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Table of Contents

Getting Ready to Outsource

Pay Attention to SLAs!

Insurer Quotes Rates from Palm of its Hand

Manufacturing Ties that Bind

Data Center Outsourcer Keeps Power Grids Up and Running

Development and Customization in Outsourcing

BPO Big Bang: Creating Value in an Expanding Universe

Taking the Pulse of Patient Care Improvement Strategies

You've made the decision to outsource a function, say your IT department. Your first move is to get a Request For Proposal (RFP) on the street to several service providers you've heard of to get on with the process. Right? WRONG!!

How do you get the most out of the procurement cycle? A common mistake is to wait until well into the due diligence phase of outsourcing, when you expect to make an award, to actually discover the boundaries of what you want to outsource, the current performance levels, the true full costs of those functions and what the impact will be upon the remaining functions. Proper preparation helps avoid these challenges. From Everest's experience with helping clients procure outsourcing solutions, we believe five steps are crucial to proper preparation.

Step 1: Decide why you want to outsource.

The most popular reasons include:

• To lower the overall cost of providing services.
• To improve overall service efficiency and performance.
• To gain strategic advantages that may not be available internally.
• To make up for a lack of skilled resources.
• To gain access to capital.

Truly understanding why you want to outsource and how those reasons fit into your overall business objectives are the needed platform upon which to build. Also understand any constraints that might affect the scope.

This is the point in time to ascertain if you really want to focus on one function or take an enterprise view that may offer more value from the final solution. This is also the optimum time to enlist the skills of a consulting firm, such as Everest, that can help you identify the value of various options.

Step 2: Commit the necessary internal resources to be successful.

Okay, you now know what you want to outsource. Now what? The next step is to commit internal resources to the project. This involves relieving them of some of their day-to-day responsibilities to free them up to really devote quality time to the project. They must understand the information they need to collect and what management is going to do with the information collected. The people selected for this phase need to be empowered to get the required information.

The number of people required will vary with each situation. Generally, at least one person for each discipline plus a finance person will be required.

What kind of information are you looking for? Let's start with the basics: How much am I spending today for that function? No, not just the operating budget associated with that function. You have to tabulate how much you really are spending. Every function has a "shadow budget" -- resources used to accomplish the job that are not in the direct operating budget. For example, people who review bills for accuracy are not in the direct operating budget. You must capture the cost of these resources to properly identify all the activities the service provider will have to replace.

While you are capturing the cost information, understand all the activities that the soon to be outsourced function performs. As basic as this sounds, it means describing each discrete activity as you would in giving someone directions. Things you do out of habit may take 10 separate activities. Describe how to make a bed and you will have the idea. This is important because you have to be able to define a complete scope for the service provider (that's how they determine their bid) and to ensure that all activities that are currently being performed will be included in the supplier's scope.

Step 3: Draft the Service Level Agreements

The next piece of this puzzle: What kind of output are you getting out of the activities for the cost you are expending? What are your current performance levels and are they sufficient to meet your business needs?

For example, you may have a customer service call center that currently answers 80 percent of the calls in 90 seconds. Is this good enough or can you achieve a higher customer satisfaction if you improved the answering time to 30 seconds? If those calls generate revenue, then there may be a case to improve the time.

The cost for you to improve to this level internally also needs to be part of the cost comparison that you will use to judge the service providers. It also helps you determine the right performance level to request from the supplier. Remember, the higher the performance, the higher the cost, regardless of whether it is done internally or with an outsourcing supplier. So getting this element right is important.

Step 4: Understand the Impact on the End Users

What about the end users of the services? What would they think if the services were outsourced? What are their expectations and what would be affected by outsourcing? Getting their buy in is important as they are the ones who will be either praising or criticizing the services; having users critical of the services will not bode well for the long-term success of the outsourcing effort.

Step 5: Make the hard decisions on scope

The final step: applying the accumulated data to make complicated scope decisions impacting people and existing third-party contracts. Human resource implications always take time and are the most sensitive area. Identify the people and positions that will be affected. Determine who you will retain and who migrates to the service provider. If you transfer people, you must understand the legal and corporate implications of notification periods, severance and your perpspective on the supplier's retention of the transferred staff. You need documentation on current salaries, benefits and benefits costs. The service provider will need to know the current situation so it can develop comparable offerings.

The supplier will also want documented volumes of transactions and any projections for the contract years. The company needs to identify any assets that it will need to support and/or transfer as part of the outsourcing.

Finally, the service provider needs to know if outsourcing will affect any current third-party contracts. You need to identify all third-party contracts and determine how you wish to deal with them. You can retain and manage them, or retain them but let the supplier manage them or simply transfer everything. Identify your ability to transfer, assign, or terminate the affected contracts.

When you complete this process, you will have an in-depth understanding of what you are currently doing, how well you are doing it and how much it is really costing you to do it. You will have made the hard decisions on the outsourcing boundaries, and on what and who will be affected. You will also have a good expectation on the service levels required to meet your business needs. In short, you will now be ready to begin the outsourcing procurement cycle.

Lessons from the Outsourcing Journal:

• Proper preparation happens before the procurement cycle begins.
• Five preparation steps include:
  1. Decide why you want to outsource.
  2. Commit the necessary internal resources to be successful
  3. Draft the service level agreements.
  4. Understand impact on the end users.
  5. Make the hard decisions on scope.

Publish Date: September 2002

Copyright © 2002 - Everest Partners, L.P.

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