PROJ410 Case Study 2
Contracts and Procurement
ABC Marketing Services is the company that provide their clients a complete suite of marketing and e-commerce solutions that help them to win new customers, retain their clientele and also help them develop their marketing services and strategy. ABC Marketing Services designs and manages thousands of client e-commerce websites which help implement customer marketing targeting and segmentation strategies to increase and measure the revenue potential in every customer interaction/segment. ABC Marketing Services’ customer Innovation solutions are specifically tailored to improve each customer’s end-to-end experience, helping to build brand loyalty and drive the highest levels of satisfaction across all customers. The company has wide range of customers spread all over the globe and has been in the marketing services business for 20 years now. The company has another division that specializes in the call centre and related customer interaction services. The company has expanded its operations over the last few years and has several departments within the company to take care of various functions such as operations (ecommerce solutions development and management), sales & marketing, administrations, Information technology, Human Resources, Legal, Customer Services, Procurement and Purchasing, Finance and accounts, Business Strategy, distributions and logistics and Head Office.
Business processes to outsource
ABC Marketing Services is thinking of focussing on their core business and outsource their other non-core businesses. For this, it went through the due diligence of categorizing the core and non-core functions within the company. Core functions that were identified are:
* Sales and Marketing
* Information Technology
* Finance and accounts
* Business Strategy
* Human Resources
* Procurement and Purchasing
* Head Office operations
Non-Core functions that were identified by the management are:
* Legal Department
* Customer Services
* Distributions and logistics
Out of these four non-core functions, the Legal department and Administrations have very low head counts. Personnel in these departments are experienced and have been there in the company now for almost 10-15 years. Distribution and Logistics have their headcounts increasing every year but at a very slow rate. The Customer Services cater to the requirement of both internal and external customers. ABC Marketing Services is planning to outsource Customer Services department to an offshore vendor as there is a heavy need to employ more number of headcounts for taking care of high volume of calls and queries from the customers all over the world. Because of the tremendous growth in the company’s business, the need for hiring in-house employees have gone up considerably and the company is not able to ramp up its resources for various reasons such as cost, lack of experienced resources in the market and also because of the complexity in the hiring process. Overseas Vendors have a massive English-speaking population trained as well as extremely low labor rates.
One of the major advantages of outsourcing customer service is that the best suppliers have great experience in rapidly installing call centres. This includes acquiring and training new staff, locating new facilities, installing phone and computer terminals, and building required links to the company’s computer system. The customer service function is not considered by employees to be a critical job function so companies routinely hire sub-par employees which lead to problems with having to constantly recruit new employees and train them. A company can avoid this issue by giving the task to a supplier. The best suppliers have good recruiting skills to select right kinds of people, pay and benefit levels calculated to retain their existing staffs, and ongoing training programs designed to maintain the quality of their staffs. An important reason for using a customer service supplier is that the company is dealing directly with the customer through this function and must present the best possible face to the customer. A good customer service supplier has extensive experience in taking calls and hiring a quality customer service supplier gives a company a professional image with its customers.
When a company has its own call center, this is entirely a fixed cost as the company must pay the salaries of all employees irrespective of call volume. A company can convert this fixed cost to a variable one by switching to a supplier who will only be paid based on the volume of inbound/outbound calls. This conversion from fixed costs lowers a company’s break-even point, since there are fewer fixed costs to cover, which makes it somewhat easier to earn a profit on lower sales volume.
Establishing the preliminary performance targets / level of service
A key part of any outsourcing agreement is the service-level agreement (SLA). The SLA defines the performance level expected of the supplier by the company and is tied to such performance indicators as speed, availability, reliability, capacity, timeliness, and/or customer satisfaction. The SLA and Performance metrics in this outsourcing agreement would be as follows:
Performance metrics – The supplier’s performance must be measured objectively by including performance metrics in the contract. These metrics can specify a wide range of issues, such as the speed with which the supplier completes transactions, ongoing cost reductions, quality levels, and customer satisfaction levels. Performance metrics identified are:
* Nos. of inbound and outbound calls (Transaction Volumes) attended by the Customer account representatives
* Nos. of customer queries resolved
* Turnaround time per query taken on each query
* Customer service rating Index
* Nos. of customers attended
* Nos. of escalations per month
* Average Time spent per call per customer
Performance metrics penalties – Once performance metrics are included in a contract, they must be enforced with significant penalty clauses that specify charges to be levied if the metrics are not achieved.
Assessment of the type of contract chosen for each business unit outsourced
Fixed-price contract is one in which the buyer pays the seller a fixed price for the goods or services that it is procuring. For the customer service outsourcing, the nos. of tickets/call volumes is not known. The company ABC Marketing Services has around 100 employees currently and this is expected to increase by 50-100% every year given the nos. of customers’ growth and increase in the call volume or tickets/queries. Given the market situation and the demand of ecommerce activities and marketing services increasing very rapidly every year, the company doesn’t want to commit any fixed volume to the supplier. Also, the demand could be flexible and so the number of headcounts is not fixed or can’t be estimated at this stage.
Unit-cost contracts are similar to lump-sum contracts in that the price of each “unit” is determined at the start of the contract. The scope is well defined, so that the types of units are defined; however, the number of units needed is not known at the start of the contract. Given the above scenario, the company is considering to go for unit price contract based on the some baseline transaction volumes. There will be unit price fixed as follows depending upon the transaction volumes.
Transaction Volume (Per Year) Price Per Call (in USD) 0 – 50000 Nos. USD 2 50000 – 100000 Nos. USD 1.50 Above 100000 Nos. USD 1.00
Suppliers will reduce prices if transaction volumes increase above a baseline amount. The supplier will want to base prices on an average baseline volume that would be determined based on the data collection at the beginning of the contract. The company wants prices to decline in conjunction with an increase in transaction volume, so it is reasonable in many instances to move away from fixed fees toward a pricing structure that varies directly with volume. In case of high volume, setup costs will be spread over more units, resulting in lower per-unit costs that should be passed on to the company as lower prices.
The key pricing issue to focus on is the price per call. There are many pricing variations to consider for the contract, but most of the money the ABC Marketing Services will pay is for the price per call, so this should be the focal point of negotiations.
Assessment of any issues that may arise (both in the short-term and long-term)
The issues that may arise because of this outsourcing are:
1. Supplier may need access to the company’s database. When the supplier is answering customer queries and the supplier must access the company’s database to answer the question. This presents the danger of having supplier employees gain unauthorized access to company’s database, as well as making incorrect changes in that portion of the database that they are authorized to access. These problems can be overcome by allowing read-only access to the database, as well as by constructing a special interface for the supplier that does not present any other menu options than those for which the supplier is allowed access.
2. Another problem is when incoming calls are relatively unstructured, which requires a much higher level of training by the call centre staff to properly handle. If a great deal of expertise is required, the range of possible questions is broad, or answers cannot be reduced to a set of simple responses, then it may be best to train the customer service staffs.
3. The company must also specify in the contract the availability of the call center. One of the elements of availability is the business hours of the call center. The length of open hours will be a function of the time zones served as well as the types of product problems encountered by customers. For example, if customers are worldwide, the call center must be open around the clock, but if the time zones served are just in the United States, two shifts will probably be sufficient. Finally, availability is impacted by system downtime, which can be caused by hardware breakdowns in the computer or phone systems, or by power shortages. All three of these availability issues should be addressed in the contract.
.Evaluating Potential Outsourcing Suppliers
Selection criteria include a weighting of a number of criteria, such as a supplier’s price, experience, financial stability, and references. The ABC Marketing Services may seek to outsource its contract to subcontractors who have special expertise in customer services. The company will want to review the qualifications, experience, and stability of each subcontractor to ensure that required service levels will continue to be met. ABC Marketing Services will assess the following criteria to evaluate outsourcing suppliers.
Supplier’s reputation – The reference lists of all supplier finalists should be used for lengthy phone interviews and possibly for on-site visits. When conducting these interviews, the review team should use a standard set of interview questions so that the responses to all questions can be more easily compared between candidate suppliers.
Supplier’s level of experience and past work done – The review team should request from each supplier a set of resumes for the group likely to be performing services for the company. These resumes should be summarized based on skill levels, industry experience, and years of functional experience to determine the quality of the group.
Technical knowledge – There are special customer call tracking software that would be required to be used as part of this contract. This knowledge is usually confined to very specific niches in the customer service area to be served, so the company must be sure that the knowledge the supplier possesses is the same knowledge required to service its needs.
Supplier’s financial condition – Arranging outsourcing agreements requires an extensive amount of work, and the last thing a company needs after all of this review work is for the supplier to go out of business due to financial difficulties. The safest approach is to stay with a big supplier who has a history of longevity. However, smaller suppliers tend to be hungrier for the business and therefore provide better service, so there are reasons for not going with the biggest suppliers in the industry. At a minimum, any suppliers showing strain on their financial statements should be avoided.
Bid prices – Careful comparison of the bids will be done to ensure that the quoted prices are all for the same baseline services. A common supplier ploy is to shrink the baseline services being quoted, which allows it to quote a reduced price and later charge higher fees for non-baseline services. If the baseline prices are not comparable, the company can either request new bids based on a common set of baseline services, or calculate estimated total costs based on the different pricing structures submitted by each supplier.
Strength of argument on the number of vendors selected to provide the services.
After having reviewed the supplier bids, it is possible that the company will find that no supplier provides the correct mix of services to adequately meet the company’s needs. In this case, it may be possible to select a lead supplier, with several other suppliers subcontracting to provide services to the company. This approach has the advantage of allowing the company to create a tailor-made package of services that exactly fits its needs. The downside is that there may be too many suppliers to effectively manage, and the suppliers may blame each other for service problems, resulting in some service problems being bandied about for too long before being solved. If the multiple-supplier approach is used, it is best to keep the total number of suppliers to a manageable size even if the resulting mix of services is not perfect and assign total responsibility for the function to a single supplier, preferably the one with the best management expertise. This one supplier will take care of all billings to the company and will handle all complaints. In exchange for providing this extra service, the lead supplier should be paid somewhat more than the market rate for its services. For ABC Marketing Services, it would be good to go along with a single vendor as the management of a single vendor would be better both from the cost and people perspective.
Assessment of timeline for bid activities and time duration for each contracting process.
Contracting Process Plan Duration Plan Purchases and Acquisitions stage 1 Month Procurement Planning 2 Months Request Seller Responses 1 Month Vendor Selection 2 Months Contract Administration 3 Months Contract Close-Out 15 Days The company’s selection team should spend a large amount of time interviewing the management of each potential supplier, visiting supplier locations, and, if possible, talking to employees of the supplier. This gives the company a good idea of how the company operates. Contract Administrator’s team should devise a standard set of questions to be asked of each reference and should obtain complete answers to all questions. The activities in each of the contracting process would be as follows:
Plan Purchases and Acquisitions stage – This phase involves make or buy analysis. At the end of this phase, company will have a documented project procurement plan.
Procurement Planning – In this phase, ABC Marketing Services will prepare the solicitation document (RFP). The RFP gives the supplier background information about the company and its industry, and it describes the function that the company wishes to outsource, specific tasks to be taken on by the supplier, current transaction volumes, expectations for performance, and a deadline for when the RFP must be received at the company.
Request Seller Responses – In order to accomplish this step, ABC Marketing Services will develop a procurement package that will be distributed to potential sellers. This procurement package includes the request for a proposal. The Contract Administrator of ABC Marketing Services should derive a set of selection criteria for picking a supplier. These criteria should be as quantitative as possible, including the supplier’s record in setting up call centers, the degree of supplier knowledge of the company’s industry, experience with the volume of calls the company is anticipating, and technological expertise in linking to the company’s database.
Vendor Selection – The Contract Administrator of ABC Marketing Services and other committee can use the completed criteria to compare suppliers and make an informed choice. The best way to use the criteria is to assign an importance weighting to each potential supplier’s score on each item, then multiply the scores by the weighting factors. The supplier with the highest score should be selected.
Contract Administration – In this phase, both the parties have to meet their respective contract obligations. The process also reviews and documents the supplier’s performance in accordance to the contract. Once the supplier has been picked, the supplier will need a due diligence period in which to investigate all of the company’s needs in detail so that it will be able to negotiate the contract on a knowledgeable basis. It is best to give the supplier all necessary project details prior to signing a contract, since the supplier might otherwise agree to terms that are unrealistic based on actual requirements, resulting in a lengthy renegotiation of the contract at a later date. The vendor may not have enough excess capacity available to handle it. Instead, the supplier must construct or rent a facility, install cubicles, and add computer terminals and telephone connections.
Contract Close-Out – This process will involve all verification of all work and deliverables are met as per the contracts.
John K. Halvey and Barbara M. Melby. (2007). Business Process Outsourcing. Second Edition. John Wiley and Sons, Inc.
Steven M. Bragg. (2006). Outsourcing. John Wiley & Sons.
PROJ410 – Case Study 2