Process of outsourcing

The decision to outsource is taken at a strategic level and normally requires board approval. Outsourcing is the divestiture of a business function involving the transfer of people and the sale of assets to the supplier. The process begins with the client identifying what is to be outsourced and building a business case to justify the decision. Only once a high level business case has been established for the scope of services will a search begin to choose an outsourcing partner. Due to the complexity of work definition, pricing, and legal terms and conditions, clients often utilize the advisory services of outsourcing consultants to assist in scoping, decision making, and vendor evaluation. A Request for Proposal (RFP) is issued to the shortlist suppliers requesting a proposal and a price.

A competition is held where the client marks and scores the supplier proposals. This may involve a number of face-to-face meetings to clarify the client requirements and the supplier response. The suppliers will be qualified out until only a few remain. This is known as down select in the industry. It is normal to go into the due diligence stage with two suppliers to maintain the competition. Following due diligence the suppliers submit a "best and final offer" (BAFO) for the client to make the final down select decision to one supplier. It is not unusual for two suppliers to go into competitive negotiations.

The negotiations take the original RFP, the supplier proposals, BAFO submissions and convert these into the contractual agreement between the client and the supplier. This stage finalizes the documentation and the final pricing structure. At the heart of every outsourcing deal is a contractual agreement that defines how the client and the supplier will work together. This is a legally binding document and is core to the governance of the relationship. There are three significant dates that each party signs up to the contract signature date, the effective date when the contract terms become active and a service commencement date when the supplier will take over the services. The transition will begin from the effective date and normally run until four months after service commencement date. This is the process for the staff transfer and the take-on of services.

The transformation is the execution of a set of projects to implement the service level agreement (SLA), to reduce the total cost of ownership (TCO) or to implement new services. Emphasis is on 'standardization' and 'centralization'. This is the execution of the agreement and lasts for the term of the contract. Some outsourcing contracts contain clauses giving the client the right to benchmark the price paid to the provider at certain milestones during the life of the agreement. A third party benchmarking firm is selected according to the terms agreed to at contract signing (e.g. selected by client, selected by provider, selected by mutual agreement, or pre-selected at contract signing), and conducts a comparison of the price being paid to current market prices. If the terms of the contract provide for it, the provider and client may adjust the pricing based on the results of the benchmark.