By Sara Cullen

No outsourcing contract lasts forever. There are many issues to assess before yours terminates

It is inevitable that your outsourcing contract will end. This represents the start of the next generation of sourcing decisions. The prevailing trend is to retain the incumbent in some capacity, but at least some services tend to go to an alternative supplier while others are backsourced. The following table contains statistics on each of these directions.

What this means is that it is likely you will want to use all options for the next generation and you will need plenty of time to get ready. Consider these issues t least a year before the term expires, as any tendering activity can require at least six months, and the goal is to have the next deal in place before the term expires.

Source:Cullen, S, Willcocks, L and Seddon, P (2001) Information

There are three options, for all or part of the scope:

1. Retain Incumbent– Consider this option when:

• there is little change to the scope;
• supplier provides services at or below market prices;
• supplier has delivered the key performance indicators (KPIs), which are at or above market levels;
• both parties will save time and effort by not re-tendering; and
• both parties wish to continue the relationship.

2. Re-tender – Consider this option when:

• you want to show the most competitive price is obtained;
• the scope has changed and other suppliers may have greater expertise;
• the incumbent will not accept the desired next generation deal; or
• probity rules dictate a re-tender.

3. Backsource – Consider this option when:

• you want to rebuild organizational competence; or
• the service is more effectively provided internally.

Firms and markets both change over time in ways that require a reconsideration of the initial decision in the current context. There are three assessments to consider:

Current Arrangement

This involves assessing what the current deal has evolved to, what worked and what did not, and what can be learnt from the earlier generation.

1. Gap analysis between the contract and actual operation. Unless the parties have kept the contract strictly current, it is unlikely to represent the evolved practices and informal agreements, or ‘variation by conduct’.

HE SOON FOUND THE CONTRACT BORE LITTLE RESEMBLANCE TO THE EXISTING ARRANGEMENT

For example, a government agency was preparing to re-tender. No big changes were expected as it was for the same scope. The project manager expected minor changes, and gave himself a few days to finalize the documents. But he soon found that the contract bore little resemblance to the existing arrangement. A pre-tender update project was required, which ended up delaying the tender by months.

2. Stakeholder satisfaction. The survey should including all aspects of delivery, including the contract, the relationship and cost management.

3. Performance and cost trends. These determine overall value for money and provide the baseline.

4. SWOT (strengths, weaknesses, opportunities, threats). This analysis ensures that you determine.

5. Degree to which the objectives were achieved. This includes the original business case and the goals that the deal was designed to achieve.

IT IS INEVITABLE THAT INDUSTRY WILL HAVE EVOLVED SINCE THE ORIGINAL ARRANGEMENT WAS PUT IN PLACE

This is not always easy. Nearing the end of a five – year contract, a university chancellor directed the contract manager to assess whether the benefits were achieved. This was critical to the university steering committee’s decision on further outsourcing. No business case could be found and none of the decision-makers involved in the original deal remained. The manager could not infer what benefits were intended, let alone whether they were achieved.

Knowledge Refreshment

It is inevitable that industry will have evolved since the original arrangement was put in place. The next generation offers the opportunity to investigate and adopt evolved practices.

1. Benchmark performance levels and cost against industry standards to determine if the KPIs should be upgraded and to determine future cost expectations.

2. Update knowledge of leading practice, technology with better price/performance, business processes that offer improved effectiveness or efficiency, and better outsourcing practices.

3. Determine the pool of potential suppliers, competitiveness in the industry, and new entrants.

New Requirements

The next generation offers the opportunity to determine new requirements and to refresh original ones, especially if this has not been a continuing process.

1. Forecast business requirements of and potential changes in the projected life of any new outsourcing arrangement.

2. Reconsider the scope and potential bundling/unbundling of services.

3. Develop revised service level agreements, con – tracts and price models in addition to the contract management function and the retained organization. Otherwise you risk having to deal with under-scoped bids, suppliers lacking the necessary expertise, and potentially very expensive remedies.

Reprinted with permission from ABIE Source