3600 evaluation matrix for selecting the right outsourcing partner

TABLE OF CONTENTS

1. Executive Summary …………………………………………………………………………………………………...1

2. Introduction………………………………………………………………………………………………………………..2

3. Consequences of Selecting the Wrong Outsourcing Partner..........................................3

4. Key Parameters for Evaluating Outsourcing Partners ....................................................4

5. The Outsourcing Partner Evaluation Matrix…………………………………………………………………9

6. Conclusion………………………………………………………………………………………………………………...10

EXECUTIVE SUMMARY

The outsourcing industry has come a long way. However, despite its maturity, the outsourcing industry continues to register higher failure rates. Research indicates that on an average, organizations realize only 72% of value from an outsourcing contract. This failure is primarily experienced by those organizations that are unable to develop and manage effective outsourcing relationships with their partners. A fundamental first-step for organizations willing to realize the right outsourcing partner is to undertake a comprehensive 360-degree evaluation. This white paper seeks to help organizations address this outsourcing conundrum through a time-tested and workable outsourcing partner evaluation matrix. This matrix outlines a set of criteria that can be addressed to jump start the evaluation process.

Copyright © 2013 R Systems International Limited. All Rights Reserved. www.rsystems.com 1

3600 Evaluation Matrix for Selecting the Right Outsourcing Partner

Avirag Jain

INTRODUCTION

The outsourcing industry has transformed radically over the last two decades. What was seen as an emerging phenomenon having tremendous potential few years back, has now culminated into a common course where organizations are trying to efficiently and cost-effectively meet their business goals. Today, global organizations see outsourcing as an integral part of their growth story. Successful outsourcing arrangements depend upon the effective relationship between two parties. To ensure an abiding and win-win relationship, selecting the right outsourcing partner (also called as a service provider or vendor) is a pre-requisite. It is the essential first-step towards establishing a strong foundation for a successful outsourcing relationship and mutually beneficial outcomes. However, it is also equally true that the selection of a wrong partner can turn down an organization’s all expectations from this arrangement and result in wastage of time, efforts, and other valuable resources. Findings of the Deloitte Consulting Survey (2008) reveal that 35 percent of respondents are willing to spend more time on selecting the right service provider if they could go back to the beginning of their initiative. Recent research suggests that more and more organizations are now considering or willing to terminate their outsourcing relationships, although this could bring about a great loss to an organization’s resources and shareholder value. Thus, to avoid future repentance, organizations need to carefully work through a rigorous and well-structured evaluation process while selecting the outsourcing partner. Time and efforts invested at the initial stage of partner selection is sure to pay off later in terms of a strong and win-win relationship. Outsourcing promises a number of significant benefits, such as reduced costs, an ability to focus more on core capabilities, an access to specialized skills, a movement of fixed costs to variable, and a chance to enhance productivity and quality. However, organizations can realize these benefits only if they are able to select the right outsourcing partner through a 360-degree evaluation. The evaluation process requires effective comparison of service providers on certain criteria. The traditional process of simply sending an RFP and selecting partners on the basis of the lowest price quote will have to be discarded for a more thorough evaluation. The evaluation should be holistic and focus on every major goal of outsourcing including the partner’s capability to fulfill each of them. A methodical evaluation matrix can be instrumental in determining the right outsourcing partner and thus realizing productivity gains, cost savings, and quality enhancements.


This transformation in the outsourcing landscape has been captured by global research bodies. Gartner (2008-2009), in its Fifth Annual Publication on Outsourcing, underlined that organizations that understand and avoid downsides of cost-focused outsourcing and apply business-outcome-focused outsourcing will be successful. It highlighted the fact that RFPs, which will focus on price comparisons will eventually make buyers compromise with quality. The Deloitte Consulting report (2008) observes that service providers of 44 percent of organizations did not have the capability required to deliver expected quality levels and cost savings. Although, many organizations had realized their financial objectives but they failed to derive the value that they were expecting from the arrangement. They were disappointed with service providers overall ability to generate business value and improve processes and technology. Findings of global research bodies confirm that organizations are now moving away from looking at cost alone. They want to derive value from outsourcing beyond just cost savings. Organizations are now emphasizing on how well their outsourcing partners can help them stem innovation, improve quality, achieve flexibility, mitigate risks, and gain a competitive advantage.

CONSEQUENCES OF SELECTING THE WRONG OUTSOURCING PARTNER

Selection of the wrong outsourcing partner can considerably impact the business case and lead to unexpected fallouts. Following could be some of these consequences: Repetition of the whole process to

select the right one Wastage of time on resolving conflict

and revisiting decisions Increased costs and failure to meet

saving targets Data breach involving the loss or theft

of the organization’s information On-time delivery performance and end-

user satisfaction level may decline due to delays at the outsourcing partner’s side

The quality of products or services may deteriorate causing serious damage to organizations’ relationship with customers, employees, and other stakeholders

Due to financial instability of outsourcing partners, organizations may be exposed to service or product delivery interruption risk or related problems

REPETITION OF THE WHOLE PROCESS

WASTAGE OF TIME

INCREASED COSTS & MISSED SAVING TARGETS

DATA BREACH RISK

DECLINE IN ON-TIME DELIVERY PERFORMANCE

DETERIORATION IN PRODUCTS/SERVICES QUALITY

PRODUCTS/SERVICES DELIVERY INTERRUPTION

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KEY PARAMETERS FOR EVALUATING OUTSOURCING PARTNERS Evaluation of an outsourcing partner should be based on three broad parameters – Corporate, Delivery, and Contracting. Each of these parameters is further sub-divided into several granular parameters that need to be evaluated. The broad parameters and their granular elements are as follows:

CORPORATE PERFORMANCE: Organizations should look for a reputed and a financial

stable partner with sufficient experience in the targeted processes and standards. The partner should be compatible with their culture and equipped with a competent and skilled workforce, and a management team that understands their outsourcing goals. Following are the granular elements within corporate performance that organizations need to evaluate:


MANAGEMENT TEAM: Search for a partner who has a strong management team with

appropriate change management skills. An experienced and competent management team promises robust project management, effective communication, and quick resolution of issues. An experienced team will ensure smooth sharing of knowledge and insights between both parties. Ask the following questions:

What is the composition of the management team? What is the role of each member? What are the escalation processes? What experience and skill sets does the management team have? To what level senior management will participate in planning, development, and other

aspects of the project?

FINANCIAL STABILITY: Look for a partner who is financially stable. Only a stable partner can provide a robust backup through onshore, offshore, and near shore centers and withstand crisis situation. Financial stability of service providers can be best assessed by reviewing their latest financial statements.

CULTURAL MATCH: Cultural differences are considered to be one of the biggest reasons

why outsourcing deals face difficulties and fail. A study in 2009, by Vantage partners, acknowledged, that “Culture” is the biggest issue, causing challenges in outsourcing arrangements. Try to find out the following: Does the partner’s culture match with your organization’s culture? Does the partner encourage constructive and confident working relationships? How will the partner address the cultural barriers to manage the performance?

EXECUTIVE COMMITMENT: Evaluate whether the partner demonstrates executive

commitment to strong relationship management. The executive commitment must place importance on trust, proactive communication and effective resolution of issues.

HR PRACTICES & ATTRITION: Efficient HR practices fulfill staffing needs relative to sourcing

needs and ensure availability of an optimal level of skills and resources. Low attrition rate and employee-friendly policies are the signs of a stable organization. On the other hand, massive layoffs, attrition, and resigning announcements reflect the instability of an organization. Try to find out the following:

Are the outsourcing partner’s employing, training, compensation, and termination

practices effectively controlled and compliant with local laws? Are they aligned with your own organization’s practices?


DELIVERY CAPABILITIES: The outsourcing partner must have a well-established

infrastructure, adequate resources, and required domain and technical expertise to handle the project. Organizations should learn about the processes and methodologies that are followed by the outsourcing partner. Following elements need to be evaluated to ensure the robust delivery capability of the outsourcing partner:

DOMAIN EXPERTISE: The partner must have domain expertise in the specific area. It’s

always beneficial to do business with a partner that has rich domain expertise because outsourcing involves fulfilling tough regulatory and compliance norms.

RELEVANT TECHNICAL COMPETENCIES: The partner may have an extensive list of the

technologies that they expertise in but organizations should find out whether they have competency in the technologies and tools that the project requires. Undertake the following: Ask for work samples and if possible a pilot to assess the technical expertise of the

outsourcing partner Find out whether the partner has partnership with industry leaders, such as Microsoft,

Oracle, IBM, etc. Discover what tools and technologies are used by the partner throughout the product

life cycle Find out whether these tools and technologies are compatible with what is available

in the market and with your own systems INFRASTRUCTURE: Checking the outsourcing partner on infrastructure is crucial. This is

because infrastructure can have a great influence on organizations productivity and continuity. So, try to find out the following:

Does the partner have an established and secure infrastructure? Does the technology infrastructure of the partner ensure that there are multiple levels

of redundancy, automated data back-up and no single point of failure? Does the partner have the right communication channel in place? Does the partner have a reliable power system including a back-up plan? Does the partner have availability and capacity of private/public network

infrastructure? Can the outsourcing partner offer constant IT support?

QUALITY CERTIFICATION: Checking the quality certification is essential to ensure quality

outcomes. This will assure that the work processes of the outsourcing partner are standard and well-determined. So, try to find out the following :


What relevant industry certifications the partner has achieved: CMMi, ISO, Six Sigma,

etc.? Does the partner have a defined project management tool? What are the reporting guidelines for deliverables and performance? What industry standards are used by the partner to ensure quality and client

satisfaction? How does the partner ensure that they are building the expected solution? What quality metrics are used by the partner during the software development?

OPEN COMMUNICATIONS: Make sure that the outsourcing partner practices open

communication. Find out how the prospective partner will manage knowledge transfer and communication to and from your organization. A step-wise procedure may include the following: The partner’s team members have adequate communication and language skills The partner provides language and communication skills to staff to manage cultural

barriers The partner’s process approach suits your operations

AVAILABILITY OF KEY TEAM MEMBERS: Find out whether the outsourcing partner has a

team of experts with adequate experience in the field. The partner’s team members must have the experience of executing the projects of similar size and complexity. Aspects like educational qualification, employee attrition rate, and communication & language skills are of high importance in an outsourcing deal. So, weigh these seriously.

CONTRACTING TERMS & CONDITIONS: The outsourcing partner should be able to offer sufficient flexibility, value added capabilities, references, and IP security. Assess the following elements of contracting:

REFERENCES: Checking references is a crucial part of the evaluation process. Issues like

schedule adherence, trustworthiness, and responsibility, which cannot be judged by work samples alone, can be best assessed by references check. Ensure that the partner has a proven track record and can provide you with sufficient references and testimonials. For this, you will need to undertake the following:

Visit or talk to other clients. If possible, assess their contracts and status reports. Check references from previous clients to get an idea of the capabilities of the partner Find out the experience of other clients with the same partner Check whether the partner had matched up with the previous client expectations


RECENT CASE STUDIES: Review the case studies of recent projects executed by the

prospective outsourcing partner. Find out what tools were used and how the challenges were resolved. Try to also find out how innovative the partner has been in developing business solutions.

FLEXIBLE CONTRACT TERMS: Ensure that the contract terms are flexible. According to Gartner (2009), outsourcing contracts often are not structured to provide the flexibility needed to enable the contract to adapt quickly to changes in the market and organization. Due to lack of the required flexibility, changes may result in business disruption including the inability of organizations to compete effectively. Besides, find out the following:

Does the contract contain comprehensive operational conditions that could be better

managed in the SLA? Does the contract include sufficient termination and exit clauses?

ADDITIONAL VALUE-ADDED CAPABILITY: The partner should be innovative and creative.

They should be competent enough to add value to your business by offering value-added services.

IP PROTECTION: Find out whether the outsourcing partner follows industry-standard

security practices to ensure the confidentiality of information. The partner must have established, documented and implemented Information Security Management Systems (ISMS). Try to find out the following: Does the partner practice a documented set of security procedures to guarantee the

confidentiality of data? Does the partner have sufficient business policies in place to protect key corporate

assets and meet regulations? Does the partner have a secure facility to protect against the unauthorized access of

confidential data? PRICE: Ensure that the partner is offering you a flexible pricing option to better

accommodate your needs. However, price should not govern your outsourcing relationship.


THE OUTSOURCING PARTNER EVALUATION MATRIX

The outsourcing partner evaluation matrix is given below. This matrix is functional and it can provide organizations real-time feedback on their outsourcing decision. This matrix has been developed after a thorough analysis, which included primary and secondary research. Once organizations have evaluated their prospective partners on parameters listed here, they can assign grades to each. Grades include Poor, Average, Good, Very Good, and Excellent.

Outsourcing Partner Evaluation Matrix

Importance Partner 1 Partner 2

Corporate

Management Team

Financial Stability Cultural match Executive Commitment HR Practices & Attrition

Corporate Performance Score

Delivery

Domain Expertise Relevant Technical Competence Infrastructure Quality Certifications Open Communication Availability of Key Team members

Delivery Capabilities Score

Contracting

Reference Recent Case Studies Flexible contract terms Additional value-added capability IP Protection Price

Contracting Score

Overall Performance Score

Once all individual items are ranked for each prospective partner’s proposal, the evaluation matrix gives scores to each item. Scores are calculated in this matrix on the basis of rankings given by organizations. Based on this evaluation matrix, organizations can confidently make their final recommendation for the outsourcing partner.


CONCLUSION

In today’s highly competitive and dynamic business environment, outsourcing is such an option that businesses just can’t do without, if they intend to improve performance and enhance quality while maintaining costs. However, before jumping on the outsourcing bandwagon there are some aspects to consider in determining whether this is the right choice. After all, outsourcing is not a matter of chance but choice. So, organizations should meticulously choose their outsourcing partner to derive a win-win relationship and generate optimal value from the outsourcing arrangement. Prospective outsourcing partners must be weighed on different criteria beyond the single goal of cost saving. A thorough evaluation of potential outsourcing partners by organizations on criteria, such as corporate performance, delivery capabilities, and contracting terms and conditions, will improve the chances that the initiative will deliver on all their expectations, efficiently and abidingly, over the years to come.

ABOUT R SYSTEMS

R Systems is a leading OPD and IT Services company, which caters to Fortune 1000, Government, and Mid-sized organizations, worldwide. The company is hailed as an industry leader in the outsourcing space with some of the world’s highest quality standards, including SEI CMMI Level 5, PCMM Level 5, ISO 9001:2008, and ISO 27001:2005 certifications. CONTACT [email protected] | Phone: (+91) 120-4303500 | Fax: (+91) 120-2587123

ABOUT THE AUTHOR:

Avirag Jain has 25+ years of rich experience in the IT industry including managing large on-site, off-site and offshore projects. He currently heads the Offshore Development Center of R Systems International Ltd. as CTO and EVP. Avirag is a science graduate with PGD in Cyber Law. He also holds an MBA degree with specialization in Finance and International business.

Email: [email protected] / [email protected]

To receive the Outsourcing Partner Evaluation Matrix (Excel Sheet), write to Mr. Avirag Jain at his above-mentioned Email IDs.

mailto:[email protected]

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3600 evaluation matrix for selecting the right outsourcing partner

Technology