Outsourcing is intended to introduce Market Discipline into internally provided (back-office) processes and activities. Yet, many outsourcing arrangements grant exclusive right to perform the services in scope for the duration of the term of the arrangement. This in effect cancels out both the intent and one of the key benefits of outsourcing.

We consider three major categories as a guide: Location, Complexity, and Buy side profitability. Each case should be analysed in more detail, but we start with the following rebutaable propositions:
Location: Offshore deals between 10% and 12% of TCV ("Total Contract Vaalue"); Local (or Onshore) deals between 3% and 6% of TCV.
In addition, we note the rule established by TAU Group Inc. that: BUY-SIDE OUSOURCING CONTRACT GOVERNANCE IS INVERSE PROPORTIONAL TO SELL-SIDE DEAL PROFiTABILITY. In other words the slimer the Vendor profit margin (or even loss) the more expensive is to manage the vendor to deliver contracted services at the price and service levels prescribed.

Ronald Coase established in 1937 the theoretical framework as the basis for outsourcing. Coase was awarded the Nobel prize for economics. He states that when the internal cost of processing a transaction exceeds the market price, the transaction will tend to be processed externally. We suggest that outsourcing is an economic necessity and that it affects mostly parts of the business not normally exposed to market discipline forces (IT, HR processes, Supply Chain processes, Accounting processes, e.t.c.).

As a logical consequence of Roland Coase's theorem (1937), the likely candidate will be parts of the company that are not normally exposed to market discipline forces. What is observed in the market place is that the functions more commonly outsourced are: IT, Call Centres, Supply Chain Management, Finance & Accounting, and HR - Processes. The debate continues where do Payroll and Accounts Payable fit. For a visual representation of this follow this link: CLICK TO SEE

The sort answer is yes. If the deal construction is well planned at the time of the tender (RFP development), then the Requirements Section in the RFP should be written such that it becomes the Statement of Work (SOW). The same thing should apply to Services, Service Levels, and Statement of Fees.

Most will agree that there are differences, but the differences appear not well understood, even by procurement departments and professionals. There are in fact more differences than similarities. The differences include: Buying goods is a Balance Sheet transaction, buying services (especially outsourcing services) is a Profit & Loss transaction; the interaction with a vendor of outsourcing services is deeper, more critical and much more frequent; the terms of the agreement with the vendor are not even similar; the relationship with the vendor is completely different. In summary, the knowledge of buying goods (much more available in the market place) does not immediately translate into the needed expertise to buy and manage outsourcing services. The transition requires learning and new experiences.

Assuming the outsourcing deal will last an average of 5 years or more, this error will become obvious and create perceived (and perhaps real) harm. We believe negotiations should build trust, even in an adversarial environment. We prefer and welcome opportunities to convey this to the other side and start the relationship on a solid foundation. We suggest that by pointing the error out to the vendor and engaging in a problem resolution mode, the vendor will most likely reciprocate with a concession when needed.

To achieve a more precise and comparable result of any site visits, site visits should be turned into site inspections. This entails having: prescribed forms, questionnaires, process and buyer team training. Instead of a site tour the process will ask the same questions, look for evidence that the answers are verifiable, and score the site visit (inspection) accordingly. This implies that the vendor site visit (inspection) will be allocated points in the overall evaluation score card. The same answer would apply to vendor references.

For the purpose of answering this question we will assume this is a straight buy-sell outsourcing deal (i.e.: no shared economic interest). In both cases of Termination for convenience (of the buyer) and the breach by the buyer, there is a fairness argument that the vendor should receive all or a portion of the expected profits realized if the deal would go to full term. At the same time, the deal should be fair to both sides and economically balanced. By balanced we mean that there should not be situations where the vendor makes more money doing no work than doing the work; which will be case here (for early terminations). To be fair, if you decide to include in the economic model compensating the vendor for loss of expected profits, you should ensure that you (the buyer) get compensated for the same relative portion of your (the buyer's) savings in the case of breach by the vendor, termination for cause (service levels) or abandonment (by the vendor). Thus, the economic model is balanced for both sides.

The scope of services of each outsourcing deal determines specifically what will be required in the Termination provisions of the deal. In addition, the market does establish what vendors are geared to offer and the general expectations of most buyers. A full analysis requires that all cases be identified and rights and obligations checked for completeness. Site members have access to the TAU Group Termination Analysis Framework which we constantly update to reflect the market and reflect the specific scope of every deal and the most critical aspects of service provision.

In most cases the use of "partnership" to describe the relationship is NOT appropriate, but a widely preferred marketing language twist. If the deal under consideration is a straight buy-sell deal, the concept of Partnership simply does NOT apply. Vendors tend to use this to position the deal management, governance, and escalation as a relationship of equals. If the deal under consideration includes specific shared economic interest, at least for some of the deal, the term Partnership is appropriate.

To quantify and compare the results of reference checks, they need to be driven by the buyer (less free form, more prescribed). This requires having prescribed: interview questionnaires, process and buyer team training. This implies that the results of the reference checks will be allocated points in the overall evaluation score card. The same answer should apply to vendor site visits.