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Everest Group has prepared a white paper on the appropriate use of sole source outsourcing. This is an excerpt from that white paper. In Part 1, we discuss why and how to sole source. Part 2 covers a brief history, then discusses how sole source approaches can derail. To read the full text of the white paper, click here.

Sole Source: A Brief History

In the early 1990s, companies opted for a sole source approach to outsourcing for many large information technology outsourcing (ITO) transactions requiring either complicated or rare sets of capabilities. Since service providers with such capabilities and geographic presence were scarce, buyers were faced with a limited selection of those capable of delivering the required services. More recently, as business process outsourcing (BPO) has become an accepted alternative, buyers are choosing sole source approaches with service providers with whom they currently have a relationship or who have unique capabilities.

For purposes of this discussion, a relationship refers to any existing or pending engagement between a buyer and service provider. When a buyer and service provider have worked together previously, that "relationship" often carries the weight of trust and confidence in the service provider's opinions and ability to deliver service - especially as needs and business conditions change.

The rationale to tap existing relationships for BPO was often pragmatic. First, in the early days of BPO, few service providers had proven capabilities for delivering the processes under consideration. Second, by entering into a sole source relationship, the buyer takes advantage of existing, strong relationships, as well as simplifies the intermingling of current ITO services that often serve as the foundation of BPO processes. Finally, existing relationships can shorten the negotiating curve at a time when economic pressures dictate a need for speed.

Indeed, a recent poll indicated that 50% of organizations are more likely to consider a sole sourcing approach for BPO than ITO.

Conversely, 33% are less likely to consider sole source approaches for BPO. Surprisingly, only 17% of respondents indicated that the difference between BPO and ITO has no impact on their sourcing approach. Clearly, BPO is driving a change in how organizations think about their sourcing approaches - both towards and away from sole source approaches.

A final factor has also contributed to the consideration of sole source approaches: buyers experienced in multi-provider outsourcing arrangements have recognized the less obvious limitations that multi-provider approaches face. The "hidden costs" of multi-provider sourcing can dramatically influence the ability of the buyer to build a relationship with the right service provider. These hidden costs include:

1. A longer, more taxing procurement process
   In a multi-provider, multi-bid process, the buyer releases requests for proposals. Once the service providers answer, the buyers must review and weigh them for individual merit. This lengthy process typically slows the development of relationships between key executives at both the buyer and the service provider and can raise the resulting cost of the overall procurement process. Further, the burden of simply engaging with more than one service provider may strain existing resources within the organization, notably the already limited time of the executives involved.
2. "Over-promising" by a service provider
   In an effort to win in a multi-provider situation, service providers occasionally commit to deals that they cannot deliver. Such commitments lead to poor solutions or solutions they can not implement. In other cases, the winning contract will need to be renegotiated within a few years.
3. Lack of attention
   Small to mid-size buyers in a multi-provider process may struggle to gain the full attention of service providers. The result is fewer "pursuit dollars" being allocated to the provider's sales efforts, thereby limiting the degree to which the provider can tailor its solution to match the buyer's unique needs (or even pursue the opportunity at all).

How Sole Source Approaches Can Derail

While it can help streamline the process, sole sourcing can also create unanticipated stumbling blocks. Deciding to undertake a sole sourcing arrangement is just the beginning of what can turn into a long and expensive process. Therefore, it is important to understand how a sole source process can unravel if not carefully managed.

Consider the potentially divergent goals of the buyer and the service provider. The buyer wants a solution tailored to meet the company's specific needs, while the service provider wants to develop a solution that leverages its capabilities and infrastructure. Further, the service provider often makes service and delivery promises in order to quickly obtain a letter of intent (LOI). Why quickly? Because the service provider wants to create an emotional commitment, and the trust at the core of the relationship will usually prevent the buyer from declining to contract.

The service provider's efforts to move quickly through the initial stages in order to expedite the signing of a loosely defined LOI can result in an engagement that better serves the service provider's needs than those of the buyer. This "Commitment in Principle" lacks appropriate details in three key areas:

1. The scope and nature of the arrangement
2. Guaranteed levels of services to be provided
3. The nature of how the buyer and service provider will share in the value created by the service provider's solution.

In these cases, the service provider will have negotiated for terms more favorable, easier to deliver, and less taxing - regardless of whether the terms and deliverables fully suit the buyer's expressed or intended needs. Ultimately, the buyer feels locked into the agreement and can be reluctant to re-open the discussions to address any perceived shortcomings.

If re-opened, such negotiations may bog down as both buyer and service provider attempt to inject their goals and motives into the agreement. This can dramatically slow the process, often leading the service provider to enjoy perceived negotiating power in its favor as the buyer becomes increasingly concerned with facilitating a speedy closure to the arrangement. If negotiations do slow down significantly, two additional challenges are prone to emerge.

First, any slowing of the negotiations can lead to a respective "wandering" of focus and attention by both buyer and service provider. The buyer's lost focus can result in a reinterpreting of the effort's desired objectives and scope. This leads to a "moving target," which changes the nature of the effort from the service provider's point of view. In addition, it provides fuel for the buyer's internal forces opposed to the initiative. Opposition finds opportunity to build barriers to the arrangement. This undermines the project's scope and objectives.

Second, idle time during the negotiation phase can lead to the introduction of additional processes by the service provider to broaden the scope of the initiative and inclusion of mechanisms to limit risk to the service provider. Just as the buyer's organization often senses a lack of firm scope to the agreement, the service provider's own internal risk mitigation group will seek to insert additional protections into the agreement's terms and conditions to protect the service provider from perceived financial risk associated with a poorly defined scope or unclear customer expectations.

To avoid these types of issues in a sole source situation, the process must be carefully designed - by the buyer, not the service provider. In order to present an option that is credible to internal managers and decision-makers, the buyer must guide the sole source selection process. This prevents any inappropriate influence by the service provider and ensures that the decision was made according to the buyer's specific needs.

In Part 3, we will share a design for a successful sole source outsourcing approach.

Lessons from the Outsourcing Journal:

• In the past, buyers used sole source outsourcing in complicated transactions where there was only one service provider with the requisite expertise.
• BPO is changing how buyers feel about sole source outsourcing.
• Multi-vendor, multi-bid processes tend to cost more and use up more of an executive's valuable time. They can lead to over-promising by an eager service provider.
• Buyers, not service providers, must drive the sole source approach. This is the only way to insure the outsourcing initiative addresses the buyer's specific needs.

Publish Date: November 2003

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Copyright © 2003 - Everest Partners, L.P.

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