CIOs often find little value in their due diligence visits because they typically perform due diligence after they have already selected a supplier.
By Steven Kirz
Executives often underestimate the value of performing due diligence visits with potential suppliers when procuring outsourcing services. They may question the value of these trips because specific suppliers are well known and respected, very little value came from such visits in the past, or they may simply be trying to manage expenses. However, with the right approach, onsite due diligence trips can become a critical part of the procurement process, unearthing key information that helps organizations select the suppliers best suited to their business.
Why Should You Go?
If your procurement process was competitive, the preferred list of suppliers (at least two) will be within 5 percent of each other in price and comply with virtually all requirements. Therefore, the potential supplier teams, tools, transition plans and solutions should be the primary criteria that differentiate the top supplier from the rest. A properly executed due diligence exercise will identify problems or poor assumptions on both sides in advance of supplier selection, rather than when service providers “show up” after contracting. Companies that visit suppliers repeatedly tell us that they cannot imagine having made the right decision without having made the trip. In other words, the best way to accurately differentiate key selection criteria among suppliers requires traveling to their delivery centers.
When Should You Go?
It is best to go when negotiations are almost complete. The first set of reasons centers around the quality of resources—customers are likely to meet the bulk of their prospective team members because the suppliers can commit to resources when they feel that an agreement will be reached within weeks. At the same time, a lack of committed team members can be an indication that the supplier will not meet resource requirements from either quality or timing perspectives. Furthermore, at this point in the process, customers have a better chance of getting the supplier to commit its best resources to the team to better position winning the work. Finally, at this stage, if customers are unhappy with proposed team members, the supplier will be more amenable to switching them for higher-quality resources without argument.
The second set of reasons relates to the contract negotiations themselves. If customers emphasize that they will not engage in contract negotiations during the trip, because suppliers will want to eliminate as many obstacles to a successful visit as possible, suppliers will work to reach agreement on as many outstanding terms as possible before the visit begins. Timed in this way, due diligence visits can accelerate the resolution of outstanding issues.
One reason CIOs often find little value in their due diligence visits is because they typically perform due diligence after they have already selected a supplier. None of the advantages listed above exist after a supplier knows it has been selected. But there is another reason the CIO often finds little value on such trips—he or she should not necessarily be the one making the trip.
Who Should Go?
If the purpose of the supplier visit is to perform due diligence on the potential teams, tools, transition plans and solutions, then the CIO should send his or her key IT staff members who are best qualified to evaluate these criteria. Typically this will be the IT staff members tasked with making the outsourcing relationship work and engaged with the service provider on a day-to-day basis (e.g., evaluators). If the evaluators have not already been involved in the selection process, their participation in this phase can be critical to securing their support of the proposed change; and their support will be critical to the success of the proposed transition and solution. Finally, evaluators are often best at communicating the intricacies of their IT environment to the service providers. The direct interaction of these two groups before final selection can identify and anticipate potential issues before they arise.
What to Evaluate
While evaluators must address a long list of standard due diligence requirements (e.g., dual entry of telecom providers, backup power, physical and virtual security), the leading service providers will appear on par with one another. Typically, the service providers will differentiate themselves in how they present the following criteria, and therefore these are essential to any due diligence exercise.
Regardless of whether the solution is delivered through a staff augmentation or managed services model, the primary purpose of the evaluators should be to meet and rate the quality, experience, expertise and cultural fit of the proposed team. In particular, it is important to determine two things: the team members’ ability to collaborate on a plan based upon your live feedback and their ability to demonstrate a desire to go beyond addressing incidents to adding value.
Proposed Solution and Transition Approach
While service providers are very experienced in developing proposed solutions and managing transitions, customers typically have requirements or considerations that demand customization of the proposed plan. The evaluators must review the details of the proposed solution and transition approach to ensure that they can implement them from a practical perspective. A positive outcome of the trip typically includes the evaluators communicating to the service provider those parts of the solution or transition approach that cannot be implemented within their unique environment, and working together to create alternative solutions.
Service provider tools can appear to be very attractive in RFP responses. However, during due diligence, evaluators can watch how the service providers actually deploy and use these tools with their other clients. Another way evaluators can judge the value of tools is to learn if proposed team members have ever used the tools or received training for them; if experienced resources have never used the tool, chances are that the tool is not as critical to delivery as evaluators may have originally thought. Furthermore, evaluators can “pull back the curtain” to understand how the proposed tools really work to determine whether the tools can work within their environment (e.g., determining whether a Java-based tool cannot be deployed because the customer will not support Java code within its environment).
How to Evaluate
The right agenda is critical to achieving a deep understanding across these criteria and identifying potential issues or poor assumptions. Therefore, the agenda must be designed so that evaluators will carefully examine not just what service providers do, but how they operate.
In developing the agenda, and during the visit itself, keep in mind how much time and effort will have gone into the trip. Consistently question whether it was necessary to make the trip in order to learn what is being presented. If the presentation could have been delivered back at a client’s headquarters in the U.S., then skip it.
To understand how the service provider will deliver services, remove the sales people from the process (or request that they participate silently) and have your proposed delivery team describe how it will support the solution at a detailed level. This can include the proposed team members relating their transition experience and approach, demonstrating how they use tools to support the solution, and even role playing.
Visiting service provider teams that are supporting customers with similar environments is the most efficient way to see the service provider in action. Not only does it provide another opportunity to validate the use of tools, but it also allows evaluators to understand what data the service provider requires and how they will use that data.
Interviewing small groups of resources is another important agenda item. The interviews, without the presence of service provider leadership, allow the opportunity to validate the accuracy of what the service provider has said regarding training, culture and experience. Interviews are also the best way to validate the cultural fit of proposed resources with your organization. Note that the evaluators should pick the resources to interview from the proposed team members and the resources who evaluators meet with while visiting the teams that are supporting other clients.
Service providers will not be prepared for this approach unless the agenda and goals of the visit are established well before arrival. Even with clear communication in advance, service provider teams may fall back to their typical approach to visits; for your benefit and theirs, be prepared to course correct during the visit, perhaps multiple times.
Long Term Repercussions
A carefully planned due diligence trip to visit suppliers that are competing for your business typically yields an improved understanding of the supplier proposals and presents a clear supplier winner. By having the teams that will lead the supplier compare resources, tools, approaches and transition plans, and by having your team leads work together with the supplier team leads to address misunderstandings and problems in advance of contract award, you are more likely to make a decision that leads to a successful outsourcing partnership. Not making the investment associated with due diligence can also lead to long term repercussions that far exceed the cost of the trip, even if you selected the same supplier.
Steven Kirz is a principal of business transformation and outsourcing advisory firm Pace Harmon.