Spotlight

Considerations Before Outsourcing Services

Often, the most cost-effective solution is internal management reform. If contracting out seems your best solution, make sure you take the following points into account:

•  Properly define your problem. Are you trying to fix a personnel problem by going to an outside vendor? In almost all cases, solving your internal problem will be the more effective solution. If you are not getting straight answers internally, have an outside reviewer or audit your existing programs.

•  Make sure there are enough qualified bidders. If not, the vendor has limited incentive to provide and maintain low prices.

•  Conduct a thorough cost analysis. Carefully analyze all internal direct and indirect costs. You will need this when you begin evaluating vendor proposals.

•  Write an RFP and solicit proposals. Have a qualified and independent specialist consult with you in drafting the RFP and evaluating proposals. Regrettably, proposals seldom compare apples to apples. Careful weighing is required in the evaluation process. Have a team of readers that includes people with all relevant skills.

•  Closely review proposed contract language. Have a specialist and your lawyer review the proposed contract. Look for fine print such as increasing cost clauses, fees for extra services, limits on services and the like.

•  Make sure you have a realistic escape clause. What’s the length of the contract? Are there cancellation penalties? Will you have sold your fleet or inventory and thus be effectively held captive?

•  Examine hidden, overhead and indirect costs. Consider your costs for monitoring, compliance, management, business support, facilities support and supply costs. Will you have to hire supervisory staff? Will these costs make outsourcing no longer cost effective?

•  Closely evaluate caps on services. Are they realistic and reasonable? Are above-cap costs in line with market costs?

•  Analyze the social costs to your community. Will this cause a reduction in pay for some of your citizens? Will it put community members out of work? Will health benefits be removed from a segment of your population? Will it affect your economy?

•  Check the experience of other customers. Just like when hiring personnel, there is no substitute for checking the company’s history. Are they responsive? Do they provide good service? The best predictor of future performance is past performance.

— William Mathis and Lorna Jimerson