Negotiating the right deal

The key to successfully outsourcing procurement is in co-developing the right deal with potential partners, says Rick Simmonds.

Having been involved in business process outsourcing initiatives as a supplier, client and consultant for the last 15 years, it has become clear to me that outsourcing deals are very different from other procurement decisions.

This is because outsourcing is all about co-developing a deal with a partner, not just about choosing a supplier and agreeing a price. Complex business-process outsourcing deals, including outsourcing of procurement, are almost living organisms, subject to growth and change. There is no standard approach, nothing straight out of the box. If you are selecting a partner, you should be working together throughout the selection process to determine the nature of the partnership.

And this must be reflected in the contract, because this is, in effect, what you are buying. The contract is the deal. Although people and assets may transfer, you’re buying the outcome of the service that is delivered, and you will only get what you contract for. So the selection process needs to be the foundation for the contract – you need to use the time and effort involved to craft a deal with a potential partner, and to ensure that the deal is fully articulated in the contract. The outcome of a selection process based on engaging with potential partners to co-develop the contract is that you’ll both structure the right deal and, as a result, be able to determine who is the best partner for you.

This should test your understanding of your requirements and the supplier’s proclaimed capabilities. It should help to build a robust solution and, through engagement and co-development, provide the platform for both parties to succeed.

There are some givens that apply to all complex, high-value procurements. You need to understand what you are trying to achieve. You must understand the supplier market. You should run a structured, rigorous election process that allows you to compare bids on a like-for-like basis. You must verify supplier capabilities and develop balanced, weighted selection criteria. And you should negotiate before finalising selection.

But there are some selection principles specific to complex outsourcing. First, understand what you have, what you want, and what you could do yourself. To be able to contract for a deal that moves you forward, you need to know what your baseline is – spend, categories, headcount, cost and service levels – or else you will have no way of knowing whether it has improved.

Secondly, use the process to garner new ideas from the suppliers about improving performance. Be open to them as they are supposed to be experts, so let them open your eyes to new possibilities. This has to be balanced against the need for comparable bids. The way to do this is to define what you want to achieve and the format for the responses in the usual way.

But also encourage suppliers to separately propose different approaches if they think they would be better. This clearly adds complexity to the analysis and comparison of proposals, but selection in these deals needs to be based on both rigorous analysis and experience-based judgement. The advantages of moving your thinking forward in a field that is developing all the time should outweigh the added complexity.

Thirdly, use the process to engage closely and constantly with potential suppliers, building a robust working relationship. It’s about selecting a partner with whom you will be effectively living with for five to 10 years. You need to know as much as possible about how they work, what they think and who they are. An arm’s-length procurement process cannot achieve this.

Even worse is when consultants are engaged to keep the suppliers at arm’s length. The problem is that when the deal is signed, there will be insufficient relationship and in-depth knowledge of each other and the real requirements to deal with changing circumstances – and in outsourcing deals, change starts from day one. Consultants certainly have a role (they know the market and the suppliers, what has worked before and what hasn’t, and they can bring rigorous analysis to the process) but they must support, not replace, the principal parties.

Engaging closely with potential suppliers enables you to understand how they will deliver, not just what. It is common to think that the client can rely on the contract to deliver whatever has been promised. But this is only true up to a point: the deal must be sustainable and based on what can be delivered.

Understanding the ‘how’ can help ensure a sustainable deal. If the supplier can’t or won’t describe how they will deliver the promised savings, the chances are they can’t or won’t be able to do so. And if that’s the case, it’s a shared problem, whatever the contract says. Either the supplier will take a hit and have a lossmaking deal that will be managed accordingly (for example, understaff to control costs), or they will seek to renegotiate and get the client to take the hit. Either way, it’s bad news.

Fourth, ensure you track and capture all the sales promises during the selection process, and be clear that you expect them to be contracted for. Outsourcing is often thought of as a means of transferring risk from the client to the supplier, which indeed it can be, but only if the contract is right. It is a nice irony that the top-tier suppliers, whom a major corporate would want to trust with something as critical as procurement outsourcing, will also be the most sophisticated to deal with, both in the sales pitch and in their ability to minimise the risk they take on when contracting for delivery. So when the salesman promises all the savings that can be guaranteed, the tools that can be leveraged, and the risks that can be taken away, ensure these are captured and contracted for before you make a selection based on them.

Finally, allow time during the selection process for due diligence to be carried out by the supplier, so that promises can be contracted for on the basis of fact. Due diligence is the practical process by which risk can be transferred – the supplier confirms that it understands what it is taking on and that it can stand by its promises. This is a risk-transfer issue: risk can never be transferred as clearly on the basis of assumptions only, and post-contract the supplier will have the knowledge, the people and the focused resources to radically shift the balance of power. They will then know more about the detail of what is under their management than you will. Without due diligence, promises will be based on assumptions, which can provide the basis for not delivering what was expected.

Procurement outsourcing can be a compelling proposition. When done right, the value generation can far exceed that delivered by other BPO initiatives. But the key to the success of the deal is in the contract, and the foundations of the contract are in the selection process.

Rick Simmonds is a partner at Alsbridge, a leading global sourcing consultancy headquartered in London and Dallas.