Strategic Sourcing: Don’t Skip the Essentials
By: Scott Tibbo, CRE Managing Director, EMS Printed in: IFMA FM Journal
Whether your company is big or small, local, national or global, a manufacturer, financial services company or retailer, or any variation of the above, a significant portion of your company’s activities involve “sourcing”. In today’s economy the pressure to increase leverage and reduce costs, means effective design and execution of complex sourcing projects is an essential core competency.
A common approach to sourcing begins with a baseline spend analysis and moves through the identification of potential suppliers, development of a request for proposal (RFP), detailed review of the bids, selection of the optimal supplier and concludes with contract negotiation. This is a very logical and straight forward process, right? How hard can it be? Pull out of your files an RFP from a previous assignment and “tweak” it to serve the purpose of the current bid, and go. Given the limited amount of time and resources you have available, your goal is to get it done efficiently. Reuse of prior work makes sense, right?
In this case, maybe not. The success of your sourcing initiative depends heavily on your RFP. While you can always “recover” a sourcing initiative by providing additional detail, issuing a “best and final”, or resolving ambiguities through negotiations, it is far more effective to lead with a strong RFP. The document should clearly address the logistics of the bid process, provide the objectives or goals which you are trying to achieve, clearly document the conditions of the bid and the basis on which you will make the award, and ask the questions you will need answered in order to make your decision.
The RFP should incorporate five key elements needed to make sure that the bidders provide clear, unambiguous solutions and will be well positioned to succeed in the event they are awarded the business. They are:
- Service Level Agreements – Whether called scope of work, service expectations, or service level agreements (SLA’s), clearly defined expectations are the most critical aspect of a strong RFP. Experience shows that outcome-based statements that articulate the expected results and define the key measurement criteria for each specific aspect of the service are the most effective. Task based specifications that dictate to a supplier “how” they are to achieve the outcome often prove to be ineffective, and can frequently backfire. If the supplier does exactly what you tell them to do, and yet the results are not what you wanted,- who is at fault?
- Pricing Model – Too often RFP’s ask the supplier to provide a price for their services, but do not provide a sufficiently detailed or consistent format. Bidders should be required to quote their services under a fully-integrated pricing model that provides complete visibility to the true cost of each service in a format that can easily be compared across bids and be benchmarked to market on an ongoing basis. Using a facilities management outsourcing example, management fees are often structured on a fixed cost per rentable square foot with a percentage of fees at-risk based on the suppliers’ ability to meet the requirements as defined in the SLAs. Fees also can be tiered based on the type of asset and corresponding range of services required of the supplier. If bidders are required to quote anticipated operating expenses for a number of full service assets, you can assess potential cost savings that each firm could provide via their delivery model or purchasing leverage. Variable services such as project management, move add change, conference room setups, transaction management and lease administration can be quoted on a fixed unit price basis tiered by volume and by complexity of the service.
- Workload Volumes – While it is tedious and often difficult to identify the total volume of mail to be distributed, the estimated number of help desk calls, the volume of maintenance work orders to be generated or the number of widgets you will need in any given year, it is essential that the bidders understand the overall composition and magnitude of the work to be performed. Without this baseline information included within the RFP, each supplier will estimate the frequency, volume, and potential magnitude of the work to be performed. These assumptions will vary widely and result in dramatically different unit prices, staffing numbers, and total bid prices. As a result, you may miss opportunities for leverage or economy of scale, or may see a price that is not truly indicative of a supplier’s costs if your volumes are substantially lower than they estimated.
- Master Services Agreement (MSA) – Many organizations wait to address the MSA until after the supplier has been selected. The rationale - “everything is negotiable…why slow down the sourcing initiative with legalese”. This is a risky business practice. Whether you are outsourcing complex services such as facilities management, lease administration or mail distribution, or sourcing something as straightforward as office supplies, it is essential that the supplier be aware of the business and contract terms before submitting their proposal. A good contract will identify the level of responsibility, accountability and allocation of risk the supplier is being asked to assume, clear provisions relative to compensation, and performance measurement. As these conditions can have a significant impact on the deal structure as well as the cost, it is critical they be identified up-front so the evaluation team can assess the responses as part of the overall bid assessment. In addition, if the MSA is included in the RFP, the suppliers can review and comment on their acceptance or exception to key provisions within the client’s contract. The sourcing evaluation team will not get too far down the path in selecting a supplier only to find out key provisions such as insurance, indemnification or sub-contractor liability cannot be negotiated without significant concessions. You don’t want to run out of time, alternatives or leverage. As such, it is recommended you include the proposed MSA as part of the RFP.
- Key Performance Indicators (KPIs) and Performance Measures – KPIs and related mechanisms define how you will measure the performance of the supplier. It is difficult to manage the relationship effectively if you don’t measure and track the supplier’s performance on a frequent and consistent basis. Inclusion of KPIs and performance measures within the RFP give suppliers the benefit of “knowing the score” before they develop proposed solutions, account structures and delivery models. While you could develop KPIs with your supplier after the contract is in place, or proceed without any key measures, EMS client surveys indicate that outsourced relationships based on well-defined KPIs and supplier performance management programs yield as much as 24% increased value over the term of the contract and ensure stronger alignment between the client and supplier.
Client Case Study: One client organization attempted to re-bid outsourced project management services using an RFP that did not contain clearly defined SLAs or workload volumes. The pricing model did not capture bid pricing in a manner that enabled the suppliers or the evaluation team to clearly understand the unit pricing structure or the total value of the deal. The results of their initial bid process generated bid pricing from suppliers that varied as much as 600% . Based on the significant variation in pricing and the fact that the RFP did not include any KPIs or mechanisms to effectively manage the service provider’s performance, senior management pulled back the initiative and engaged EMS to restructure the RFP and re-bid the services.
EMS worked with the client to re-define the bid strategy and pricing approach and develop a comprehensive RFP. The new RFP included customized SLAs for each primary function; an integrated pricing model that incorporated a consistent pricing format for each service; projected workload volumes for all in-scope activities; a master service agreement tailored for outsourced project management services; and a performance management scorecard program inclusive of KPIs and a mechanism to award at-risk fees.
Under this refined sourcing process there was less than 20% price variation across the major categories among the five bidders. The refined bid strategy also resulted in a new delivery model that yielded increased performance and client satisfaction levels while reducing the client’s costs related to project management fees and move labor by as much as 25%.
Does each element require an investment of time, resources and effort? Yes. Are there alternatives that would require far less investment at the start? Yes. Will these alternative methods work? Possibly. The issue is that at some point in the process each element needs to be clearly defined and documented. The later in the process you wait to complete each adds ambiguity and complexity. Ambiguity and complexity, by definition, typically add time and costs to any process.
Consider carefully how making an investment of time and effort early in the process to incorporate these five key elements into your sourcing initiative can improve the outcome of the bid process and ensure the success of your supplier relationship.
