Isn’t it obvious that any company thinking of outsourcing should follow a competitive procurement process?

One of the issues for all organisations looking at outsourcing is whether to go through a competitive procurement process or whether to move directly to a deal with a single supplier. Readers may be surprised that this is a common issue – wouldn’t most organisations need to go through a demonstratively competitive process when contemplating a multi-million pound deal for services which often go to the heart of their business?
 
Do sole source deals ever occur then?

The answer is yes – many sole source (or as our US colleagues dub them, “Barney”) deals are actually done, and high profile ones at that. And one of the reasons for this is the effort that the major outsourcing suppliers put in to persuading clients that there is no need for a competition – in fact that a competition would actually be disadvantageous to the client.
 
In what way could it be disadvantageous to go through competitive procurement?

Well, the suppliers might say, in the following ways: it will undermine our relationship, by indicating that you don’t trust us to give you a fair deal; it will take time, which will delay the delivery of benefits; and it will cost money, both directly to the client for their costs in the bid process, and indirectly because of the increased sales costs which the suppliers will incur and inevitably pass on.
 
And with these siren voices ringing in their ears, many major organisations have moved ahead with a single supplier. Great for the supplier of course – much of the sales cost is saved (and some outsourcing procurement processes can take many months and cost the suppliers millions), and they aren’t under competitive pressure to sharpen their pencils regarding either fees or commercial terms.
 
So with that in mind, can single source ever make sense for the client?

The answer is yes, it can. But only in certain situations - it is of course an underlying tenet of capitalist markets that competition promotes efficiency, and therefore most purchases should be competed – who buys a new car having only looked at one model? And in the case of outsourcing, deals are complex, and often the process of defining requirements and receiving proposals and having a dialogue with a range of suppliers helps to clarify what is really needed.
 
Under what circumstances might there may be a case for sole sourcing?
 
There is a need to move fast, and The client and supplier know each other well and there is a strong, multi-layered relationship, and The supplier has the capability to deliver the required solution, and The client understands that there are other suppliers available, and The supplier recognises its privileged position and agrees to adopt a principled and competitive commercial approach.
 
And if all these circumstances do apply?

If all the above do apply, the client needs to weigh up the advantages of sole sourcing (mainly speed and direct cost avoidance), against the disadvantages (mainly lack of access to alternative solutions, and lack of commercial pressure to help achieve an optimal deal).
 
In sole source circumstances what can the client do to protect their interests?

If the decision is to go sole source, then it is imperative that the client gets expert client-side advice on both the solution and the commercial terms – not to imply that the supplier isn’t trusted, simply to recognise that their interests are not totally aligned, and that impartial professional advice can provide assurance that the deal really is as good as it looks. And of course, using a third party advisor will bring to the table the added benefits of current market pricing and deal shape information for comparison with the sole source offer.