David Borowski and Marc Tanowitz10.12.10
Business Process Outsourcing: Finding the Right Vendor
Selecting the right vendor-partner is critical to medical device manufacturers’ success when outsourcing business processes.
Pace Harmon
Achieving the advertised benefits of business process outsourcing (BPO) is never easy. In fact, according to The Outsourcing Institute in Syosset, N.Y., 60 percent of outsourcing clients are not satisfied with their results and additional research shows that more than 50 percent of outsourcing relationships are terminated prior to the end of the contract term.
Outsourcing can be especially challenging for medical devices manufacturers, for whom industry, geographic, and customer- or segment-specific expertise often is fundamental to successful process execution. Manufacturers must overcome myriad unique hurdles, including regulatory barriers, product and technology specificity, organizational culture, manufacturing footprint, and sourcing strategy. They also need to accept the risk of transitioning operational processes that, if executed poorly, may have a detrimental impact on elements such as sales, supply of goods and services, or internal operations.
While success throughout the sourcing transaction life cycle is essential to achieving meaningful business results—from the initial assessment of outsourcing as a viable option to the implementation and stabilization of a BPO solution—investing sufficient effort to identify and select the right vendor will yield dividends throughout the engagement and enable the company to more rapidly achieve a stable outsourced environment.
The “secret sauce” in ensuring outsourcing success begins with answering a simple question: Why are we outsourcing?
Once this question is answered, a company can proceed through the next logical questions of “what are we outsourcing?” and “how are we outsourcing?” This sequence of questions can drive a buyer through a structured approach to identify and select the optimum prospective outsourcers and formalize the relationship commercially.
Once a medical device manufacturer has decided to outsource certain business processes or activities, it faces the challenging task of determining which outsourcing vendor is best positioned to provide those services. While it is true that the BPO market is maturing rapidly, as are vendor capabilities, many organizations make the mistake of assuming a one-size-fits-all approach to vendor selection. Even for more commoditized BPO services, such as payroll and invoice processing, the success of the outsourcing relationship depends on a number of factors—such as initiative objectives, outsourcer size, client size, specific services being outsourced, volume of services, locations requiring support, and level of automation/improvement required.
Selecting the wrong long-term partner not only inhibits an organization’s ability to meet its stated—and often committed—financial and operational goals, but it actually may result in increased headcount to manage a dysfunctional relationship and resolve exceptions; reduced productivity and efficiency due to multiple handoffs and ineffective communication; and increased cost.
What’s the Objective?
The combination of defining an organization’s outsourcing objectives and identifying the most important attributes of a prospective vendor determines who gets “invited to the party.”
Well-articulated, aligned initiative objectives are critical for selecting the right BPO vendor. Deciding which outsourcer to choose will depend heavily on the specific objectives of your organization (see Table 1 for common BPO objectives). For example, if a primary objective is introducing best-in-breed technology solutions to enable process optimization, then vendors with a particular area of focus (e.g., collections), noted technology capabilities and advanced solution enablers should be targeted for participation. Conversely, if a critical objective is reducing labor costs, then vendors with offshore delivery capabilities in low labor cost locations (e.g., India, the Philippines) should be evaluated.
Table 1
Common Business Process Outsourcing Objectives
• Labor arbitrage/direct cost savings
• Increased focus on strategic activities and core competencies
• Process optimization
• Introduction of best-in-breed automation tools
• Capability for rapid scaling and growth
For many medical device companies, the decision to explore outsourcing results from a major business transformation event (e.g., acquisition or spinoff), or is part of an effort to re-focus efforts on strategic activities (e.g., product innovation, market rationalization), while deemphasizing non-core activities. Additional benefits, such as cost reduction and process improvement, also are important factors in justifying the time and effort required to transition the outsourced activities, but these often are secondary priorities.
In general, vendors deliver a fairly standard service offering that is tweaked to meet each buyer’s specific needs. However, each vendor endeavors to present a unique and compelling value proposition that will persuade a buyer to either exit a competitive procurement process as quickly as possible or bypass one altogether (in either situation, it puts the vendor in a powerful position to “close” the sale). As such, it is paramount that, prior to meeting with any vendors, buyers determine their strategic objectives and use these objectives as a starting point to “control the agenda” with the vendor pool—a best practice in sourcing. This enables a buyer to validate vendor capabilities and the vendor’s willingness to apply those capabilities to specific company needs.
Buyers who successfully control the agenda throughout the sourcing process are best positioned to drive vendors to develop customized solutions that meet the buyer’s needs and subsequently negotiate from a strong position when commercializing the transaction. Developing and communicating a clear set of outsourcing objectives signals to the vendor marketplace that a buyer is providing a credible business opportunity, thus generating enthusiasm from the vendor pool. This also is important in helping to ensure that the vendors provide their “A-Team” throughout the competitive sourcing, solution design and implementation phases of a transaction. Many outsourcing buyers have come to realize that, since resource capabilities in vendor organizations can vary dramatically, engaging the most capable vendor resources for the long term can mitigate the risk of an unsuccessful transition.
Vendor Qualification: Comparing Apples to Apples
The vendor qualification process aims to narrow the universe of prospective vendors to the most qualified subset by matching vendor capabilities to a buyer’s unique characteristics and objectives. Once the initial vendor selection criteria are defined, those criteria should be applied to the list of prospective vendors to arrive at a revised list of providers that are capable of performing the required scope of services and will be invited to formally participate in the competitive sourcing process.
If the selection timeline permits, an effective way to become familiar with vendor capabilities is through administering a request for information (RFI) to a list of prequalified vendors or alternatively, inviting the vendors to present their capabilities to the sourcing team. The objective is not to select a vendor, but to narrow the list of potential vendors to a manageable subset of qualified providers. In addition, this gives vendors a better sense of the objectives, credibility and scope of the opportunity. As mentioned above, this activity should be structured with the buyer controlling the agenda to ensure that the vendor materials and/or presentation achieve the intended result of validating vendor capabilities relative to buyer objectives. When constructing an RFI or capability presentation request, it is key to ask for information that will inform a qualification decision, as vendors often are predisposed to presenting a potential buyer with boilerplate business development materials that take time and attention away from the real objectives of the activity.
As an example, during a recent transaction, a medical device manufacturer required that its outsourcer have the capability and physical presence in Europe and Asia to support local order management, customer support, collections and warranty dispatch services. As a result, prospective vendors were requested to describe their global presence, with special emphasis on European and Asian delivery capabilities (in terms of both local presence and native language capabilities).
Whether through engaging an advisor with specific vendor knowledge, market research, or the administration of an RFI or capability presentation request, the goal of vendor qualification is to match the specific objectives of an outsourcing initiative with the broad capabilities and characteristics of prospective BPO vendors. This will provide buyers a range of vendor alternatives, from which a company can drive active vendor participation in a competitive sourcing process with the best available vendor deal team. Additionally, the insights derived from this activity can help to further highlight vendor specifications that can lead to more customized solutions from vendors.
Crafting an Optimal RFP: Focus on the Desired Result
When creating a request for proposal (RFP), companies often focus only on specific business requirements that mirror how tasks are performed today. While these details typically are important RFP components, they should be supplemented—and possibly replaced—with critical elements such as descriptions of the buyer’s “to-be” world. This may include requirements for process efficacy or specifications for how the buyer and vendor will transact commercially.
The benefits that outsourcers are expected to deliver may be as straightforward as cost advantages driven by labor arbitrage, or as complex as the introduction of best-in-breed technology solutions, productivity improvements, and process innovations perfected through the vendor’s multitude of client experiences, years of service provision, functional focus and process development. If your outsourcing objectives extend beyond labor arbitrage, it is even more important to describe the business outcome targeted though the outsourcing strategy (the “what”) than to precisely describe the manner in which the activity is completed in the current state. This is because the current state does not reflect the acceptable performance of activities to be undertaken by the vendor. In fact, providing highly specified current state descriptors often implies a presupposed solution (i.e., prescribing the detailed steps an outsourcer must take to accomplish transaction processing objectives) and limits an outsourcer’s ability to suggest a more efficient, effective, technology-enabled, and/or lower cost alternative.
A properly structured RFP should enable the vendor pool to develop a solution for the buyer (as opposed to a commoditized service), and serves as the foundation for the remaining sourcing activities, such as due diligence, term-sheet negotiations and contracting. Accordingly, the RFP content and the vendor responses to the RFP not only should consider these future vendor selection activities, but should reduce the time, effort and expense required to complete them. When creating an RFP table of contents and structure, consider both the helpful background information to endure sufficient initiative understanding, as well as the specific requirements that the vendors should be made aware of and, preferably, agree to during the down-selection process, when competition among prospective vendors is at its peak.
The vendors should receive sufficient information to deliver a customized response that addresses what makes the particular opportunity unique. As an example, for a medical device client that recently contemplated outsourcing its technical services activities (e.g., warranty and repair dispatch services), an RFP was constructed to provide outsourcers with an understanding that they would be expected to communicate with customers, descriptions of the nature of the products and services that would be supported, identification and descriptions of the commercial model in each supported location (e.g., direct sales model, wholesaler/distributor model, commissionaire structure), and the countries and languages they would be required to support.
The RFP also is an effective medium to communicate and get agreement on key business terms and conditions, such as pricing and creditable performance specifications, such as service-level agreements and key performance indicators. During the competitive sourcing process, prospective vendors understand and react to the reality of competing against other equally qualified vendors. Accordingly, they will be more willing to accept terms, conditions and language that is less advantageous to them than they would be in a sole-sourced environment. Buyers should clarify that all of the content of vendor responses will remain valid throughout the remainder of the vendor selection process, and such agreement ultimately will be incorporated into contract documentation—thus expediting the overall process and limiting the vendor’s ability to “re-trade” offers that it made during the procurement process.
Due Diligence: Is This the Right Fit?
Due diligence allows the client organization to verify both the accuracy and credibility of the responses received throughout the selection process. Perhaps more importantly, though, it creates the opportunity for the client to explore its cultural fit with a prospective outsourcer. There are a variety of due diligence activities that can aid in this investigation, the objective of each being to provide opportunities for direct interaction with outsourcer personnel and clients.
Scripted vendor presentations of capabilities and RFP responses are essential to learning firsthand about vendor credentials, history and specific solution elements. The impressions made during vendor presentations often provide a good sense for the way the relationship will be managed during transition and into a steady state. During these presentations, the buyer should probe for continuity and relationship management elements, such as:
• How support is transitioned from business and solution development personnel, through transition management and support resources, to steady-state operations resources.
• The level of support and attention that will be provided from vendor senior executives; and
• How issues will be addressed, escalated and resolved.
Additionally, site visits to outsourcer delivery centers enable buyers to directly experience the culture of the outsourced environment, more realistically envisage how their transactions will be processed and activities will be executed from a remote location, and interact with outsourcer employees at various hierarchical levels. As many clients execute BPO transactions very infrequently (often only once), such visits can be once-in-a-lifetime learning experiences about how outsourcers operate and can provide general insights into the value proposition of an outsourcer. More specifically to a transaction, it allows the buyer to further test personnel capabilities, experience technical solutions firsthand through demonstrations, see live transaction processing, understand how process and tools drive productivity, and get a sense for the level of cultural harmonization to the extent an offshore delivery model is employed.
One of the most useful due diligence activities is one of the least expensive and time consuming—vendor reference checks. While some outsourcing experiences convey independent of industry and services being outsourced, it is most useful to obtain a list of vendor references from companies that share similar industry and service profiles. This approach will help uncover feedback about integration challenges and performance from companies with comparable priorities, markets, needs, and restrictions (e.g., regulatory environment, statutory requirements). Keep in mind that vendors typically identify their most satisfied customers as references; therefore it often requires additional probing and specific questioning to discover the most meaningful challenges for a particular vendor. When preparing your list of questions for references, cover both positive and negative experiences with the vendor, and isolate steady-state operations from transition and pre-cutover periods to help identify particular vendor strengths and weaknesses.
As an example, a medical device company previously outsourced certain order-to-cash business processes as it spun off from a larger pharmaceutical company, but it ultimately was unhappy with the result and pulled the services back in house after a short time. Several years later, once post-transition processes had stabilized and business focus shifted to cost and process optimization, this company elected to explore outsourcing again and used its previous experience to craft very specific due diligence questions probing transition management and change readiness support.
Regardless of the specific due diligence activities undertaken, buyers should use this step to probe key areas of concern and perceived risks, which will help to:
• Prioritize key contracting terms
• Identify critical transition risk mitigating activities
• Better understand the role of the buyer’s organization in enabling a successful transition.
This information will help in the contracting phase of the sourcing process and will further ensure the lowest risk and most expeditious path to a stable outsourced environment.
It’s Not Over Until It’s Over: Term Sheet and Contract Negotiations
It is essential to maintain a competitive environment as long as possible during the vendor selection process. The term-sheet process enables the business owners to come to agreement on critical business terms prior to engaging legal counsel in direct negotiations. Through the term-sheet process, parties can discuss and agree on elements of the relationship that are meaningful to business stakeholders and agree to a conceptual framework that bounds each issue without bogging the conversation down with legal nuances required for the final contract. Accordingly, since no contractual agreement is in place at this stage, it is recommended that buyers enter into term-sheet negotiations with a subset (typically two) of the vendors who participated in the RFP process.
Prior to engaging vendors in term-sheet negotiations, an organization should invest the time to ensure there is a complete and aligned understanding of each key business term and the organization’s position on that term. It is meaningful for an organization to define not only its perspective on a term, but to do so within the universe of possible outcomes. For each term, buyers should determine deal breakers, stretch goals, least acceptable alternatives, trade-away areas, and overall approach. To establish such positions, it often is necessary for the core contract team to reach out to individual functional owners and subject matter experts to discuss specific elements such as insurance provisions, product liability, regulatory compliance and financial controls.
For medical device companies, this may include working with a procurement department to confirm preferred and worst-case payment terms, working with internal audit to define required controls and audit procedures, and working with quality assurance to codify must-have terms involving critical events such product recalls, field corrective actions and sterility certifications.
Buyers should note that term-sheet negotiations are an effective practice to ensure that maximum leverage is employed prior to making the final vendor selection. Once a final vendor selection is made, a buyer’s leverage is reduced significantly, and, as such, its ability to negotiate most favorable terms becomes increasingly difficult.
Vendor Selection=Foundation of Outsourcing Success
Vendor selection is only the first step in establishing a long-term, successful and mutually beneficial relationship with an outsourcing partner, but it is a critical one. By investing time, effort and resources during the vendor selection process, a medical devices organization will have established a foundation for the remainder of the relationship.
While selecting the right vendor does not guarantee outsourcing success, selecting the wrong vendor will almost certainly result in an outsourcing relationship that fails to achieve objectives, especially given the complex regulatory, competitive, and operating environments that medical device companies operate within. By following the best-practice guidelines and structure, companies can feel comfortable that the basis for a successful partnership with an appropriately qualified outsourcer has been established, and can focus on supporting key downstream activities such as solution design, transition planning and stabilization.
David Borowski is a senior associate with Pace Harmon, an outsourcing advisory services firm providing proven guidance to Fortune 500 and high-growth middle market organizations on complex outsourcing and strategic sourcing transactions, process optimization, and vendor program governance. He has extensive experience in business process and IT outsourcing, contract manufacturing, global operations and sourcing process improvement, and complex project execution. Marc Tanowitz is a principal with Pace Harmon. He brings more than 15 years of experience in outsourcing advisory services, strategic sourcing and supply chain process improvement, in which he has served more than 30 Fortune 500 and middle-market clients.
Selecting the right vendor-partner is critical to medical device manufacturers’ success when outsourcing business processes.
Pace Harmon
Achieving the advertised benefits of business process outsourcing (BPO) is never easy. In fact, according to The Outsourcing Institute in Syosset, N.Y., 60 percent of outsourcing clients are not satisfied with their results and additional research shows that more than 50 percent of outsourcing relationships are terminated prior to the end of the contract term.
Outsourcing can be especially challenging for medical devices manufacturers, for whom industry, geographic, and customer- or segment-specific expertise often is fundamental to successful process execution. Manufacturers must overcome myriad unique hurdles, including regulatory barriers, product and technology specificity, organizational culture, manufacturing footprint, and sourcing strategy. They also need to accept the risk of transitioning operational processes that, if executed poorly, may have a detrimental impact on elements such as sales, supply of goods and services, or internal operations.
While success throughout the sourcing transaction life cycle is essential to achieving meaningful business results—from the initial assessment of outsourcing as a viable option to the implementation and stabilization of a BPO solution—investing sufficient effort to identify and select the right vendor will yield dividends throughout the engagement and enable the company to more rapidly achieve a stable outsourced environment.
The “secret sauce” in ensuring outsourcing success begins with answering a simple question: Why are we outsourcing?
Once this question is answered, a company can proceed through the next logical questions of “what are we outsourcing?” and “how are we outsourcing?” This sequence of questions can drive a buyer through a structured approach to identify and select the optimum prospective outsourcers and formalize the relationship commercially.
Once a medical device manufacturer has decided to outsource certain business processes or activities, it faces the challenging task of determining which outsourcing vendor is best positioned to provide those services. While it is true that the BPO market is maturing rapidly, as are vendor capabilities, many organizations make the mistake of assuming a one-size-fits-all approach to vendor selection. Even for more commoditized BPO services, such as payroll and invoice processing, the success of the outsourcing relationship depends on a number of factors—such as initiative objectives, outsourcer size, client size, specific services being outsourced, volume of services, locations requiring support, and level of automation/improvement required.
Selecting the wrong long-term partner not only inhibits an organization’s ability to meet its stated—and often committed—financial and operational goals, but it actually may result in increased headcount to manage a dysfunctional relationship and resolve exceptions; reduced productivity and efficiency due to multiple handoffs and ineffective communication; and increased cost.
What’s the Objective?
The combination of defining an organization’s outsourcing objectives and identifying the most important attributes of a prospective vendor determines who gets “invited to the party.”
Well-articulated, aligned initiative objectives are critical for selecting the right BPO vendor. Deciding which outsourcer to choose will depend heavily on the specific objectives of your organization (see Table 1 for common BPO objectives). For example, if a primary objective is introducing best-in-breed technology solutions to enable process optimization, then vendors with a particular area of focus (e.g., collections), noted technology capabilities and advanced solution enablers should be targeted for participation. Conversely, if a critical objective is reducing labor costs, then vendors with offshore delivery capabilities in low labor cost locations (e.g., India, the Philippines) should be evaluated.
Table 1
Common Business Process Outsourcing Objectives
• Labor arbitrage/direct cost savings
• Increased focus on strategic activities and core competencies
• Process optimization
• Introduction of best-in-breed automation tools
• Capability for rapid scaling and growth
For many medical device companies, the decision to explore outsourcing results from a major business transformation event (e.g., acquisition or spinoff), or is part of an effort to re-focus efforts on strategic activities (e.g., product innovation, market rationalization), while deemphasizing non-core activities. Additional benefits, such as cost reduction and process improvement, also are important factors in justifying the time and effort required to transition the outsourced activities, but these often are secondary priorities.
In general, vendors deliver a fairly standard service offering that is tweaked to meet each buyer’s specific needs. However, each vendor endeavors to present a unique and compelling value proposition that will persuade a buyer to either exit a competitive procurement process as quickly as possible or bypass one altogether (in either situation, it puts the vendor in a powerful position to “close” the sale). As such, it is paramount that, prior to meeting with any vendors, buyers determine their strategic objectives and use these objectives as a starting point to “control the agenda” with the vendor pool—a best practice in sourcing. This enables a buyer to validate vendor capabilities and the vendor’s willingness to apply those capabilities to specific company needs.
Buyers who successfully control the agenda throughout the sourcing process are best positioned to drive vendors to develop customized solutions that meet the buyer’s needs and subsequently negotiate from a strong position when commercializing the transaction. Developing and communicating a clear set of outsourcing objectives signals to the vendor marketplace that a buyer is providing a credible business opportunity, thus generating enthusiasm from the vendor pool. This also is important in helping to ensure that the vendors provide their “A-Team” throughout the competitive sourcing, solution design and implementation phases of a transaction. Many outsourcing buyers have come to realize that, since resource capabilities in vendor organizations can vary dramatically, engaging the most capable vendor resources for the long term can mitigate the risk of an unsuccessful transition.
Vendor Qualification: Comparing Apples to Apples
The vendor qualification process aims to narrow the universe of prospective vendors to the most qualified subset by matching vendor capabilities to a buyer’s unique characteristics and objectives. Once the initial vendor selection criteria are defined, those criteria should be applied to the list of prospective vendors to arrive at a revised list of providers that are capable of performing the required scope of services and will be invited to formally participate in the competitive sourcing process.
If the selection timeline permits, an effective way to become familiar with vendor capabilities is through administering a request for information (RFI) to a list of prequalified vendors or alternatively, inviting the vendors to present their capabilities to the sourcing team. The objective is not to select a vendor, but to narrow the list of potential vendors to a manageable subset of qualified providers. In addition, this gives vendors a better sense of the objectives, credibility and scope of the opportunity. As mentioned above, this activity should be structured with the buyer controlling the agenda to ensure that the vendor materials and/or presentation achieve the intended result of validating vendor capabilities relative to buyer objectives. When constructing an RFI or capability presentation request, it is key to ask for information that will inform a qualification decision, as vendors often are predisposed to presenting a potential buyer with boilerplate business development materials that take time and attention away from the real objectives of the activity.
As an example, during a recent transaction, a medical device manufacturer required that its outsourcer have the capability and physical presence in Europe and Asia to support local order management, customer support, collections and warranty dispatch services. As a result, prospective vendors were requested to describe their global presence, with special emphasis on European and Asian delivery capabilities (in terms of both local presence and native language capabilities).
Whether through engaging an advisor with specific vendor knowledge, market research, or the administration of an RFI or capability presentation request, the goal of vendor qualification is to match the specific objectives of an outsourcing initiative with the broad capabilities and characteristics of prospective BPO vendors. This will provide buyers a range of vendor alternatives, from which a company can drive active vendor participation in a competitive sourcing process with the best available vendor deal team. Additionally, the insights derived from this activity can help to further highlight vendor specifications that can lead to more customized solutions from vendors.
Crafting an Optimal RFP: Focus on the Desired Result
When creating a request for proposal (RFP), companies often focus only on specific business requirements that mirror how tasks are performed today. While these details typically are important RFP components, they should be supplemented—and possibly replaced—with critical elements such as descriptions of the buyer’s “to-be” world. This may include requirements for process efficacy or specifications for how the buyer and vendor will transact commercially.
The benefits that outsourcers are expected to deliver may be as straightforward as cost advantages driven by labor arbitrage, or as complex as the introduction of best-in-breed technology solutions, productivity improvements, and process innovations perfected through the vendor’s multitude of client experiences, years of service provision, functional focus and process development. If your outsourcing objectives extend beyond labor arbitrage, it is even more important to describe the business outcome targeted though the outsourcing strategy (the “what”) than to precisely describe the manner in which the activity is completed in the current state. This is because the current state does not reflect the acceptable performance of activities to be undertaken by the vendor. In fact, providing highly specified current state descriptors often implies a presupposed solution (i.e., prescribing the detailed steps an outsourcer must take to accomplish transaction processing objectives) and limits an outsourcer’s ability to suggest a more efficient, effective, technology-enabled, and/or lower cost alternative.
A properly structured RFP should enable the vendor pool to develop a solution for the buyer (as opposed to a commoditized service), and serves as the foundation for the remaining sourcing activities, such as due diligence, term-sheet negotiations and contracting. Accordingly, the RFP content and the vendor responses to the RFP not only should consider these future vendor selection activities, but should reduce the time, effort and expense required to complete them. When creating an RFP table of contents and structure, consider both the helpful background information to endure sufficient initiative understanding, as well as the specific requirements that the vendors should be made aware of and, preferably, agree to during the down-selection process, when competition among prospective vendors is at its peak.
The vendors should receive sufficient information to deliver a customized response that addresses what makes the particular opportunity unique. As an example, for a medical device client that recently contemplated outsourcing its technical services activities (e.g., warranty and repair dispatch services), an RFP was constructed to provide outsourcers with an understanding that they would be expected to communicate with customers, descriptions of the nature of the products and services that would be supported, identification and descriptions of the commercial model in each supported location (e.g., direct sales model, wholesaler/distributor model, commissionaire structure), and the countries and languages they would be required to support.
The RFP also is an effective medium to communicate and get agreement on key business terms and conditions, such as pricing and creditable performance specifications, such as service-level agreements and key performance indicators. During the competitive sourcing process, prospective vendors understand and react to the reality of competing against other equally qualified vendors. Accordingly, they will be more willing to accept terms, conditions and language that is less advantageous to them than they would be in a sole-sourced environment. Buyers should clarify that all of the content of vendor responses will remain valid throughout the remainder of the vendor selection process, and such agreement ultimately will be incorporated into contract documentation—thus expediting the overall process and limiting the vendor’s ability to “re-trade” offers that it made during the procurement process.
Due Diligence: Is This the Right Fit?
Due diligence allows the client organization to verify both the accuracy and credibility of the responses received throughout the selection process. Perhaps more importantly, though, it creates the opportunity for the client to explore its cultural fit with a prospective outsourcer. There are a variety of due diligence activities that can aid in this investigation, the objective of each being to provide opportunities for direct interaction with outsourcer personnel and clients.
Scripted vendor presentations of capabilities and RFP responses are essential to learning firsthand about vendor credentials, history and specific solution elements. The impressions made during vendor presentations often provide a good sense for the way the relationship will be managed during transition and into a steady state. During these presentations, the buyer should probe for continuity and relationship management elements, such as:
• How support is transitioned from business and solution development personnel, through transition management and support resources, to steady-state operations resources.
• The level of support and attention that will be provided from vendor senior executives; and
• How issues will be addressed, escalated and resolved.
Additionally, site visits to outsourcer delivery centers enable buyers to directly experience the culture of the outsourced environment, more realistically envisage how their transactions will be processed and activities will be executed from a remote location, and interact with outsourcer employees at various hierarchical levels. As many clients execute BPO transactions very infrequently (often only once), such visits can be once-in-a-lifetime learning experiences about how outsourcers operate and can provide general insights into the value proposition of an outsourcer. More specifically to a transaction, it allows the buyer to further test personnel capabilities, experience technical solutions firsthand through demonstrations, see live transaction processing, understand how process and tools drive productivity, and get a sense for the level of cultural harmonization to the extent an offshore delivery model is employed.
One of the most useful due diligence activities is one of the least expensive and time consuming—vendor reference checks. While some outsourcing experiences convey independent of industry and services being outsourced, it is most useful to obtain a list of vendor references from companies that share similar industry and service profiles. This approach will help uncover feedback about integration challenges and performance from companies with comparable priorities, markets, needs, and restrictions (e.g., regulatory environment, statutory requirements). Keep in mind that vendors typically identify their most satisfied customers as references; therefore it often requires additional probing and specific questioning to discover the most meaningful challenges for a particular vendor. When preparing your list of questions for references, cover both positive and negative experiences with the vendor, and isolate steady-state operations from transition and pre-cutover periods to help identify particular vendor strengths and weaknesses.
As an example, a medical device company previously outsourced certain order-to-cash business processes as it spun off from a larger pharmaceutical company, but it ultimately was unhappy with the result and pulled the services back in house after a short time. Several years later, once post-transition processes had stabilized and business focus shifted to cost and process optimization, this company elected to explore outsourcing again and used its previous experience to craft very specific due diligence questions probing transition management and change readiness support.
Regardless of the specific due diligence activities undertaken, buyers should use this step to probe key areas of concern and perceived risks, which will help to:
• Prioritize key contracting terms
• Identify critical transition risk mitigating activities
• Better understand the role of the buyer’s organization in enabling a successful transition.
This information will help in the contracting phase of the sourcing process and will further ensure the lowest risk and most expeditious path to a stable outsourced environment.
It’s Not Over Until It’s Over: Term Sheet and Contract Negotiations
It is essential to maintain a competitive environment as long as possible during the vendor selection process. The term-sheet process enables the business owners to come to agreement on critical business terms prior to engaging legal counsel in direct negotiations. Through the term-sheet process, parties can discuss and agree on elements of the relationship that are meaningful to business stakeholders and agree to a conceptual framework that bounds each issue without bogging the conversation down with legal nuances required for the final contract. Accordingly, since no contractual agreement is in place at this stage, it is recommended that buyers enter into term-sheet negotiations with a subset (typically two) of the vendors who participated in the RFP process.
Prior to engaging vendors in term-sheet negotiations, an organization should invest the time to ensure there is a complete and aligned understanding of each key business term and the organization’s position on that term. It is meaningful for an organization to define not only its perspective on a term, but to do so within the universe of possible outcomes. For each term, buyers should determine deal breakers, stretch goals, least acceptable alternatives, trade-away areas, and overall approach. To establish such positions, it often is necessary for the core contract team to reach out to individual functional owners and subject matter experts to discuss specific elements such as insurance provisions, product liability, regulatory compliance and financial controls.
For medical device companies, this may include working with a procurement department to confirm preferred and worst-case payment terms, working with internal audit to define required controls and audit procedures, and working with quality assurance to codify must-have terms involving critical events such product recalls, field corrective actions and sterility certifications.
Buyers should note that term-sheet negotiations are an effective practice to ensure that maximum leverage is employed prior to making the final vendor selection. Once a final vendor selection is made, a buyer’s leverage is reduced significantly, and, as such, its ability to negotiate most favorable terms becomes increasingly difficult.
Vendor Selection=Foundation of Outsourcing Success
Vendor selection is only the first step in establishing a long-term, successful and mutually beneficial relationship with an outsourcing partner, but it is a critical one. By investing time, effort and resources during the vendor selection process, a medical devices organization will have established a foundation for the remainder of the relationship.
While selecting the right vendor does not guarantee outsourcing success, selecting the wrong vendor will almost certainly result in an outsourcing relationship that fails to achieve objectives, especially given the complex regulatory, competitive, and operating environments that medical device companies operate within. By following the best-practice guidelines and structure, companies can feel comfortable that the basis for a successful partnership with an appropriately qualified outsourcer has been established, and can focus on supporting key downstream activities such as solution design, transition planning and stabilization.
David Borowski is a senior associate with Pace Harmon, an outsourcing advisory services firm providing proven guidance to Fortune 500 and high-growth middle market organizations on complex outsourcing and strategic sourcing transactions, process optimization, and vendor program governance. He has extensive experience in business process and IT outsourcing, contract manufacturing, global operations and sourcing process improvement, and complex project execution. Marc Tanowitz is a principal with Pace Harmon. He brings more than 15 years of experience in outsourcing advisory services, strategic sourcing and supply chain process improvement, in which he has served more than 30 Fortune 500 and middle-market clients.