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In The Headlines
Outsourcing Stock Prices

Best Practice
Structure Outsourced

Contracts and Negotiations
Ten Key Questions for Developing Effective Service Level Agreements

Special
Extra! Extra! Read All About It Outsourcing Fuses Tradition With Technology

ASP Focus
ASP Makes CRM Affordable For Mid-Sized Firms

Focus on Healthcare
Delivering the Difference

Case Study
An Ounce of Prevention

The Theory and Practice of Outsourcing

Integrated People + Processes + Tools = Best-of-Breed Service Delivery

Gain Control of Your Computing Environment

University of Pennsylvania Health System: Outsourcing Intervention Turns Hospital's Financial Condition From Red to Black

Outlook on Outsourcing in Wireless

Ask Before You Outsource: Ten Critical Questions to Put to Potential Service Providers

Outsourcing the telecommunications process can have a major impact on a corporation's bottom line. The global local area networks (LAN), wide area networks (WAN) and the accompanying infrastructure may account for as much as 30 percent of the corporate IT budget, making it one of the most visible numbers on the books.

Many large corporations that have merged find common strengths in business principles; however, the actual merging of infrastructure is often put together with less enthusiasm. Combine several mergers and purchases over a few years and the cost of the network begins to rise without the ability to monitor cost, hence the budget goes through the roof. Is the solution outsourcing?

You have to discover the cost of various components of the infrastructure before you can make that decision. These components include circuit, equipment, monitoring, engineering and support costs. Performing a true telecommunication audit requires both accounting skills and an understanding of how a network operates. Most internal auditing practices count backwards, from the balance sheet back to the business unit?a difficult task at best.

When IT professionals approach the question, "should we outsource?", the tendency is to have a primary telecommunication outsourcing supplier perform the audit function. These suppliers are well aware of the cost of doing this and categorize it as pre-sales engineering expense to get a best-guess estimate. The supplier only needs to collect 80 percent of the actual information to provide a baseline-pricing matrix. The problem has been the remaining 20 percent escalates into higher costs and missed service levels, leading to complaints about network performance. This is a major reason why buyers return to the table to renegotiate their contracts.

Some companies take a different path and make a decision to build an internal team to identify and provide information to several suppliers, creating an internal Request For Information (RFI) for outsourcing. This team, depending on the skill set, provides the same information to several suppliers. The suppliers must then perform a due diligence on this information. The same pre-sales group creates a best-guess estimate. Then the same cycle can take place collecting similar information and creating the same sad results.

The Solution

The solution is to hire an outside firm to assist with creating a Request For Quotation (FRP) for outsourcing and thereby shift the responsibility to an outside firm who understands the issues. Few companies have the skill set to perform such an in-depth task and it can be costly.

The first task is to collect 95 percent of all the information. The second, and most important, is to use the bidding suppliers' post-sales transition team to assist with the process. Why?

The typical way suppliers handle an outsourcing initiative is to use an internal pre-sales team to estimate the cost, negotiate the contract, review the legal contract and attend the post-award meeting. They then turn over the information to the post-sales team who redoes all the due diligence information collected during the bid cycle. Looking at a timeline, it takes months, sometimes years to get a contract signed and again months if not years to transition a large network.

So, why is it important to get the post-sales transition team involved? The answer is time and money. For a $30 million (per year) outsourcing contract, suppliers typically spend $3 million while the buyer spends another $2 million. Other bidding suppliers have spent similar money and consider this expense a cost of doing business.

Once the contract is signed, a post-sales team gets to work. It takes six to nine months to perform a due diligence, rediscovering the network. This typically costs an additional $3 million.

If the due diligence information could be provided in a transition format and in "real-time," the buyer could realize savings from the outsourcing engagement five months earlier. The supplier and the buyer would save a considerable amount of upfront cash.

However, the process is not over. Once a full transition has taken place, the network, monitoring tools, engineers and staff all belong to the supplier. If the contract was written correctly, the buyer set up a governance board to review the service level agreements (SLA). They rely on accurate information from the supplier to see if the network is providing what they expected. Unfortunately, the buyer has lost control of the ability to audit the supplier because all the information belongs to the supplier. Relying on reports generated by the supplier is simply not enough to keep them in check.

Consider when a contract is coming towards the end. What process does a buyer go through to put out an RFQ again? This time, who has all the information? It is time to perform a due diligence audit again?

The Everest Group addresses all of these challenges with a specialized portal that provides:

• Accurate data from the beginning of the process that continues past implementation.
• The information needed by the governance board to make decisions.
• Virtual discovery of all intelligent devices throughout the life cycle of the contract.
• Information ready for renewal or re-bidding the contract.
• Simplified process of constructing pricing metrics.
• Complete understanding of Present Mode of Operation with documentation.

The portal stores all the data in a database. Everest can produce actual appendices for RFQs in the specific format required by the industry's biggest suppliers.

Suppliers Need Accurate Data for Accurate Pricing

Suppliers need an accurate, up-to-date due diligence report so they know how to price their bids. If they only know about 80 percent of the system, they have no idea what that unknown 20 percent will cost. So suppliers typically build a large premium into the price to cover the "unknown unknowns." I've seen premiums as high as 15 percent.

Using the Everest process allows suppliers to generate a more accurate price that should save the buyer money by removing the costly "unknown unknowns." Accurate information also helps the buyer do a better job of judging the supplier's bids. Buyers usually just guess at who is giving them the best price because no one knows the true costs.

Suppliers have found this process so cost effective that the winning bidder has been willing to reimburse all of Everest's fees. In essence, the supplier refunds the buyer's fees to Everest. That makes it a win-win solution for everyone. Even losing suppliers become winners because they did not have to spend typical large sums on due diligence.

The Everest portal eliminates the need to perform a second costly due diligence. This saves money for all parties involved and continues to make the Everest process the least-cost solution to providing a path to a successful contract?both the supplier and buyer become winners.

Using the Portal

The first part of the process is low tech, high touch. When Everest works with a buyer, we develop a personal relationship with the chief executive officer who announces he has granted a third party permission to document the company's telecommunications infrastructure. He commands the crucial infrastructure managers who hold the keys to the data to cooperate with us. They know how to get past the firewalls and negotiate around the roadblocks.

Then Everest brings in specialists who use the portal tools to study the buyer's infrastructure. The portal communicates with all devices in the telecommunications infrastructure.

The team builds the discovery tools within the buyer's own organization. All the information is then stored in a database. The software allows users to prepare the data required for an RFP for bid submission as well as transition data for the supplier implementation team.

The portal continues to operate after the supplier takes over the process from the buyer. The database provides all the figures the buyer's governance team requires to check the supplier's performance against the SLAs.

Lessons from the Outsourcing Primer:

• Everest's portal and processes remove the need to perform due diligence twice, saving both time and money.
• Using technology to perform due diligence raises the accuracy of the data from 80 percent to as much as 95 percent.
• The Everest portal remains in place during the life of the contract, producing the data needed by the governance group to monitor the supplier's performance.

Next month we'll discuss how to outsource telecommunications engineers.

Publish Date: October 2001

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Copyright © 2001 - Everest Partners, L.P.

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