of work and changes etc. Any business left un-managed will cost more.
27. Use of comprehensive negotiating plans will provide the maximum return.
A. Establish a Negotiating Team - The appropriate business manager should assemble a negotiating team ("the Team") as soon as it becomes clear that a significant transaction will be negotiated.
B. The team should be kept small for efficiency and confidentiality but include representatives of business groups and support functions who will be impacted.
C. The team should manage all communications between the company and the other parties to the negotiations, keeping affected parties current with information.
D. Before negotiations the team should prepare a pre-negotiation plan. The plan should address our motivations, goals, and minimal acceptable positions and also address our expectations of the Outsource Supplier's motivations, goals and minimal acceptable positions
Plan contents:
1. Schedule, deliverables and responsibility. The schedule should provide adequate time for
A. Preparation of internal strategy.
B. Collection of information required for due diligence efforts.
C. Collection of forecast and other business sizing data
D. Financial evaluation,
E. Due diligence
F. Drafting of contract documents
G. Internal review and approval processes (for both parties)
H. Any regulatory approvals.
Every item the Buyer must provide needs a responsible party to manage and ensure the information is provided as scheduled.
28. It is important to have an excellent documented file in the event of later questions or disputes. From the beginning the team(s) should begin to build that file:
A. Track and document all contacts, correspondence, phone calls, meetings and negotiating sessions.
B. Document all information provided the Outsource Supplier.
C. Prepare formal minutes of each negotiating session to both document what was said but also what was agreed.
29. Negotiations require confidentiality. Parties should take precautions that are appropriate to the character of the activity to prevent any un-authorized disclosures. Information provided internally should be on a need to know basis until the activity is complete. If the activity requires the highest degree of confidentiality, it should be
managed as restricted distribution. Non-disclosure agreements with perspective suppliers will normally be required because of the sensitive nature of the business and technical information to be shared.
30. Due Diligence will be required and should take place prior to any commitment to the price and final structure of the deal. Rule #1 in negotiations is ALWAYS AGREE UPON THE SCOPE BEFORE YOU NEGOTIATE PRICE. Due diligence investigations should be tailored to the needs of the particular transaction and will occur on both sides. The Buyer’s due diligence or pre-qualification will include an assessment of the supplier's financial, technical and managerial capability to perform. The supplier's due diligence will be to the nature and character of the business - the financials, performance, forecasts, any assets and liabilities to be acquired (all the information they need to value the business and determine whether they can operate it with their desired profit).
31. The parties must have a clear understanding of what kind of business relationship they intend from the beginning. It is important to take the time to pre-determine the structure of relationship to ensure that it meets your goals and should meet the supplier's needs. Relationships should not "evolve", they should be planned. Negotiations will fail if you only consider your own goals and needs and do not consider the "Supplier" goals and needs. The parties must have a clear understanding of what business is being taken on or acquired by the "Supplier".
A) What are the performance responsibilities?
B) What capital equipment resources are being acquired? How valued? Book value? How depreciated?
C) What residual inventory/goods/materials are being acquired? How is it valued? Book value?
D) What contracts, in particular software licenses, are to be assigned?
E) What process(es) will be followed for disposal of residual or generated scrap or excess? Who owns it?
F) What other unique factors which could limit the Supplier's ability to perform should be listed by the seller/customer
Thorough analysis of the foregoing requires real "due diligence". Outsourcing should be looked upon as the sale/purchase of a portion of the business.
32. Outsourcing must provide wins for both parties. The parties must agree on short-term and long-term goals so that they understand what accomplishments constitute "wins". A reasonable, mutually agreed-to profit for the Supplier is one usual goal.
33. The roles and authority of designated middle-echelon contacts must be addressed functionally, or generically--in negotiations. "Who speaks for whom?" "Who can approve" etc.
34. The contract should contain a Statement of Work that addresses all issues of the relationship. This provides the baseline for the agreement, and for the provider's performance, and enables a clear definition of the roles of the parties: customer and supplier.
35. It is as important to define "how the work gets done" and "who is responsible to do the work" as it is to define "the work" itself.
36. The contract must provide a defined change-control process for both minor and major changes. This is an ongoing relationship which will evolve and change as your needs change. You need to insure that we have mechanisms to manage and control costs on minor changes and we need to have a mechanism to end the relationship with minimal pain and impact if the supplier is unable or unwilling to change with your changing needs. Changes to the "baseline" must be agreed to, written and recorded, and compensated.
37. The contract should clearly address the Supplier's ability to subcontract work to 3rd parties and the approval(s) for same, reserved by you. The relationship is with the supplier and anything that will substantial change that relationship must meet with your approval.
38. The contract should specify criteria for performance measurement. What constitutes success? What are the critical indicators? What are the frequency and methodology of measurement?
39. The contract should specify who is to handle common supplier management responsibilities if the relationship contemplates sub-contractor performance.
40. The contract should require that projects and rograms be "specified" in writing and that mutual acceptance of those specifications be documented.
41. Program Management responsibilities of the provider and customer with respect to projects and programs should be spelled out in the contract.
42. To minimize the administrative burden of managing changes in the scope of work and performance issues, the parties should assign specific contract administration responsibilities to designated personnel.
43. An outsourcing contract is first and foremost a purchase document. It should include in sufficient detail the rates of payment that reflect the provider's pricing and customer's financial obligations. UNDER NO CIRCUMSTANCES SHOULD THERE BE COMMITMENTS TO PERCENTAGES OF BUSINESS OR VOLUMES WITHOUT A
CORRESPONDING COMMITMENT ON PRICE OR AN ACCEPTABLE
PRICE FORMULA. No surprises!
44. The contract should contain incentives (rewards) that motivate the right behavior for the provider to improve performance and/or lower costs and provisions to ensure that you have their complete attention (penalties, reduced rates, etc.) if they fail to perform or improve. A pass-through of savings to the customer that either does not affect or lowers the provider's profit (fee is calculated as a % of cost) is a disincentive to offer you improved performance. If the goal is to have them reduce cost, don’t penalize them when they do.
45. Cost Improvement should include avoidance as well as savings. There should be a benefit to the supplier for achieving either or both.
46. The contract must address in detail the possibility of termination or non-renewal of the agreement it embodies. This is a difficult discussion to have when you are just starting to create the relationship but it’s absolutely necessary. This can run from a simple termination to pre-agreeing to establish the outsourced activity as a separate company that you would have the option to re-purchase and re-sell or a number of other structures anywhere in between.
47. The Statement of Work and provider's performance responsibilities must address the rights and obligations of both parties.
48. The definition of the Buyer's responsibilities may involve a transfer of physical and human assets to the Supplier or to a third party or creating a transition agreement where the Buyer is obligated to provide assistance with the transition.
49. Due diligence is required in the determination of the value of assets to be transferred, and in understanding how those valuations were arrived at. It is EXTREMELY important that the information which you provide be accurate in every detail from the beginning. Accurate information builds trust in the information.
50. Avoid memorandums of understanding or letters of intent. If they must be given, they should only be given after completion of the appropriate internal analysis, review and approval processes as they may be held to be binding commitments.
51. Avoid any actions that could have the "Supplier" rely upon your information or representations or that will prevent or create estoppel from refuting claims. If memos of understanding or letters of intent must be given, they should include clear disclaimers on their non-binding nature prior to the execution of final agreements. This applies for everything but confidentiality provisions. All your personnel and agents must be counseled to avoid making any representations or demands that can create such problems such as:
A) Making assurances that agreement has been reached prior to necessary internal approvals;
B) Asking the "Supplier" to take actions, expend funds or make commitments to others in connection with it anticipated obligations;
C) Representing or stating that a certain condition such as board approval will be fulfilled;
D) Agreeing to significant terms, such as price lists or delivery schedules, without emphasizing that the deal will not be final until the definitive documents a signed.
E) Making commitments in anticipation of the agreement such as placement of purchase orders.
If placement of Purchase Orders is required for long lead materials or other reasonable business purposes, the purchase orders should include disclaimers as to their not committing an obligation with respect to the proposed agreement and should also contain language which either allows termination at no cost or assignment and novation of such orders to you at cost in the event the agreement is not consummated.
52. The Supplier must be able to sell products or services to the internal customers on terms at least as favorable as the best terms the customer can obtain outside the outsourcing contract. If they can't, their usage will erode as individuals seek lower cost alternatives.
53. Any non-competing provisions that you may desire to impose on the supplier need to be reviewed to weigh the risks to you if they were to compete versus the ability to benefit from the Supplier's opportunity to leverage profit through economies of scale.
54. The RISKS of failing to structure an outsourcing program properly, and to document that structure in a contract are great. They affect costs and profit, business relations between the parties, business relationships with 3rd parties, and may affect the position of the parties in the same or other markets.
55. If work statements and changes in scope are not documented and aggressively managed, cost/price relationships will be skewed and costs will increase.
56. If supply chain issues are not addressed in the contract, supplier relations will be unmanageable with adverse affects for both parties.
57. If economies of scale are not achieved, the provider may lose business and while the initial cost impact may rest solely on the supplier, you will be impacted through future price increases or the costs and service or product interruption required to move the outsourced activity to a third party.
58. If service does not meet requirements, you may suffer business loss for which you will look to the provider to compensate or will want "incentives" built into the agreement to improve service.
59. The rewards of success include planned profit margins for the provider, effective cost management for the customer, optimum service levels for the customer, and an opportunity for the provider to leverage other business in the same or related markets. Further benefits, calculable in real dollars when related to specific programs, accrue
from effective management of a common supply base and efficient disposition of capital assets and other goods at the outset, during, and at the end of an outsourcing program. When agreeing what to compensate the "Supplier" you need to consider all the rewards and benefits that will accrue.
60. Adherence to the terms of a well drafted contractual agreement will repay the effort taken to put such a contract in place. Clear understanding of all terms and conditions is as essential to successful outsourcing as to any contract for purchase. The rewards expected by an outsourcing Supplier will increase with the risks and complexity of the program.
61. You need to insure that what we offer is what they need to be successful. We should not try to force them to take more than they need. Any excess will have diminished value to them and they will price that accordingly in their offer. Use other alternatives to dispose of the excess which they do not require.
62. Make sure that your initial proposal or offering includes everything the supplier will need to be successful.
63. Understand the supplier's cash position as cash and cash flow may be the critical key to making the deal.
64. Establish a position on liabilities - at what date is buyer responsible and what date do they assume the liabilities.
65. Establish a position on timing of closure. It is very important to have structure that forces closure and not let discussions/negotiations drag on. The longer discussions / negotiations go on, the less you will get.
66. Document all discussions in detail to prevent misunderstandings. Misunderstandings cost money as you have the tendency to give in to make the sale of the business or assets.
67. Set values on everything that is included in the sale and seek agreement on those values.
68. Set minimum elements of the outsource purchase (below which you're not interested in the sale of assest and outsourcing.)
69. If you agree on the minimum, the values you can force agreement of a price. The whole should become the sum of the parts)
70. Be prepared to discuss the following:
A. Purchase Contracts. (are they included or not, if they are:)
A.1 Provide a summary of applicable open contracts ( Supplier, Parts covered , Contract $ Volume, expiration, and Assignability )
A.2 Will these contracts be assigned or terminated ? If they will be terminated, what is the estimated cost of termination ?
A.3 Summary of contracts with liability potential (Master Orders, Guaranteed volumes, bill-back Provisions, Extraordinary cancellation or termination Provisions). Will these contracts be assigned or terminated ? If they are to be terminated, what is the estimated cost of termination?
B. Equipment Leases.
B.1 Summary of open leases (Lessor, Items, Cost, expirations and Assignability.
B.2 Summary of Leases with liability potential (Extended lease terms, extraordinary cancellation or termination provisions).
Will these leases be assigned or terminated ? If they will be terminated, what is the estimated cost of termination ?
C. Open Purchase Orders.
C.1 Summary of open orders (Dollar Volume, dates)
C.2 Summary of Long Lead Orders (Open orders with over 90 days remaining)
How will these be treated ? Which are assumed, which are terminated ?
If terminated, what liability or cost will we assume ?
D. Non-disclosure agreements.
D.1 Copies of any Non-disclosure agreements the responsibility of which would have to be assumed by the Acquiring Entity (Supplier's Non-disclosures). Are there any which have to be transferred ?
D.2 List of Companies/contracts which have Non-disclosure agreements which we would need to continue.
Are there any which have to be transferred ?
E. License Commitments (rights acquired from third parties).
E.1 Summary of and copies of all third party licenses which would be transferred by the company. (License terms, Assignability)
What is included ? Will there be a cost to assign ?
F. Legal
F.1 Summarize all legally required programs.
F.2 Summarize license constraints on approval to operate (transfer of licenses, permits).
G. Taxes:
G.1 Summarize the nature and extent of any known Tax responsibility
How is this defined ?
H. Rental and Maintenance Agreements.
H.1 Summary of any major (in excess of $25K) rental or maintenance agreements. Period under agreement, amount, Assignability, unusual or extraordinary cancellation or termination costs. Are these to be assigned ? Are rights to pre-paid periods included ?
I.Tooling Agreements.
1.1 Summary of owned Tools which are at third party manufacturers.
Are these to be transferred ?
J. Consigned Equipment.
J.1 Summary of owned Equipment loaned to third party suppliers. Are these to be transferred ?
K. Consigned Material.
K.1 Amount and locations of consigned materials. Is this included in the sale ?
L. Loaned Equipment.
L.1 Amount and locations of equipment loaned to customers period of loan, disposition. Is this included in the sale ?
M. Hazardous Materials and Disposal.
M.1 Disclosure of any problems identified in this area through internal or environmental control organizations.
M.2 Summary of contracts for purchase of hazardous material (Supplier, Materials). Are these to be assigned or terminated ?
M.3 Summary of contracts for disposal of hazardous material. Are these to be assigned or terminated ?
N. Inventory:
N.1 History of Inventory Evaluation Changes
N.2 Date and status of last Physical Inventory
N.3 Inventory aging (Classifications, definitions)
What is transferred, when, AND HOW WILL ITS VALUE BE CALCULATED ?
O. Facilities:
O.1 Occupancy status
O.2 Description of any owned property (including all encumbrances) required insurance binders/policies etc.
What is to be transferred ? When ? For any pre-payments, deposits, bonds, made with respect to the facility, are these included or to be canceled ?
P. Equipment:
P.1 Provide a list of all equipment with a value in excess of $1,000
P.2 Provide a list of all equipment which has been fully depreciated but the sale is included.
What is included ?
Q. Systems and software used (Internal and third party)
Q.1 If external, supplier name, version, revision level and summary of internal enhancements. Are these to be included in the sale ?
IF SOFTWARE IS EXTERNAL, IS THERE AGREEMENT FROM THE
SUPPLIER ON ASSIGNMENT OF THE LICENSES ? Note: Software
Licenses are traditionally not assignable without the developers approval.
R. Determine detail allowed to remain for use after closing (as applicable):
List of all suppliers
List of Service Agents
List of Service Subcontractors
List of all authorized Purchasers and limits of authority
All part number detail
Detailed Purchase Specifications for all parts
Bills of Material, all products (Currently MFG or supported)
Illustrated Parts Breakdown, all products (Current or supported)
Property Disposal Procedures
Training
Documentation
Diagnostics (source code)
Existing Policies and Procedures in place in the groups
Key operation logs and reports
A description of filing system
Index of volume purchase agreements
S. If people are to be transferred, additional information will be required to be disclosed by both parties to insure compatibility of transfer offers, benefits etc. There is a high cost for personnel terminations in many locations. If the outsource activity involves the transfer of people, this risk will generate conditions from the acquiring company either of guarantees on the volume of business, the percentage of business or some recovery of costs if they must
Terminate transfered employees within an initial period. This risk has to be balanced against the cost if the company were to terminate the employees on their own. Sometimes it may be cheaper to terminate employees versus making long term commitments.
71. Sharing of information and communications. Unless otherwise instructed affected staff will "Open their Kimonos" and shared detailed information about all aspects of our business with the prospective buyer. The prospective buyer promptly will use the information provided against you in the negotiation of both the purchase of the business and the purchase agreement. Communication channels can form outside of the negotiation team, again with the result being that information can be disclosed and used against you. The learning here is:
1) you need to control the contacts.
2) all individuals who will have contacts with the potential buyer need to be counseled in advance as to what can or cannot be discussed and should probably be scripted in terms of what to say.
3) requests for information should be looked at from two perspectives
A) what does the prospective buyer need the information for and,
B) if disclosed, how would this information be used against you in
The negotiations of the purchase.
You need to give them enough to keep them interested but not so much
That they can use your information against you.
71. A NEGOTIATION PLAN IS CRUCIAL TO SUCCESS.
Every good negotiation has a detailed negotiation plan scripted out in advance with as many alternatives as possible considered and the team needs to stick to it. If you don't have one or people are allowed to freelance you run the serious risk that decisions or interim agreements will be reached without fully understanding the ramifications of what is being agreed upon.
72. NO IS AN ACCEPTABLE WORD. If the Supplier can sense tremendous internal motivation to sell the asset or outsource, they will continue to ask for concessions along the way. Until you say NO and hold firm to that NO, the supplier will continue to try to nibble away at different things to get the best deal they can get. We should learn to say NO to drive a behavioral change (If you agree they keep asking, several
NO’s will reduce or end the nibbling process). We need to be able to mask your motivation and learn to say no to insure you get the best deal.
73. The toughest job in sales in knowing how and when to close. In prior outsourcing deals we did not have a structure which forced closure. Discussions went on for months and there was nothing which forced closure. In one case, that coupled with a non-disclosure provision kept us from discussing the opportunity with other potential buyers was clearly used against us. In Real Estate they make it easy.If you want to
Lock something up you pay a deposit for that privilege and you have a date to close by or you may lose the deposit.
74. Minimum business obligations across multiple business units are difficult to enforce. "Forced marches" are strongly resisted and business unit profitability measurements drive business unit focused behavior.
75. Management of post-sale activities is almost as important as the pre-sale management and negotiation effort. Negotiation is an on-going process and it is important that we meet our obligations.
76. Avoid non-disclosure agreements that limit our rights to communicate the transaction with affected or other interested parties during negotiations. Until we have them locked in we should not be prevented from discussing with others.
77. The inability or failure to bring affected business unit managers into the conversation until later will result in a lack of buy-in as it relates to execution.
78. Limit future obligations and liabilities after closing. One should give as little as possible to ensure the sale. Don’t mortgage the future with commitments we may not be able to provide.
79. We should not indemnify the buyer on issues unless it is absolutely required to make the sale and the risk can be separated and managed.
80. Internal financial statements and performance measurements will not translate for a third party's evaluation of financials. There is a serious risk to provide a third party with internal financials. The entire accounting process/ procedures have to be restated in a “proforma” format to present it in a manner the the outside business would understand if they were reviewing a free-standing entity without the corporate or group overhead burdening the costs / performance.
81. The Supply Agreement should have specific, measurable performance metrics that preserve rights to terminate in the event performance is not at the committed level. When there are multiple teams with different goals the team charged with selling the assets have in the past made considerable efforts to soft-pedal this under the `we will partner with _______ and work the problem" theory or intent. This never works.
82. When quantitative measurements for cost, quality, performance and delivery were in the Contract we have been successful. When we have relied upon good faith of the parties it has been to our disadvantage. Protect rights by being very specific about performance metrics. The statement of work and provider's performance responsibilities must be addressed. You must have alternatives if they cannot perform.
83 For projects that are large enough to warrant it, having full-time representation gives you a window into what was going on, and provides the supplier with a focus for their issues and concerns. This is especially advisable when the activity is cross business.
84. You need defined process for making sure that pricing will be competitive for the length of any commitments and preferably longer in the future if transfer from the Supplier will be difficult, costly, or impractical. This may require refinement of a Pricing / Technology Matrix and considerable maintenance of the same.
85. Ensuring quality is also extremely important. There may be pressure to have some tolerance on the specifications, to use generally accepted specifications vs. internal criteria; or to use `form, fit or function' criteria. Insisting on the continuation of specifications blunts criticism and limits damage should poor quality occur.
86. Outsourcing is different and needs to be treated as such from a policies and procedures standpoint, both purchasing and financial. Trying to run outsourcing like any other business can be a mistake if it negatively impacts the relationship. Try to have the supplier run it as business as usual can also be a mistake if it impacts performance.
87. The buyer should expect and get "seamless" service. Seamless service means there should be either improvement or no change in service level and response between what internal customers were used to before and what they get through the outsource Supplier. This include responsiveness to requirements. Internal customers will expect seamless service and if there are any changes to the service they will receive or what they have to do to get that service that will be different, they need to be briefed in advance so they can take the appropriate steps to manage the difference (otherwise they will assume that it is business as usual).
88. Justification required by the Supplier's P & P's on customer directed requirements needs to be consistent with outsourcing.
89. As a part of the management due diligence we need to understand how the Supplier will staff up, where they draw people from, Which are temporary and which should be length of project. If people are critical to performance, you need to have control against movement of key personnel.
90. The Schedule and Agreement should plan for a "mobilization period" to allow a smooth start up and transfer of responsibilities.
91. If the deal is being sold on "we can save you money because of our buying power" concept, investigate if that is reasonably possible. Because of unique requirements, that may not be able to occur.
92. In people transfers there can be problems with the people on philosophy. When internal they may have delivered services on a cost plus basis. When they move to the Supplier they will operate under a more rigid set of price/cost constraints. Philosophical problems are harder to resolve if the transferred employees continue to work on the same site for the same clients.
93. As part of the management due diligence you need to ensure that defined processes are in place (Roadmaps, checklists of what to do, how to do it, etc.) Especially if they will staff with new personnel.
94. Another potential problem is the menu of services. What do they provide and what don't they provide? Can, should they, say no ? Can they discontinue providing products or services ?
95. Transfer of assets has problems but transfers that involve software create particular issues. Software is usually not assignable. Issues also exist with status of software maintenance/renewals.
96. Access to information and data needed to perform the work can cause problems. We need to understand all the information and systems the supplier will require access to and ensure that they have the required access in a secured mode.
97. Need to set expectations and be firm but fair from the beginning. This is what we need, this is the way it will be done unless you get us to agree otherwise..
Questions to consider in Outsourcing:
1. Why do we want to outsource or sell the business ?
A. Is the business (activity) unsuccessful ?
B. If it was unsuccessful what makes us think outsourcing it will improve the results?
2. What were the business' (activity) priorities?
2a. Would they change if the reporting structure or ownership changes?
3. What costs can be eliminated?
3a. What if they did business differently (e.g. License designs versus R&D,
Better forecasting, limit saleable menu, Contract work versus internal
Channels selling versus direct sell, Outsourced service versus direct.).
4. What overhead can be eliminated?
4a. Would they treat the overhead differently (Lease versus buy/ sublet unused space, sell unused capacity as contract services)
5. Are there any outstanding issues that can't be reversed? (E.g. Commitments, contracts)
6. Can the payroll be cut?
7. What assets are indispensable to the operation. Key Personnel, Assets, Intangible Assets
8. What assets can you do without?
9. Would they treat the assets differently (Lease versus own)
10. What, if any, business relationships would be threatened by this?
11. Are there issues with cash flow?
12. Will there be issues with receivables?
13. Are there political or labor risks involved ?
THE KEY HERE FROM THE BUYER’S SIDE IS TO LOOK FOR ITEMS THAT
1. WILL INDICATE THEY CAN EITHER IMPROVE OPERATING PERFORMANCE (MAKING THE ACQUISITION MORE VALUABLE)
2. WILL BE PERCEIVED AS RISKS TO THE OUTSOURCE SUPPLIER THAT WILL DIMINISH THE VALUE).
