Straight-Through Processing in Outsourcing

What does the ideal outsourcing procurement process look like from the customer’s perspective? It is a process that enables the customer to put in place a deal quickly and efficiently with a minimum of friction and achieves the customer’s business objectives.

How often is this ideal realized? Not often enough.

Why not? There are many causes, but one contributing factor we frequently see is a bifurcation of the procurement process into a “consulting” phase and a “legal” phase.

In this flawed model, the “consulting phase” runs from development of a sourcing strategy through selection of a preferred supplier. This phase is typically led by an outside consulting firm retained by the client with most of the RFP and related documentation being prepared by the consultants based on their templates. Legal counsel has limited involvement in this phase.

After selection of a preferred supplier, the transaction moves into the “legal phase” in which the attorneys are brought in to hammer out the contract. During this phase, the consultants start to wind down their efforts (or start working to assist the client with transition planning) while the attorneys assume a lead role in handling much of the negotiations.

The “hand-off” that takes place between the consulting phase and the legal phase often results in a significant amount of re-work as the attorneys attempt to “contractualize” the substance of the RFP and proposal documentation and the results of the parties’ discussions during the consulting phase. This can result in significant delays, contention, mistrust and frustration as new issues are brought to light, new requirements are introduced and ambiguities are identified. To the supplier, it can seem as if the client is adding substantially more risk to the deal. To the client, it can seem as if the supplier is backtracking on commitments made in its proposal.

So what is the answer? To borrow a term from the financial world, “straight-through processing” or “STP.” When applied to an outsourcing procurement process it means that the RFP and other material created during the early stages of the process are constructed to flow smoothly into the final contract documents. Just as STP in the financial world is designed to optimize the speed at which transactions are processed and reduce errors, STP in outsourcing procurement is designed to make the process quicker, more efficient and produce better outcomes.

How is STP achieved? The key is integrating the “consulting” and “legal” resources throughout the entire procurement process. Every aspect of an outsourcing transaction that will ultimately be reflected in the final contract documents has both a “consulting” and “legal” component. This includes the scope of services, service levels, pricing, transition / transformation, and contract terms and conditions.
Consultants can provide technical and project management expertise, industry knowledge and financial modeling skills. Attorneys can provide an understanding of how the technical, financial and other aspects of the transaction need to be integrated into the final contract and the drafting skills to articulate the client’s objectives and requirements with clarity and precision.

Rather than dividing an outsourcing procurement between “consulting” and “legal” phases, clients would be better served by having a team of “advisors” that has integrated the consulting and legal skill sets. The integrated team of advisors would collaborate to achieve straight-through processing by constructing the RFP and other material to flow smoothly into the final contract documents. The advisors would continue to work together as an integrated team throughout the entire procurement process, including supplier evaluation / selection and negotiations.

This high level of integration will avoid the “hand-off” problem described above, leading to a faster, more efficient procurement process with better outcomes. Properly executed, It will also reduce the overall advisor cost of the deal.