When a customer decides it has already found its provider-to-be, and wants to avoid the conflicting emotions of exploring what might-have-been with its competitors, it can inadvertently offset a spiral of sanity-losing issues for both parties, as they prepare to walk down the aisle.
One man who has lived the sole source experience – and survived to tell the tale – is HfS Research’s own Esteban Herrera, who’s new HfS Best Practice Report reveals some war-wounds most of you will definitely want to avoid getting…
The Trouble with Sole Source…
Consider the following two messages:
1) At the client organization: “Congratulations! As the senior functional executive for _________(fill in the blank : F&A, IT, HR, Procurement, Claims, etc.) you’ve personally been selected by the CEO to lead an exciting cost-reduction program involving outsourcing your very own department to a service provider! It gets better: the provider has already been picked for you based on their promise of superior service and bargain-basement pricing that has never before been granted to any client—really! Over the course of this important initiative, you will have to convince your peers and customers that this is a great idea; you will spar with lawyers, your own sourcing department, the provider’s sales staff, and possibly an advisor or two. You will need to collect terabytes of data and perform multiple analyses on it to then hand it over to our new partner so they can tell us how poorly we perform today. Oh, and your team will come to despise you, but we know you are the right person for the job! We are counting on you to double service levels and halve the cost. You have 30 days to get it done—what a fantastic career opportunity!”
2) At the provider organization: “You lucky dog, you! As the top performing sales executive last year, our chairman herself has decided to hand you the sweetest deal ever! After personally fostering the relationship with the CEO of Amalgamated Inc. for the last 18 months, she has secured a deal and all you have to do is shepherd the troops to a solution design and get a signature on the deal—it doesn’t get any easier than this! Of course, the executives at our soon-to-be new client have promised full access to their resources and their data, so it should take you no longer than two weeks to build the solution. We expect you to close this deal within the quarter. This is a fantastic opportunity to build our top line and increase our margins! Because this is so easy, you won’t have much of a solution team, but who needs it when the deal is already done? Oh, I am sure this goes without saying, but this is a career making deal for you. The chairman, the CEO, his pet parakeet, the EVP of Sales, each and every one of your insanely jealous peers, and everyone who stands to get/keep their job as a result of this mega-deal is watching YOU! Needless to say, if this doesn’t sign, well…
So begin most sole source deals. The problem, of course, is that these two messages are about the same deal. There is a lot of sole-source going on in the industry, and for good reason, but talk to anyone who has done one of these deals and they will regale you with tales of pain and suffering.
Reality, as they say, bites. Most of the seasoned sales pros I know in the industry have a war story or two about sole-source deals. Most begin with the story of the two CEOs of the parties meeting and agreeing to do a deal on a handshake. Then they turn it over to some “lucky” subordinates and tell them “make it happen.” Here the problems begin. The subordinate and his/her team may have no desire to make it happen. In all likelihood, no data has been collected, and it will need to be collected from the people whose jobs are at risk—so even if you get anything useful, it likely has some “omissions” that will come back to haunt you. The client has not had adequate denial time to get past the “…but my business is unique, and different from everyone else in the industry” objection. The provider CEO has promised “market” or “preferred” pricing but nobody stopped to define what that means. He also promised the deal would be done in about half the time it will actually take. And the poor sales pro assigned to the deal will be blamed for not closing quickly a deal that “was already done for you.” Blow a sole source opportunity, kiss your career goodbye. You get the picture…
I was thinking the other day that I have known of five outsourcing-related serious health incidents: three stress-related hospitalizations (2 providers, 1 buyer) and two heart attacks (1, provider, 1 buyer). All five came during sole-source deals. So this is a serious matter. Sole source drives people to do irrational things: A former client, against my advice, accepted an eleventh-hour offer from a provider when they magically reduced $27 million from TCV overnight, after an ultimatum that the deal would go competitive. Where did all that money come from? Was it margin? Risk? Services? More importantly, could this provider be trusted after this stunt?
In another sole-source war story, I asked the provider to come up with pricing for increasing FTEs in the deal above the deadband—what if we bought 75 instead of 50? They came up with a higher price for the increased volume! Similarly, I have seen a client CEO demand a “no-turnover” clause for the entire offshore team on the account. Who would like to sign up for that deal?
Despite what many believe, sole-source deals are not easy for either side. There’s little structure, unreasonable expectations, no understanding of how value may actually be created, usually a very recalcitrant client, scared provider delivery people and Lindsay Lohan-like visibility for everyone involved.
To read more about the complexities of sole source deals, and how you can keep your sanity (and stay out of the mental hospital) regardless of which side of the deal you are on, read the new HfS Best Practices Report, “The Trouble with Sole Source: Five ways to keep your sanity during a non-competitive transaction” (please click on the report link and register for our research, if you haven’t done so already).
Posted in : Sourcing Best Practises
Phil/Esteban – is it true that Lindsay is outsourcing her recreational drug use to an HfS run center in Jamaica? It would seem a lucrative market opportunity for the HfS entertainment industry division.
Brilliant piece, Esteban. The competitive process forces providers to push their value propositions much harder and focus a lot more on productivity gains, in addition to other value-add areas to win the business. However, when the client is clearly already “sold” on one provider, it can often be tough to get the right provider bidding behavior, which can end up wasting time and consulting dollars. Advisors need to be shrewd at entertaining competitive bidding where the other invitees in the process actually have a shot at winning the deal. In many situations, just having an advisor there (and the “threat” of a competitive bid) can help get a sole source process moving much more dilligently for all parties,
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So you’re advising both buyers and sellers to advocate having an advisor on a sole source to ensure the buyer gets a competitive show-down for their business, and the vendor has the clients’ expectations better-managed?
Am inclined to agree in several cases – it really depends on the experience of the buyer to negotiate a sourcing process sensibly, with the required datapoints to base their decisions. I believe that as the industry matures and buyers get smarter, more sole sourcing will happen, as the need for expert third-party advice lessens (and it already is in many instances today),
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Stephen, hiring an advisor is certainly one way to navigate a sole-source deal. My exposure to sole source over the last 10 years was all as an advisor, and I feel like we added a lot of value. But the key message is to be informed and prepared, to expect sometimes odd behavior, and especially to take the time to understand the other party’s predicament.
This article sums up so much that is wrong with sole sourcing. Thank you
– It starts with a handshake by the head honchos and the details are never resolved. Even when the project starts to go off course, they don’t want to hear about the problems!
– And of course the “winners curse” can be magnified a thousand times when the winner is there by default – unrealistic expectations to manage, no real baseline, dissatisfaction with the deal (did they bid too low, can they really deliver, what have they gotten themselves into)
– And for the client, buyer’s remorse sets in far sooner than if other vendors had been consulted before making a decision