Effective Due Diligence

Regardless of the function being outsourced (whether it is data centre networking services, business process outsourcing, call centre services, application development and programming), performing a detailed and thorough due diligence is the first step in cementing a successful and healthy relationship for both supplier and customer. The objectives of performing due diligence are to allow both parties to understand customer’s business requirements and objectives, to evaluate the supplier’s capabilities, to understand the cost components, to ascertain the risks to both parties, and to establish the level of cultural fit of both organizations. The extent to which the parties can minimize the assumptions and dependencies will depend on the amount and quality of information available. With the right amount of quality data, the parties can have more certainty in the solution and pricing proposal. This will in turn facilitate an effective negotiation.

There are different types of due diligence that the parties will need to undertake. First of all, before any decision to outsource is made, customer will need to perform due diligence on its own business. Customer will need to identify the objectives it wishes to achieve, determine the scope fit for outsourcing, assess the current delivery model and service levels, identify the future requirements for the services, and forecast the return on investment.

Customer also needs to perform due diligence on types of service offerings available in the marketplace, the capabilities of various suppliers, and to assess potential supplier’s ability to deliver the services, their approach to service delivery, determine whether there are any current or anticipated resourcing pressures which may impact the delivery of the services by supplier, and to assess the level of cultural fit between the customer and supplier organizations.

It is also very important for customer to provide sufficient opportunities and data for suppliers to perform due diligence on the business or functions being outsourced. Supplier needs to be provided with an opportunity to fully understand customer’s business, to confirm the business requirements, to understand whether and how the service levels are being achieved by the customer, and to validate any assumptions. Where customer organization is currently performing the services in-house, it is not unusual that customer may not necessarily have all the service level data documented. Supplier usually insists upon a post-contract verification period to assess whether the service level requirements are achievable. This means customer will not have certainty on every component of the contract on signing. Pricing and/or service levels may be subject to change depending on the data gathered during the verification period. This uncertainty can be avoided if the customer is able to provide quality and reliable historical data on the service levels.

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