Split Sole

Split Sole
Split Sole

Sole Source – the Quickest Route to an Outsourcing Deal

The decision to outsource is often a difficult one, and not one to be taken lightly.  But the real work begins once the decision has been taken to transfer services to an external party.  Sometimes, the option of ‘sole sourcing’ seems an attractive way to expedite the achievement of the end result and realise cost savings earlier.  There is no competitive supplier selection; a company simply selects a preferred supplier, based on recommendation, market analysis or perhaps due to an existing relationship then moves into a contracting phase.  So if sole sourcing is quicker and cheaper, why isn’t it more common?

Advocates of sole sourcing highlight the cost and time involved in a competitive bid process.  Taking into account management time, third party specialist support and other expenses (such as travel to multiple delivery centres and reference sites), the supplier selection process can cost around £100,000 and take between three and four months; in the end a company may still select a supplier based on a mix of tangible and intangible factors.  In addition, if outsourcing is to deliver cost savings, then surely skipping this phase will mean savings are realised three to four months earlier, with the associated positive impact on the business case.

The bid process is also extremely expensive for suppliers  Their risk of being unsuccessful is high, so the offer of a sole-sourcing relationship is very attractive.  Suppliers will additionally advocate that sole sourcing allows a company to focus on shaping the solution and service, rather than worrying about the logo over the supplier’s door.  But the bottom line is that a sole source procurement is greatly beneficial to a supplier, and the client should expect to share in that benefit.

While these are all very valid reasons for sole sourcing, it is questionable whether the elapsed time to implementation really is shorter for a sole source deal compared to a competitive bid.  Many parts of the supplier selection process are critical to the contracting process, so are not eliminated in a sole source scenario  Time must be allocated to them, whether during selection or contracting.  Requirements must be clearly articulated, along with a clear description of the current state and desired benefits to achieve.  The exact scope of services, required service levels and the solution (the onshore/offshore split, the governance model etc.) must also be defined before contract signature.  Either they are defined and agreed during the selection process, or for sole source, the contracting phase must be extended accordingly.  To ensure the contracting phase is not overly extended it can be helpful to lay down an expected timeline upfront, and track that your contracting process proceeds at the expected pace.

Even when the identified solution truly is the optimal one, a certain level of investigation and ‘kicking the tyres’ is necessary for a company to be comfortable in what it is buying.  If this has happened at the selection phase, during supplier workshops and site visits, then considerable time can be saved during the contracting process.  If not, then sufficient time should be allocated for this during the contracting phase.  Viewed another way, sole source allows an in-depth investigation of one supplier’s solution, rather than a more superficial investigation of several suppliers. 

Finally, the supplier selection process is a crucial part of change management – it gives stakeholders an opportunity to voice their requirements and concerns and to slowly gain comfort in the idea of outsourcing.  Stakeholders who have not been involved in this process are more likely to raise critical, often show-stopping questions during the contracting phase, which can de-rail the process, albeit temporarily.

Other risks associated with sole-sourcing are well understood: the loss of negotiating position both around price and service, lack of visibility of what is ‘best practice’ in the market, and the potential for supplier dominance.

But these risks can be mitigated, in which case sole sourcing may well be the best option.  For example, when a company truly has an existing, proven track record with the supplier and there are strong relationships in place at the most senior levels, then the loss of negotiating power becomes less of a concern.  If a company has previously invested time in understanding the market, conducting extensive research into the supplier landscape and best practices, then it is possible to have a clear view of the best option, without the burden of a competitive process.  If the outcome of a selection process, for whatever reason, is a foregone conclusion, then all parties would agree that a competitive bid would be ethically wrong. 

So if sole sourcing is the right option, what steps can a company take to ensure a successful deal? 

Firstly, the supplier must acknowledge their privileged position; this means being open and fair in defining the services, price and timelines and according the sole source deal the same priority as any other.  A basic expectation is that suppliers provide quality personnel at a sufficiently senior level to design and deliver the service and that they allocate sufficient resource to meet agreed deadlines.  Furthermore suppliers should act reasonably during negotiations.  It should be clearly expressed that while a company may have little recourse to change supplier (starting a competitive bid process half way through contract development is unlikely to be a realistic option), the supplier’s reputation, the future relationship and the option of increased scope is still at stake. 

Secondly, there are a number of things which can be aligned ahead of informing a supplier of their preferred or sole supplier status.  Outline acceptance to a term sheet and a supplier position on the proposed scope of services, performance standards and governance procedures will ensure neither party makes unreasonable demands further down the line.  It is also helpful to lay down indicative ideas about cost drivers, and how changes in cost will be calculated.  These may not be contractually binding, but they help avoid lengthy discussions and painful compromises during and after the contracting process.

Finally, be aware of benchmark prices, volumes and terms in the market as these will help you gain comfort that you are getting the right service at the right price. 

Sole sourcing is indeed a valid option; as part of an existing strategic partnership, or in a mature market where a client has a clear vision of requirements, it may indeed be the most appropriate option for all concerned.  Where there is a ‘burning platform’, a sole source deal can be the best strategy to maximise time available to ensure a sustainable solution which best addresses current issues.  But it is not a panacea, bringing a number of additional risks over and above those of a competitive process.  Upfront alignment of key items and ongoing control and review of achievement of targets is critical to ensure the benefits of sole sourcing are truly realised.

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