In the second of a three part series, Tim Palmer, the lead in HR Transformation at PA Consulting Group, begins to answer the two fundamental questions that must be satisfied before embarking on successful sourcing contracts.

Last week, we began to assess how sourcing contracts are best constructed in the current climate and identified two fundamental questions that determine how the contract is defined and how successful the relationship will be in the long term – what is the overriding intent for the sourcing project, and what compromises are steps too far?

Often, the answers to these questions do not become fully apparent until the closing stages of a shared service implementation or outsourcing negotiation, when the client realises there is no point pushing further as the service provider has no more to bring to the table.

There are therefore four steps that should be built into any sourcing approach to ensure that objectives are mutually agreed and achieved. The same need for balanced risk exists for both captive shared services and outsourced relationships. Similar steps can be used when planning shared service projects, helping to create a common purpose for the implementation and helping to agree an accounting approach for factoring in the risks involved.

Step 1 – Understand your intent

As you prepare for a sourcing evaluation, work out the most critical goals for your solution. Prioritise between ‘must’, ‘should’, ‘could’ and ‘will not’ have features. What are you prepared to give up to secure your ‘musts’? This is a particularly important conversation to have if flexibility and the ability to scale services up and down are key priorities. To arrive at your overall intent, you will need to consult with key decision makers and stakeholders throughout the organisation.

Step 2 – Put the intent at the centre of the sourcing process

As you move through your selection process, make your intention clear – be it with potential providers or your internal team. Embed the intent in all that you do; it should be the core part of any prequalification process. Do this by speaking to potential service providers and articulating clearly what you are looking for, asking for their help, insight and ideas. The best outcome is where any providers that cannot deliver exclude themselves from the process, and those that can, gear themselves up to meet your intent in the most appropriate way.

If flexibility is a key requirement for your organisation, use scenarios to illustrate how the service providers will behave when significant, unpredictable business changes occur. Assess their willingness to live with the intent that you have set out by performing sensitivity analyses on the pricing and business case. (Keep thorough notes on their responses, these may prove invaluable later.)

There are two further steps for ensuring that you start as you mean to go on when devising sourcing contracts – checking the approach and the contract align with your intent, and then implementing the business change, also in line with intent. We will tackle these in more detail next week.

This blog is an extract from PA Consulting Group’s book, ‘Surviving and thriving in the economic crisis: The sourcing opportunity’, and is available free of charge. To request a copy of the book, please visit http://www.paconsulting.com/sourcingopportunity