Many share a common problem. Frequently, C-level executives, business owners and supply chain executives face it: the need to execute a complex request for proposal (RFP) or similar sourcing activity to acquire mission-critical technology, products or services in a short time. They know that much.
The path forward lacks clarity. It involves multiple internal stakeholders with varying degrees of ownership and responsibility related to the initiative. Everyone wants a seat at the table in defining the requirements and making the decision. Vendor sales representatives pitch solutions before you even understand the precise business and technical requirements. Meanwhile, financial and operational pressures grow to do something and to do it quickly. In these circumstances, your need for sourcing help may not become apparent immediately. The following 10 symptoms can help you to assess quickly whether your internal capabilities are up to the task at hand.
1. You have a vendor invitee list that is limited to who you already know.
Depending on the category being sourced any number of vendors may qualify to provide the services, technology or products you need. Too often, we have seen situations where buyers take an unstructured approach to identifying vendors to invite to a competitive sourcing event, such as an RFP or request for information (RFI). Whether because of time constraints or a misunderstanding of the marketplace, buyers will hurriedly assemble an invitation list from their existing contacts. These contacts may come from sales calls, trade shows, recommendations from colleagues or personal networks.
Using a known list offers a good way to start, but without the buyer having familiarity with and up-to-date information about the vendor marketplace, it is better to thoroughly evaluate the entire universe of qualified vendors. Such an evaluation takes into account recent mergers and acquisitions, new entrants, recent expansions and contractions of offerings by the major players, and information about how well each company has performed in similar situations. A well-vetted list of potential invitees results from such an evaluation, which includes details on the advantages and disadvantages of each vendor. It gives the buyer confidence that the final invitation list comes from a rigorous analysis of each vendor’s offerings and reputations, and, nearly as importantly, the list invites no unqualified vendors, thus saving time and energy for all parties.
2. You lack situational awareness of the current vendor market conditions.
Every industry continuously cycles through phases where the balance of power changes with supply and demand in the vendor marketplace. Sometimes, too many buyers chase too little vendor capacity. Other times, the opposite holds, where recent slowdowns or over-investment by vendors creates a glut of capacity relative to demand. Equilibrium between buyers and sellers generally makes for a healthy environment, but the environment often reflects a transient state between the extremes on the supply-and-demand continuum.
As technology evolves or as the overall macroeconomic environment heats up and cools down, the structural changes in the environment respond. The vendor market also may reflect seasonal changes, with low use of resources in the first quarter, for instance, and shortages of labor or production capacity later in the year. The point is: Change is the norm. The buyer must have a deep and broad view of the prevailing market conditions and a clear understanding of how those conditions are likely to change. This perspective requires knowing the underlying forces that cause such changes. If you or your staff lacks these insights, then you are decidedly at a disadvantage as you set out on a major sourcing initiative.
3. Your favoritism crowds out objective decision-making.
Nearly every company that employs vendors to perform critical business functions suffers from the pitfalls of favoritism. For reasons that may not have anything to do with actual, measurable performance, key decision-makers in the chain of command seem to favor certain incumbent vendors. This favoritism may result from personal relationships, old habits and, too often, nothing in particular that anyone can remember. As an all-too-familiar result, they select a vendor whose performance has failed to improve, or even has degraded, over the years. Costs are up, and service levels are down. Yet the decision-makers have little appetite for change because client personnel also happen to favor the vendor.
A scene from the TV show Mad Men comes to mind. The client tells Don Draper how happy he is with his current advertising agency, despite the fact that the vendor has failed to increase the client’s market share, which is the key metric for their performance. Draper’s response, “And I’m sure they are very happy with you!” captures the scenario perfectly. The vendor in these situations is, simply put, complacent and happy. A neutral party, outside of the day-to-day political environment of the organization, can provide an objective, data-driven analysis of current vendor performance and potential improvements that could be made with other vendor options. Such analyses can cut through the operational inertia that results from favoritism and cause rapid, measurable improvements that otherwise would be extremely difficult to attain without a dispassionate approach.
4. You have been planning a major sourcing initiative for a long time, but cannot seem to take the next step.
“Analysis paralysis,” a term that has been around for decades, describes a phenomenon as prevalent today as ever. Perhaps a person or a team has been assigned a sourcing initiative. Although managers consider the employees responsible for the initiative to be competent, the employees also have “day jobs” that keep them busy, ironically, well into the night.
Meetings take place weekly or monthly, yet the sourcing project never makes progress. Typically, supply chain employees who may be assigned to the project perform transactional purchasing throughout the day. If business owners and subject matter experts share the assignment, operational work upon which their personal performance is measured occupies their time. Either way, progress moves slowly or not at all.
The result delays any potential cost or performance improvements. Then, when time begins to run out, the sourcing initiative inevitably takes shortcuts. Either it extends the contract extended in short-term increments at much higher prices or it selects a vendor selected with minimal effort invested in the critical steps of defining requirements, selecting a vendor and negotiating a contact. Such is the cost of failure to move a sourcing initiative at a rapid, constant cadence through every step of the process beginning with a needs-and-requirements assessment and ending with a contract-signing and vendor transition. An experienced, qualified sourcing resource solely focused on the sourcing initiative will not be in danger of distraction by other priorities and will apply proven project management and governance principles to the sourcing program every step of the way.
5. You have a one-dimensional, low-cost unit view of sourcing.
Purchasing directs attention toward the cost per transaction as measured by the price paid for a given item or service. In contrast, sourcing involves a comprehensive view of the total cost of ownership for the entire array of items and services being provided by the vendor over time. This includes not only the prices to be paid on each purchase order, but all other costs, direct and indirect, internal and external, including opportunity costs related to the vendor selection. One vendor’s initial pricing may be lower than a competitor’s pricing, for instance, but pricing in the out years under various probable growth scenarios cause the overall price to be much greater.
A thorough, dynamic model that takes into account all costs and that stress-tests each vendor’s proposal against multiple scenarios, with probabilities (either explicit or implicit) attached to each outcome, offers a proven way to objectively compare vendor pricing and provide reliable spend forecasts. The quality of these all-important tools requires deep experience and strong analytic capability obtained only through repetition over many years under diverse conditions.
6. You feel like you are tied to an incumbent vendor and cannot see a way out.
The vendor relationship started off well in the beginning, but the trend is heading toward minimum acceptable performance. As unsatisfactory as the relationship is, the strained nature of the status quo also makes it difficult to make improvements. Furthermore, the vendor no longer responds with a sense of urgency to problems you present to it. These are clear signs that you have a tired relationship with an incumbent vendor.
Thankfully, routes to improvement always can be found, and even the most onerous contract provisions should not tie anyone to a poor vendor relationship. You can improve the current contract through renegotiation and the introduction of healthy competition, ultimately with options to move to a more suitable vendor partnership.
7. Your contracts look quite different from your RFPs.
You worked diligently to issue an RFP under tight deadlines and succeeded in meeting your goal. You had a rigorous sourcing approach and selected the vendor that best met the RFP requirements. However, as you move closer to contract execution, the original requirements are changing materially between the original RFP and the contract draft. That can signal that the original requirements were not as all-encompassing as they could have been. The risk now is that you selected the winning RFP vendor based on a set of requirements that are no longer valid.
Additionally, because the scope is now shifting, the prices originally negotiated during the sourcing phase may no longer be valid, threatening the original business case. The advantage in the negotiations is steadily shifting from buyer to seller. You did not envision this situation.
Getting the requirements right requires asking the right questions of the business, and in the right way. It also requires the experience and discipline to walk through the most likely operational scenarios at a time when the business does not fully understand the urgency of such a task and the implications of failing to do it correctly. True sourcing experts should be able to execute with speed, yet with the rigor and discipline that comes from being detached from any internal pressure to close a deal quickly at any cost.
8. You don’t believe you can source a new vendor before the current contract expires.
When you embarked on the latest contract renegotiation for a three-year services contract, there appeared to be plenty of time available to re-source the services. You allocated months for the RFP process and for selecting a new vendor, and that initially appeared to be sufficient. Now, time is slipping away, and the current contract terms are most likely to expire before the sourcing is complete. This puts the company in that awkward position of having to ask the incumbent service provider to continue on a month-to-month arrangement precisely when you are both in the middle of negotiations with that same vendor and others for a new contract.
Sometimes it is not just a matter of whether you can complete the sourcing project yourself, but also how quickly you can complete it. This presents a challenge when you have to manage diverse stakeholders through everything from scope development and agreement on scoring criteria and weighting, through multiple levels of down-selects and negotiations. Dedicated experts not only have the expertise, they have a comprehensive set of templates and accelerators vital to getting through the sourcing lifecycle quickly and effectively. Further, a seasoned advisor will ensure that any agreement contemplates the careful transition of service and prevents the negotiation of month-to-month support in a deteriorating relationship.
9. Your last $10 million contract cost you $20 million.
All too often in complex, large-scale services sourcing, you concentrate on the core requirements effectively but do not have the dedicated time or operational expertise to drill down into the seemingly less-critical requirements or the riskiest operational scenarios. The scope expansion that results from this approach, with the additional complication of no predefined service-level agreements and payment terms, inevitably results in a troubling scenario where the original business case no longer remains valid.
Formulating the requirements accurately and comprehensively up front does not have to take long, but it does require thorough operational awareness, a rapid yet iterative review process, and extreme due diligence. Calculating the most likely total cost of ownership and accurately estimating the full costs to — and effects on — the business represent angles that veteran sourcing experts can address. Otherwise, that original business case will fall short of its objectives after the end of the sourcing process, when it is too late to take appropriate corrective action. Additionally, contractual protections and structured governance can provide a blanket of protection by implementing guardrails to address the pricing and delivery of modified or expanded scope.
10. You have difficulty operationalizing your contracts.
An extremely common and one of the most difficult and most overlooked aspects of sourcing is the difficulty involved in putting contracts into operation. The difficulty more often becomes apparent with major outsourcing contracts, but is possible in any complex deal that encompasses service requirements that have historically not been well documented or that have evolved significantly in recent time. A key sign that a contract cannot be successfully operationalized appears when a party to a contract initiates multiple contract change requests within the first six months of a multi-year contract. Too often, the teams become laser-focused on the discrete assignment of individual responsibilities in the division of responsibilities matrix without adequately stepping back to validate that the matrix actually speaks to the end-to-end operational model.
Not only is having the vision to operationally play through the consequences of a given set of contract terms difficult to achieve, it is almost impossible to achieve without holding dedicated sessions with your prospective vendors. One must first mutually agree and document an effective operating model before one is able to assess the implications of the draft contract terms by validating them against that same model. The problem offers more of a challenge than it might seem because it requires up-front work to jointly map key processes to anticipated functions as they are anticipated to exist, post-contract.
Even more crucially, it requires the business owner to confirm which specific internal or vendor teams will own each step, and whether they have the expertise and the data to perform the function. “Them or us?” is not sufficient. It is “Who?” ‘How?” “In what sequence?” and “Will they have what they need to succeed if they have to perform this function as the contract is drafted?” The cost and effort up front always pays for itself in cost-avoidance. This is the sourcing equivalent to the old adage of “Measure twice; cut once.” As difficult as it may be to quantify cost and effort in an up-front business case, quantifying them makes it less expensive and quicker early on to obtain the contract requirements that you will inevitably end up with, with or without post-execution change orders.
At times, sufficient internal capabilities exist to execute complex sourcing projects internally. However, if any of these are familiar problems in your organization, this information can help you understand your situation and support the decisions you will have to make to address specific sourcing capability gaps. In any case, the golden rule says to determine your situation early so that you can achieve the best possible sourcing outcomes and so that programs and initiatives that depend on sourcing can proceed on track.
Andrew Sheridan and Tom Burson are principals of Vertix Consulting, a firm that provides pragmatic and actionable insights on the most critical issues faced by providers and consumers of telecom, media services and technology.