This due diligence is generally is conducted using an invitation to tender process. This document should set out in detail the customer’s requirements and seek proposals from suppliers as to how it will meet those requirements and include the proposed contract so that the customer can check (in additin to the legal strenght of each supplier) the proposed service levels and other commercial points.

The invitation to tender should at least cover the following:  

·         The way in which the customer’s requirements are to be met by the supplier’s proposal, including any proposed changes to the customer’s existing service delivery processes and examples of existing work.

·         A description of all the services offered by the supplier for the customer (flexibility).

·         Details of the supplier’s organisation including geographical reach, financial standing and others depending on each case.

·         Any aspects of the services which may be subcontracted out, are they critical.

·         The supplier’s qualifications and experience in delivery of similar services.

·         The supplier’s proposals on delivering continuous improvement during the life of the contract.

·         The number of personnel or full time equivalent staff proposed to be used for each of the services, where such staff are to be located, and how the staff are to be used in the provision of the services.

·         Details of current staff turnover levels and how these compare to industry norms.

·         The supplier’s approach to staff and, in particular, the transfer of staff.

·         The supplier’s management approach in relation to implementation and service delivery.

·         The supplier’s approach to, and plans for, implementation, transition, exit and exit management.

·         The supplier’s proposals on pricing, including details of charge variation mechanisms, allowing the customer to price up any changes to volumes, service levels and other matters.

·         Any key assumptions on which the supplier’s proposal is based for example warranties and service levels.

The extent to which a supplier can meaningfully address each of the above points will depend on the amount and quality of information provided in the customer’s invitation to tender. The information presented in the invitation to tender will need to be detailed enough to allow the supplier to decide whether or not to bid for the work and to draw up its response. In particular, the supplier will need to be able to ascertain from the information provided its own detailed costs in providing the specified services, in order to fix its proposed charges, taking into account its overheads and any profit margin it is seeking. These charges will then be included in the financial proposals submitted in response to the invitation to tender. The bidders’ responses to the invitation to tender will need to be evaluated in detail and further investigations and due diligence will need to be carried out to ascertain whether the bidders can deliver their proposed solutions.  

The due diligence which is undertaken by the customer to assess the supplier’s ability to deliver the services should include some or all of the following:

• Analysing the supplier’s response and evaluating it against other proposals and each area against each other.
• Review should include at least technical, commercial and legal areas.
• A detailed review of the supplier’s charges, how these have been calculated and any assumptions that have been made.
• Visits to the supplier’s sites, including any shared service centres and other customers’ premises from where the supplier may be providing the services (where permitted).
• Taking up references and interviewing or seeking feedback from other customers.
• Analysing any current or anticipated HR requirements on the supplier which might adversely impact the supplier’s ability to deliver, including staff turnover rates, and recent contract wins.
• Presentations by the supplier’s management and service delivery and implementation teams.
• Reviewing annual accounts and taking up banker’s references.
• Reviewing industry and press reports on the supplier and the services.
• Following up with questions as appropriate.

It should be made clear in the invitation to tender that responses may form part of the outsourcing contract and therefore should be authorised by a person within the supplier’s organisation with sufficient level of authority. The way in which the customer and the supplier work together in relation to the due diligence process will also be important for both parties to see how each organisation works and to develop an understanding of the cultural fit between the parties. 

Risk assessment

An important use of the due diligence process for the customer will be in identifying and assessing the potential risks from the outsourcing to the customer’s business and in ensuring that appropriate steps are taken to avoid (or at least mitigate) those risks. This can be achieved by the implementation of a risk management framework or process to identify, assess and manage any risks that emerge during the due diligence process and later phases of the project. It is important that there is a co-ordinated approach to understanding and controlling the potential impact of different risks on the success of the project as a whole, and an effective due diligence process should feed into this risk analysis process.

As part of this co-ordinated approach, the customer and its team will usually meet at a senior level at regular intervals to identify the risks involved in the project, their current status and any action that needs to be taken to manage those risks. 

All articles are for general purposes and guidance only and do not constitute legal or professional advice. Copyright 2011 Anassutzi & Co Limited. All rights reserved. Information may be shared or reproduced only if accompanied by the author’s name and bio.