Methodology removes guesswork: a structured approach to selecting outsourcing partners reduces risk and improves ROI

Communications News, August, 2003 by Andrew Anderson

Today, more than ever, organizations are focusing on core competencies and outsourcing non-core functions, such as information technology management. The outsourcing model, however, poses vendor selection and management challenges and introduces new elements of project risk.

Due to the complexity of the technologies and issues, the range of options and the number of partners involved, organizations should adopt a structured vendor-selection methodology to reduce risk and ensure projects deliver anticipated return on investment. The vendor selection process encompasses a number of distinct phases:

Conduct a business and technical analysis to define current and future requirements. A technical analysis will determine the technology infrastructure currently in place, what changes the infrastructure will support and what enhancements are needed to support process improvements. All stakeholders should participate in the process to develop a clear understanding of the complete list of requirements and their relative importance. The organization can also seek ad vice and input during the discovery process from outside technology experts, and even from potential vendors.

The discovery phase will identify each requirement and then assign a priority--a simple rating, such as high, medium, or low, is sufficient. Additionally, the team should implement a numbering system to track each requirement. The organization can then develop a request for proposal, outlining key features for potential solution providers to address.

Establish vendor evaluation criteria. Such criteria should focus on the most critical needs, prioritized by importance to determine appropriateness of proposed vendor solutions. A vendor evaluation team is established, comprised of rep resentatives from the various business areas that will be impacted by the new solution (including end-users).

Create an objective scoring model. The vendor-selection methodology should include a scoring model that can be used by each evaluator to determine which solution is the best fit. Conceptual scoring is performed by the project team to rate the importance of each requirement before receiving proposals. The more heavily weighted a requirement is, the greater impact its score will have on the total vendor rating. To determine a winning vendor, the project team performs the vendor-comparison analysis. This document provides a basis for supporting recommendations to management and obtaining approval to move ahead with projects.

Evaluate vendor solutions. Using the uniform scoring criteria, the team must weigh each vendor's proposal and give a score. The highest-scoring vendors then are invited to meet with the selection committee in person and provide a product demonstration. The vendors should be given a structured presentation to follow to ensure that each responds to key questions and provides like information. The demonstration is again judged against predetermined, weighted criteria in each category.

The evaluation team should investigate each potential vendor's background to help forecast reliability. Talk to as many comparable customers as possible in the same industry, with similar processes and transaction volumes. Business users, IT personnel and other stakeholders should also share their knowledge about each potential vendor.

The technology maturity risk also has to be considered on the same basis. A good selection methodology should provide for testing before buying, help a buyer determine provider service capability, should something go wrong, and determine the quality of the service provided.

The state of vendor finances will help determine quality of support, as will the vendor's overall approach to service. Is service provided onsite, by qualified personnel, as well as online or over the phone in an emergency? Online service should be by a human being and not just by computer. The quality of software documentation is also an issue to consider.

Justify costs. Next, execute a detailed cost justification for the top two or three choices, accounting for current and future costs. One-time costs include: software purchase price after all discounts; additional hardware required to use the software; other software purchases required to complete the project; software modifications by the vendor and/or by third parties; installation costs for hardware and software; hours and cost of support personnel for each cost component; conversion of data from old to new formats; training for users, supervisors and IT personnel; documentation; and other rollout costs.

Annual operating expenses include: maintenance to the base package, to customized components and to new hardware; other maintenance; cost of upgrades; and license expense, if any.

Select a vendor. Following the selection process and prototype tests, the vendor-selection team creates an annual cost-savings summary that outlines savings estimates for the recommended vendor, a project net present-value chart detailing an anticipated payback schedule, and a proposed implementation plan with suggested dates for project initiation, system development and configuration, and installation, testing and deployment. The team presents this summary to corporate management and makes a final decision.