The following article is an excerpt or derived from Selling Outsourcing Services by Grant Lange.
Before we can put our best foot forward with regard to governing terms and conditions, we need to be mindful of how outsourcing services are really sold and the importance of relationships in the sales process.
This understanding is critical because overestimating the value of relationships can have a significant impact on the negotiation process and the likelihood of “getting ink” – achieving contract execution – when the dust settles.
Just How Important Are Relationships?
[pullquote align=”left” class=”” cite=”” link=”” color=”#FFA500″]Ultimately, the level of reliability of that relationship map can be the difference between success and failure.[/pullquote]
The impact of relationships on the award process should never be underestimated. Whether pursuit teams craft a capture strategy or evaluate the likelihood of success in a competitive procurement for outsourcing services, relationships do play a critical role in the selection process. Given that dynamic, pursuit teams spend countless hours enhancing existing relationships and cultivating new ones with any client representative they believe can influence the final award decision. The strength and substance of those relationships are likely to be clearly documented in a relationship map that is scrutinized throughout the sales process.
Ultimately, the level of reliability of that relationship map can be the difference between success and failure. Strongly perceived relationships may yield overconfidence, which can be very dangerous in a competitive environment with similarly qualified vendors. Weakly perceived or limited relationships may yield a decision to abandon the opportunity completely and focus business development resources elsewhere, to offer an overly aggressive price, or to accept unfavorable delivery terms and conditions to compensate for any such weakness and to avoid disqualification.
Relationships and the Evaluation Process
The evaluation criteria used by existing and prospective clients vary according to the size and complexity of the opportunity, but may include the following:
- Functional and industry expertise of the vendor
- Proposed technical approach that is the foundation for the delivery of services
- Quality and experience of the team to be deployed for delivery
- Vendor’s expertise in delivering similarly situated solutions in the client’s industry
- Level of executive involvement in the proposed solution
- Level of relationships and trust between the parties
- Vendor’s acceptance of prescribed terms and conditions that govern delivery
- Client’s perception about the delivery capabilities of the vendor
- Vendor’s prior delivery history within the client’s IT landscape
- Vendor’s financial viability and ability to scale on a global basis
Although the level of trust and the strength of relationships between the parties are typically not stand-alone criteria, they definitely factor into the award decision. Make no mistake about it: Clients who undertake large, complex, and mission-critical outsourcing engagements demand predictable results that manifest themselves through timely, quality, and cost-effective delivery. The stakes are too high and failure is not an option, given the potential impact on the viability of the underlying business and the customers, suppliers, and employees these systems support.
Do Strong Relationships Guarantee Success?
When developing the strategy for a new sales opportunity, you must carefully assess the strength of relationships across all hierarchical levels within the client’s organization – from the C-suite and likely decision-maker, to every member of the evaluation team, to all the way down to procurement. To help facilitate that process, a red-yellow-green encoded relationship map is likely to be used to highlight the strength and substance (saying “hello” in the hallway or at a social event versus being a trusted advisor) of those relationships and, most important, how those individuals may influence the decision-making process.
Most sales executives believe that their client relationships are ironclad and will be the driving force when decision-making time rolls around. Whereas relationships are extremely important, they must be augmented with a strong track record of delivering sustainable results. A trusted advisor relationship with a client gives you some credit in the bank, a seat at the table, the luxury of being considered for opportunities that may not exactly fit in your sweet spot, a first look at new opportunities, and insight into the client’s agenda and priorities. This relationship, however, is by no means a guarantee of success. This position was confirmed recently at a sales conference when a senior executive at one of the world’s largest suppliers of building materials was asked what factors most influenced his leadership team when evaluating consulting, technology, and outsourcing providers for mission-critical programs in his organization. His answer was: “Trust matters, but it’s the deal that counts.”
Relationships Versus Best Value
Assume a vendor has well-established brand awareness in the market, a strong reference base, and a history of quality and timely delivery in the marketplace, but lacks any substantive relationships in the account it wishes to penetrate. Given those parameters, is it possible to capture a competitive opportunity? The answer depends on the nature of the services provided, and where those services are in what I refer to as the relationship/best-value continuum, which is displayed below. As you see, when it comes to outsourcing services, the value of relationships is minimal and should not be relied upon too heavily when a service provider is engaged in a competitive outsourcing procurement. I have served as the lead negotiator on competitive outsourcing engagements where the sales leadership team was absolutely convinced that the strength of the team’s relationships and prior delivery history would somehow materialize in the form of a white knight who would sweep in, exempt the team from the wrath of the external counsel and the third-party advisor, and direct the award to us. Unfortunately, that help never arrived. My best advice: Keep your overconfidence in check, especially when you are engaged in a highly competitive procurement for outsourcing services.
Corporate Strategy Versus Outsourcing Services
For management consulting and corporate strategy services delivered directly to the C-suite, relationships still rule the day and trump best value time after time. For these types of services, it is common for a partner or director in one of the top strategy firms to build a relationship with and become a trusted advisor to the board of directors, CEO, or executive management team, and provide all strategy services until there is a change in leadership.
These services are typically contracted directly with the CEO or board on a noncompetitive basis, can be sizable in amount, are typically outside the purview of anyone in the procurement organization, have extensive senior executive involvement and a corresponding lower-leverage model throughout delivery, are not subject to extensive price negotiation, are, in some cases, a line item in the annual budget, and are generally exclusively provided by one party.
The bottom line is that the strategy provider’s relationships render it sacrosanct in the procurement process and price reasonableness. A former colleague once boasted that as a director for one of the major strategy firms, he had developed a long-standing trusted advisor relationship with the CEO of a financial services company, where he and his team were the exclusive providers of strategy services. For a specific engagement that he was positioning with the CEO, my colleague looked the CEO directly in the eye and said: “The cost for the engagement will be $1 million. And that is my cost; my team is free.” This is an extreme example, but it epitomizes the delivery of high-end strategy services that are still sold primarily on a relationship basis and are exempt from the much more rigid procurement process associated with more competitive opportunities across the consulting life cycle.
While that approach might be viable in the C-suite with a long-standing client who has a good sense of humor and with whom you have a trusted advisor relationship, its application is extremely limited. What if that former colleague attempted a similar approach with a client’s counsel, procurement leadership, and third-party advisor on a competitive applications outsourcing engagement where he was unable to differentiate his services and lacked any substantive relationships within the client’s buying community? Well, he probably would have a very short meeting and plenty of time to play golf in the afternoon. Clearly, as you progress farther across the consulting life cycle and leave the strategy realm, best value becomes much more important, vendors become more prevalent, competition is fierce, services are more commodity-like, and procurement and legal become much more engaged in the buying process.
Selling Outsourcing Services With Limited C-Suite Relationships
If you have or can develop a trusted advisor relationship with C-suite leadership, that relationship should be leveraged to the fullest when pursuing downstream outsourcing opportunities. If you lack such a relationship, target your business development efforts toward functional leadership that may be a few layers removed from the C-suite. Those leaders have both strategic and tactical agendas to pursue, have an ample budget, and are likely to engage third-party providers in an outsourcing capacity to help them achieve their objectives.
The bottom line is that despite the strength of any C-suite relationships, best value should be a key component of every outsourcing sales strategy. If you overlook best value based upon the perceived strength of some C-suite or other relationship, you likely have an acute case of overconfidence and a successful outcome will be tenuous at best. If you think about the relationship/best-value continuum, best value becomes much more important the farther you move away from corporate strategy in the consulting life cycle. Just to be clear, relationships in the client organization most certainly help in selling outsourcing services as well, but their relative weight diminishes as the services become more like commodities.
Relationships in Action
Let’s look at an example that highlights the impact relationships may have in a competitive procurement for IT services. Assume that a leading IT services provider maintains a great relationship with the IT leadership in a Fortune 500 financial services company, and the CIO is contemplating the award for outsourcing the maintenance and development for their full suite of financial and human resources applications. The services provider has a reputation for delivering similarly situated solutions in a timely, quality, and cost-effective manner, and its brand awareness and reference base is very strong. The provider is one of two competitors that have made it through the down-selection process for this large and strategic program. Both vendors have similarly situated technical solutions, delivery timelines, and equal capabilities in staff and industry expertise. However, one of the two vendors is 15 percent lower on price. After confirming that both vendors have submitted a proposal and corresponding price for the exact scope of services that are specified in the request for proposal (RFP), the client is now forced to address the value of the relationship and the level of price sensitivity it has for the services contemplated.
Relationships Versus Price Sensitivity – It’s Decision Time
Although a 15 percent premium may not be a big deal on a $100,000 management consulting engagement, this kind of global applications outsourcing engagement may span multiple years, is mission-critical to the organization, and requires a significant investment. When faced with this situation, most clients choose the vendor with whom they feel most comfortable, from whom they can receive predictable results manifested in timely, quality, and cost-effective delivery, and with whom they have a strong relationship. But at what point does the price variance become too high to justify an award that will cost 15 percent more during the delivery term?
If the lower-cost vendor has a less technically viable solution and there are questions about the vendor’s ability to deliver the services and meet the service levels, then, maybe, 15 percent is not a big deal and not worth the risk of failure in choosing the wrong vendor. But that is not the case here, as these vendors are similarly situated in capability and likelihood of success. So, it is decision time – what is the value of the relationship? How strong of a technical solution, reference base, reputation for quality delivery, and long-standing relationship does it take to justify an award to a higher-priced vendor? Is it 5 percent? Is it 10 percent?
What Does the Fed Say?
There is no firm answer, but there is a reference point in the public sector. The Federal Acquisition Regulations (FAR) govern the procurement of goods and services by the U.S. government and provide for a “best-value” approach in the selection process. “Best value” is defined in Section 2.101 of the FAR as “the expected outcome of an acquisition that, in the government’s estimation, provides the greatest overall benefit in response to the requirement.” While the FAR guidelines do not state a specific one that would allow for an award to other than the lowest-price offeror, a 2010 General Accounting Office (GAO) study of best-value contract awards by Defense Department agencies reflected a 5 percent price premium as the average variance that would justify making an award to a higher-price vendor based upon best value. Once the price premium increased above 5 percent, the probability of win decreased significantly. When making a contract award to other than the lowest priced offeror, the government is required to carefully document how the perceived benefits of the higher-price proposal merit the additional cost. Given the multiple service provider options available and a continued focus on reducing IT costs wherever possible, a 5 percent to 7 percent gap, at most, would be the benchmark in a typical commercial outsourcing opportunity. Even that variance can be difficult to justify, given the commodity-like nature of the underlying services delivered and the level of influence that procurement and third party advisors may play in the award process.
So What’s the Final Word on Relationships?
There will always be exceptions to this general rule, but the bottom line is that procurements for the delivery of services outside of the management consulting and corporate strategy realm are extremely competitive, and relationships do not guarantee success.
Given this dynamic, it is critical to carefully pick delivery sweet spots and to deliver in a manner both commensurate with the nature of the services provided and competitive with the other vendors in the market.
Strong relationships are always important and are a key foundational component for a successful services provider; however, the inherent value of those relationships is mitigated as commoditization and price sensitivity become more important in the decision-making process.
Liked this article? Read the full book: Selling Outsourcing Services by Grant Lange.
About the Author
Grant S. Lange is an IT services sales and delivery executive with global experience negotiating large and complex application, infrastructure, and business process outsourcing agreements within the public and private sectors.
During his career, he has negotiated outsourcing agreements that have generated in excess of $2 billion in new sales. He is a partner at a leading IT services company and has served in a variety of leadership roles at some of the world’s largest IT services, advisory, and software firms.