Acquisition: Acquisition topics: Developing plans: The agreement approach

The agreement approach

This section outlines an alternative approach, which may be useful for services that are to be provided by an outsourcer. There are three major phases to acquisition: the understanding, agreement and contract phases.

The Understanding Stage

Traditionally, the first, understanding stage has been used by an organization to gain a full understanding of the way in which its business operates. It would prepare a set of services, their required levels of performance and their performance measures. These would then be included in a Request for Proposal sent out to various outsourcers. The selection of an outsourcer would be based upon the responses to that RFP. The "understanding" stage should be an opportunity for not only the organization itself but for two short-listed outsourcers to gain an understanding of the business. However you choose to operate this stage, you should have, at its end,

a set of reasons for outsourcing
descriptions of the outcomes required
descriptions of the performance measures for the outcomes
descriptions of the required service levels.

You may also go into further detail and have:

descriptions of the processes that produce the outcomes
descriptions of the tasks that form the processes
descriptions of the intermediate results of the tasks
descriptions of the performance measures for the tasks and results.

The Agreement Stage

The agreement stage translates the understanding of what needs to be done into an agreement on how to do it. Using the traditional method of acquiring an outsourcer, this stage would be marked by the organization and an outsourcer working through the RFP and the proposal to reach a situation with which they were both satisfied. The outsourcer would be the one who had scored highest in the organization's evaluation of their proposal. If agreement could not be reached with the preferred outsourcer, the next highest scoring outsourcer would be selected and the agreement stage would start again with them. Using this approach instead of the traditional one, there is a temptation to omit this phase and begin building a contract. It is essential, however, that a clearly recognised stage of reaching an agreement is included in whichever approach is adopted.

With this approach, the Memorandum of Understanding (MoU) could be incorporated into a Memorandum of Agreement (MoA). At the least, one or more outsourcers should be confirmed as "preferred supplier" by the end of this stage. The major strength of this approach in the agreement stage is that it does allow more than one outsourcer to be appointed, based upon the results of the understanding phase. Also, the agreement stage is used much shorter, although the understanding stage may have been much longer.

The Contract Stage

The contract stage does not need any description. Once agreement has been reached, with one or more outsourcers, the contracts can be drawn up and signed. In this approach, there are no "last minute surprises", so the contract stage should simply be a matter of the parties and their consultants, advisers and lawyers getting together to ensure that the existing agreement can be translated into a formal contract. It is not unknown for a single provider to go through a full RFP process and then to raise new points, previously unmentioned, in the contract negotiation phase. The customer can do one of the following:

accept the points raised by the provider and incorporate them into the final contract;
enter into negotiation with the provider, with the risk that the negotiations will not only be protracted but also unsuccessful; or
reject the provider's conditions, with the probable outcome of having to re-start the entire acquisition procedure.

It is not surprising that many customers will take the first option, and accept the new terms and conditions, as an easier way out of the situation than the other two options. It is not surprising also that the new terms and conditions are very likely to alter the contract for service provision substantially. Sometimes these alterations can take the contract back almost to the standard contract of the provider. The MoU procedure, especially if taken onwards into the preparation of a Memorandum of Agreement, reinforces the need to move the agreement forward into a contract without substantial change by either party. If the provider raises difficulties during the final contract stage, then there is still at least one alternative provider available to the customer. The existence of this alternative provider means that:

the customer need not be brow-beaten into accepting new conditions by the first provider; and
the first provider is aware that it is replaceable right up until the moment the contract is signed.

Methods for Selecting Providers

Many organizations use inappropriate ways for selecting an outsourcer. Principal amongst these is the inappropriate use of a request for proposal (RFP). The process works by the organization issuing the RFP, a document that describes what they want to get. Each proponent then responds with a proposal, a document describing what they will provide. The proposals are marked and scored by the organization, and a "winner" chosen. There are many areas of business in which the use of RFPs is appropriate when selecting providers. There are many areas in which it can be the sole method of selection. For standard ôpackagedö software, for example, it can be used effectively. The RFP process may be useful in the early stages of provider selection for outsourcing, as a means of eliminating potential providers and reaching a short-list of manageable size. There are three disadvantages to the RFP process being the sole method of selection for outsourcing services.

The RFP process is conducted at ôarms-lengthö. In some RFPs, the proponents are told that they will have a formal procedure for asking questions, which will be directed through a single point of contact in the organization. Even when the proponents are asked to present their solution, the presentation is usually a formal affair, with the proponents' staff giving rehearsed speeches followed by a single session for questions. No real relationship between the organization and proponents is established.
The process is oppositional. The RFP is one player's move, followed by a proposal as the other player's move, and so on. The formality of the process means that each player proceeds cautiously from move to move. The eventual ôagreementö can turn out to be a compromise with which neither ôsideö is happy.
The process ignores actual capabilities. This is the worst fault of all for outsourcing. Many RFP processes involve a ôreference checkö, which is usually a telephone call to a list of existing customers that has been compiled the proponent.

The simplest way to describe this approach, which might be called the "Agreement Approach", is to compare it with the RFP approach. We shall now do this.

Preparing a List of Potential Suppliers

In the traditional method, the first step is to prepare a list of potential suppliers. Often, this can be done first by issuing a Registration of Interest (ROI) advertisement. This asks potential suppliers to ôregister their interestö in doing the required work. The ROI can then be followed by a Request for Information, issued to the respondents.

The ROI stage is sometimes omitted, and the organization can issue the RFI advertisement as the first step, asking interested suppliers to provide some information about themselves. The information supplied in answer to the RFI will be minimal, mainly because the number of questions that can be asked in the advertisement will be minimal.

When the responses to the RFI are received, the organization will look at them and decide which of the respondents will be included on the list to be sent the RFP.

The Agreement Approach to selecting an outsourcer works differently from the ROI and RFI approach. In fact, the Agreement Approach has been conceived because it can be argued that the traditional ROI-RFI-RFP approach does not answer the very basic questions that the organization needs to have answered when it is selecting an outsourcer.

The chosen outsourcer must be capable, at least, of the following.

They must be an outsourcer. In some instances, outsourcing may be their sole, core business. In others, it will be a substantial part of their business, operating as a profit-making division. However they are set up, it must be evident that they are in the business of outsourcing and that they are serious about it.
They must be good at outsourcing. This means that they have not only been good at it in the past or good at it now, but that they can provide justification for their remaining good at it in the future. They must be making investments in achieving and retaining that ôworld class capabilityö. They must be at the forefront of technological and managerial initiatives. At the same time, they must have happy customers, who are confident of a continued relationship with them into the future.
They must be able to afford it. Just as an outsourcer cannot be expected to take on the risks of an organization's ageing hardware, so the organization cannot be expected to subsidize the outsourcer's operations. The outsourcer must be a going concern; it must be able to underwrite some of the risk on behalf of its customers; and it must have substantial backing from its owners and shareholders.

Most organizations are able to identify potential outsourcers for one of their major business units readily.

The opponents of this approach will argue that this listing technique may leave off some proponents who would be included by the ROI-RFI approach. If they were planning to outsource a major IT installation, we would ask them where their advertisements would appear. They would say: "In the Herald, Dominion and Press, plus the NBR and Independent." We would then ask them why they did not advertise in Le Figaro or the Wall Street Journal. Why should they restrict the choice to New Zealand, when a British company could be a potential outsourcer (for a very large main-frame installation)?

Many customers are not aware of the fact that their consultants, asked to produce a list of potential suppliers, may use the Computerworld Directory. The customers could produce exactly the same list with the same (minimal) amount of effort.

These customers may also not be aware that their consultants will watch the arrival of responses to an ROI or RFI and will mentally "tick" a list of "the usual suspects". The consultants already know who the major contenders are likely to be.

The Agreement Approach usually builds a short-list of potential outsourcers rapidly.

There are some exceptions.

You may be planning to outsource some part of your organization for which the potential outsourcers are not immediately obvious. For example, you may be a motor-car manufacturer who plans to outsource the actual manufacturing and concentrate on marketing as your core business.
You may have to advertise publicly to demonstrate fairness. This is only likely to be true if you are a government ministry, department or agency.

Where this approach differs from the traditional approach is that it aims for a short-list of between two and four potential outsourcers.

In the traditional approach, as many as twenty proponents from the ROI stage may enter the RFI stage, which usually produces six proponents for the RFP stage. After the proposals have been evaluated, there is one preferred supplier. With the Agreement Approach, we attempt to get down to two proponents as quickly as possible. If we cannot get it down to two, we will settle for three. It is rarely practical to exceed three.

The reasons for this are connected with the cost of the approach.

With the traditional approach, the cost of preparing the proposals in response to the RFPs is apparently met by the proponents: "apparently" because the cost of sales must somehow be passed on to their customers. It is not unusual for a proposal for outsourcing to cost a proponent $100,000. If six proponents regularly compete for business, each can expect to win one out of every six proposals. The cost of the five lost proposals, $500,000, can therefore be expected to be added to the price of the fifth, winning one.

Because the traditional selects a single outsourcer, any value to the organization contained in the five losing proposals is unusable. The organization may therefore be paying out an additional half million dollars for no return.

With the Agreement Approach, all costs will be borne directly by the organization.

The Agreement Approach cannot afford the luxury of six or more proponents. It is hardly likely to support four or even three. That is why we need to get down to two, if we can, right from the start.

Developing a Memorandum of Understanding

Most organizations who have developed contracts for services based on the traditional approach will be able to develop a Memorandum of Understanding.

A standard contract for systems integration services will contain:

the parties to the contract
the nature of the contract
the period of the contract
a description of the contract
the supplier's commitments
the customer's commitments
ownership & risk
ongoing commitments
warranties
guarantees
schedules, which may cover:
- a description of the supplies;
- the performance requirements;
- the acceptance criteria;
- the payment terms and conditions;
- the delivery plan;
- the installation plan;
- the acceptance test plan;
- the performance criteria;
- the proposal documents; and
- the agreement documents.

For service level agreements, the services and their expected delivery levels will be included.

Almost all of this documentation can be assembled during the development of the Memorandum of Understanding, and, indeed, a comprehensive MoU would be expected to contain all of them. It is worth noting that these will not be items that have been reached by compromise during a negotiation: they will have been determined by mutual agreement while the MoU teams were gaining an understanding of the organization and its business needs.

Developing a Memorandum of Agreement

The Memorandum of Agreement is, in effect, a formal version of the Memorandum of Understanding.

The MoU can be seen as a statement of requirements, set out in business terms. The MoA moves more towards a formal, legal framework for delivery of the requirements described in the MoU.

There is often no reason to make any changes to the MoU for it to become the MoA. The major difference is that there were two MoUs under development; there will be only one MoA. From the MoUs, the organization will select one of the two outsourcers as the ôpreferred supplierö and will then work on the MoA with that outsourcer.

If the organization and the outsourcer are both happy that the MoU should go forward, as it is, to form the basis of a contract between them, then there is no need for the MoA to be developed at all.

There is a major exception to the rule of having only one MoA. It may be that, during the understanding phase, the organization understood that one of the two outsourcers was better fitted to provide some of the required services, with the second outsourcer better for the remainder of the services. In this instance, the organization might agree with the two outsourcers that each of them would undertake some of the requirements in the MoUs. If this were so, then two MoAs would be developed, each relating only to those requirements of the MoU that the outsourcer was to provide.

It is worth noting that, if the organization can foresee that this situation might occur prior to the understanding phase, it could invite more than two outsourcers to develop MoUs, to ensure that there was competition for the requirements.

Quality Control and Other Performance Measures

It is essential to understand that, with outsourcing, the customer is concerned with the ôfinalö outputs of the processes that have been outsourced. This is different from the facilities management and contracting models, where the customer may also be concerned with the quality of resources, with the performance of the tasks within the process, and with the intermediate outputs from tasks that serve as inputs to subsequent tasks.

The approach that needs to be taken to the quality and performance of an outsourcer must be focused on the processes' outputs.

Two difficulties may arise.

It is often very difficult to gain that focus. Traditionally, people may think in terms of tasks rather than processes and in terms of intermediate outputs rather than final outputs.
It is often very difficult to retain that focus. During discussion of the final outputs from processes, it is tempting to "decompose" them into intermediate outputs. Some who has been concerned with constructing assemblies may have trouble in keeping focused on the assemblies rather than the act of construction.

It is essential that the customer gains and retains a focus on the final outputs for the entirety of the outsourcing project.

Once these outputs have been identified and described, quality measures can be attached to them.

Quality of outputs may be determined by whether:

they conform to technical specifications;
their technical specifications reflect current world class benchmarks;
they are consistent;
they are produced in sufficient quantities to satisfy demand for them;
they are produced in a timely manner, so that they are current;
they are produced for a reasonable cost;
they are capable of modification to match changing needs.

An easy example to bear in mind when considering these quality measures is that of a car manufacturer, who outsources the production of assemblies ranging from side mirrors to engines. It is easy to see how all the quality measures may be applied for car manufacture. It is also easy to easy that a fully communicative relationship with the outsourcer is essential.

Consider the consequences for a car maker who had outsourced the production of side mirrors if:

the maker's specification of the mirrors was incorrect;
the maker's specification of the mirrors did not meet safety standards;
some models were produced without appropriate mountings for side mirrors;
the maker increased or decreased production;
the maker added additional shifts;
the maker moved to another plant; or
the maker changed the production models.