Recommended Reads | By John Meyerson | Read time minutes
An outsourcing Request for Proposal (RFP) is different than the normal RFPs for goods and services that get produced by procurement departments on a daily basis. The outsourcing provider's proposed solution and project plan will be based on this RFP. A poorly developed RFP that does not fully understand the intricacies of the current process, the costs and the future vision that the company management wants to achieve with outsourcing leads to poorly developed provider solutions. This in turn leads to scope and cost creep, and a potentially unsustainable outsourcing relationship between the company and the provider.
The following are some of the most common mistakes we see in internally developed RFPs and how companies can better manage these issues by improving their RFP processes.
Mistake #1: Writing the RFP Before Fully Aligning on Sourcing Strategy
Corporate procurement departments often worry more about writing the document and getting it out the door rather than on having a plan on how the RFP process will feed the providers' proposals development and ultimately a successful sourcing solution. This results in RFPs being issued before the company fully understands their needs, what solution alternatives are available and sometimes before key executives have aligned on the sourcing strategy and evaluated the sourcing decision (if the executives respond negatively, it means the RFP development was a wasted effort). This unplanned approach endangers the whole sourcing process and the relationship with the provider.
Outsourcing should not be used as a quick fix. Instead it is a long-term strategy, and it is worth investing in a well thought out roadmap on how to make this complex decision achieve the long-term benefits - looking at the people, the process and the technology. A thorough internal evaluation of the sourcing strategy, including change management and communication planning, is the first step. The RFP writing should start at the end of this strategy development process after the roadmap is in place.
Mistake #2: Prescribing the Solution as Part of the RFP
Often we see companies tightly setting the scope and solution based on the way their current processes are done today, with a goal of getting their same process done for a lower cost (with a hope of higher quality). This results in providers being forced to retrofit their process into the client process, and rarely results in the lowest price or high quality.
While the RFP should accurately and honestly document the existing process and the problems that exist therein, it should not try to fit the future solution into this box. Instead, the RFP should ask for the providers to propose their best solution (and alternative solutions) using their best practices and leveraging their process and technology. This will allow the providers to exhibit their flexibility, demonstrate their ability to innovate, and typically result in a better, lower-priced solution.
Mistake #3: Not Sufficiently Addressing the Retained Organisation Assumptions
One of the common RFP errors we see is companies who do not fully document their retained organisation assumptions in the RFP. Some companies who are doing outsourcing RFPs for the first time have not even thought through, or have severely underestimated, the support and skills needed for the retained organisation. This results in the providers having to make some assumptions that can be radically overestimated for key support and management costs that they really won't need. Conversely, providers can underestimate their costs by assuming that the company will provide resources to do far more tasks than the company plans.
A good RFP will include a responsibility matrix documenting what steps the company wishes to retain (for approvals, controls, support and other purposes), and how the provider relationship will be governed. An assumption of the number of retained full-time equivalents (FTEs) and their skill sets should be given in the RFP, and if the provider wants to suggest any changes, they should be allowed to as part of their alternative solution.
Mistake #4: Inadequate Research and Evaluation of Outsourcing Service Providers
Too often the list of providers selected to receive an RFP is the result of a Google search coupled with some office politics and a few anecdotal tales from coworkers ("I heard provider X is good but to stay away from provider Y"). The lack of investment in proper research to find the right group of providers who can fulfil the long-terms needs of the company puts the whole source project in jeopardy from the start.
A good RFP should only be sent to providers once the company has invested the proper amount of time in research, fully understands the marketplace, and has narrowed the potential matches to a select few. This level of provider evaluation needs to be done before the RFP goes out versus sending the RFP to dozens of providers then trying to evaluate too many. A good shortlist number to use for the providers to receive the RFP is four (with a couple kept in reserve in case one declines to respond). This will give you a good mix of potential solutions, enough time to actually read and evaluate the responses, and enough competition to drive the price down through negotiations.
Mistake #5: Improper Evaluation of RFP Responses
Sometimes there is so much focus on the RFP preparation that the evaluation of the RFPs gets less attention than it deserves, with attention given primarily to pricing. Provider selection is the critical decision in the process, and special attention to this is necessary to make sure you end up with the best fit. Some of the evaluation problems we've seen are not having pre-defined selection criteria and not doing proper provider due diligence (three to five reference calls with clients of similar size and scope, review of provider's financial strength, and site visits).
Before the RFP is written, you need to determine what key attributes you are looking for in a service provider, and how you will evaluate the RFP. There then needs to be a purposeful set of questions written into the RFP that will allow you to score the responses objectively to help make your decision. The RFP should also require the provider to attend a series of meetings to review their solutions, to meet the team that will be working with you, and to host a tour of the actual location that will be providing the service. You need to have a plan for selection before the RFP gets written to avoid any subjective influence on the decision (or have the decision just come down to lowest price vs. best overall ability to meet your long-term needs).
By improving their RFP process, companies can reduce overall costs and improve the quality of their sourcing. To achieve successful and lasting sourcing relationships, companies must thoroughly evaluate this long-term strategic decision and educate themselves on what is achievable in the marketplace. A roadmap with proper planning and alignment needs to be done to make sure the company goals are achieved, proper market research is performed, and an objective provider scoring system is developed. Once all of these are in place, then they can be easily translated into an RFP that will address all the key areas, allow providers to develop meaningful proposals, and allow the organisation to select the best value and fit for the company.
Organisations looking to develop the right request for proposal to drive their sourcing strategy and transform their operations may benefit from these findings. The right sourcing decision is based on designing a solution (outsourced or shared service, onshore or offshore, etc.) that will best achieve the unique mix of management objectives of the individual company.
John Meyerson is a senior research analyst at ISG, the premier consulting firm providing unbiased advice on the use of outsourcing, shared services and offshoring for functions such as Information Technology (IT), Human Resources (HR), Finance & Accounting (F&A), Customer Relationship Management (CRM), Procurement, and other business processes. With a global presence across North America, Europe and Asia Pacific, they provide clients with unmatched functional experience and in-depth industry knowledge. They help clients reduce costs, improve processes and maximise shareholder value through the use of both onshore and offshore outsourcing and shared services. Completely independent of all outsourcing providers, ISG is committed to providing clients with impartial and unbiased advice. ISG's proven methodology can help you develop the right roadmap to guide you to a successful sourcing solution.
Recommended read: Motivating Your Outsourced Offshore Team by ExecutiveBrief.