Successful Outsourcing: How to Select B2B Vendors (Part 1)
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This is the first installment in a series outlining practical criteria for evaluating B2B service providers. Be sure to read:
- Part 2: How to Evaluate a Vendor’s Leadership and Team
- Part 3: Why Vendor Industry and Product Focus are So Important
- Part 4: How to Evaluate a Vendor’s Commitment to Innovation
- Part 5: Scalability: Select Vendors Who Can Grow with You
Companies today are outsourcing all types of business processes, from payroll and background checks to security and legal document review. Outsourcing allows companies to focus on core competencies and strategic activities, operate more efficiently, and save money.
Trying to decide what processes to outsource? Look for workflows that are critical but not core to your business—such as high-volume, routine legal activities like non-disclosure agreements (NDAs). Several providers offer technology solutions designed to take over these repetitive-yet-critical workstreams, freeing internal teams to focus on strategic, value-generating work.
When Outsourcing Relationships Go Wrong
Successful outsourcing delivers many benefits—when everything goes right. But nearly a quarter of all outsourcing relationships fail within two years. Half fail within five.¹ As one industry watcher commented, “Marriages fail at about the same rate as outsourcing deals.”² The blame for such failure often falls on vendors who overpromise, lack industry expertise, or run unsustainable businesses.
But it’s not always the vendor’s fault when things go sideways. At Ontra, we’ve witnessed the buying processes of more than 1,000 enterprise companies. They’ve taken a range of approaches with varying degrees of success. Most companies handle procurement in a thoughtful and sophisticated way, but we’ve seen disorganized buying processes that lacked clear objectives or even a clear decision-maker.
One of the biggest problems? The lack of good selection criteria. Without it, you risk picking a provider whose products or services are wrong for your business needs. This can lead to a number of business and operational headaches.
Sharing Our Experience
We’ve had our own learning curve at Ontra: We’ve bought approximately 100 different tools and services over the past six years. While many of these buying decisions have been successful, we’ve also made mistakes, many the byproducts of growth. But they have helped us refine our own purchasing processes.
For example, as we started expanding outside the United States and operating multiple entities in multiple currencies, we discovered that our payments processing service provider couldn’t distribute payments in multiple currencies.
On the services side, we had to change accounting firms—despite a positive relationship with our original firm—because our tax and audit issues became too complicated as we brought in institutional investors and extended our global reach.
Outsourcing Fail: Queensland and IBM
Still, the hiccups we’ve experienced don’t compare to some of the biggest outsourcing mistakes. Here’s one dramatic example.
In 2007, Queensland’s health department hired IBM to create a payroll application. The company said it could complete the project for $6 million by mid-2008. Instead, the timeline stretched out several years. Project costs ballooned to $1.2 billion, 16,000% above the contracted cost. The app never did work.³
A government inquiry called the system—which went live in 2010 after 10 aborted attempts—a “catastrophic failure.”⁴ But, as one article put it, “there was plenty of blame to go around.” For one thing, Queensland officials hadn’t communicated expectations well or evaluated contractors properly.
The project’s flawed and mismanaged scoping and evaluation process doomed it to failure from the very beginning.
How to Prepare for the Vendor Selection Process
Situations like the Queensland-IBM project can be avoided by taking a few simple steps before you start evaluating service providers.
- Identify your business needs. What problem are you solving by outsourcing this process? How will you measure the impact of a solution and whether it’s met your business needs?
- Identify your criteria. What specific criteria, technical or otherwise, must the solution meet to fit your needs?
- Identify the team. Determine who’ll be involved in vendor evaluation as well as in the final decision-making process.
- Create a scorecard. Develop a written method for evaluating and ranking members.
- Map the finish line. Determine exactly how and when you’ll make a final decision and stick to your deadlines.
As the Harvard Business Review suggests, “Develop a systematic selection process and treat negotiations as a win-win. Treat the selection process as if you were hiring a new employee. Work with your team to develop objective criteria, agree on respective weightings, and then make a value-based decision.”⁵
In this blog series, we’ll give you practical criteria you can use to evaluate B2B service providers. These criteria will help you ensure a successful partnership that delivers the right products or services for your business, on-time and on-budget.
Download “Successful Outsourcing: An Evaluation Guide for Selecting B2B Vendors” for a full list of our vendor selection criteria.