Project initiation

At the outset of an outsourcing project, the customer will need to evaluate the business case for the project. In doing so, it will be necessary to consider the overall scope and objectives of the project and the likely benefits of outsourcing, risks and costs of outsourcing together with the likely work required to achieve its aims. A project team will need to be established, the scope of the project will need to be addressed and the conduct of the process will need to be set out. In establishing such a project team, it is often prudent to establish some form of terms of reference which will guide the project team. 

In our previous articles we explained that the customer will need to undertake an outsourcing due diligence of its internal requirements and what to look for in potential outsourcing suppliers. Part of this internal due diligence will include putting together an initial business case which aims to provide justification for the project in the light of the objectives. This will address such matters as whether the project can be achieved successfully within the current organisational framework, and whether there appear to be any financial constraints which would limit the success of the project.

Approval of the initial business case will be necessary before the project can proceed.  The project will need to consider at the outset which elements should be outsourced and which retained. This will obviously need to be analysed in the light of the organisation’s overall objectives and its sourcing strategies as a whole. Key to this analysis will be the capabilities that the organisation has and wishes to retain in-house and the sophistication of the offerings in the marketplace. 

As well as this, a project plan will need to be drawn up showing when and how the project is to be achieved. The project plan can, in certain circumstances, include a quality plan setting out how quality is to be maintained and controlled in the project, or this could be included as a separate document. Both the business case and the project plan will then need to be continually reviewed and revised throughout the term of the project to monitor progress. 

As part of this initial consideration, the customer should:

1) identify any risks and issues that it considers may arise during the life of the project to ensure that the outsourcing contract addresses any such issues. Ideally, the resulting risk register should set out a description of the individual risks, the likelihood of the risk happening, the practical solutions and the impact the risk would have were it to occur. The impact and likelihood scores can then be multiplied and the resulting figure is often used to track the importance or risk-rating of a particular risk. The register should also set out any strategy for mitigating the risk in question and the status of the proposed mitigating action. It often sets out the date and person by whom the risk was identified and who is to take responsibility for managing the particular risk in the future. The initial risk and issues registers can be attached to the project initiation document, and they will be amended, monitored and refined throughout the project. 

2) conduct a due diligence exercise in respect of the function to be outsourced (and any relevant information technology) at the outset of the project. This will enable the customer to get a clear idea of its requirements and help to reduce the potential for "scope creep" during the tender exercise and after contract award. In addition, the exercise will help the customer to complete its business case for the outsourcing and the Invitation to tender document (ITT) that is subsequently provided to the supplier during the tender process. In addition, the customer must offer each potential supplier a full opportunity to conduct its own due diligence exercise in relation to the customer's operations which are relevant to the proposed outsourcing. This will include, amongst other things, due diligence in relation to the employees who may transfer as a result of the outsourcing, the transferring assets and software licences (if any) and the status and quality of the customer's data that will be transferred to the supplier to populate its systems at the outset of the outsourcing. The more open the process, the more risk can be transferred to the supplier. 

3) consider how to address the Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) issue. The main effect of TUPE is to transfer the contracts of employment of employees involved in the outsourced business to the supplier. However, many questions arise during the process as a result of TUPE, including which employees are employed in the undertaking, what happens to those who choose not to transfer and what liabilities are actually transferred. The key point in considering employment-related issues at the outset of the outsourcing process is for the customer to identify, to the extent that it is able, those employees who are or may be in the pool of transferring employees at the time of the transfer. These should be identified by the customer early in the due diligence process and ultimately may be included in a list of transferring employees in the outsourcing agreement. 

4) be mindful of confidentiality. Much of the information provided by the customer to the supplier, such as that included in the ITT, is likely to be of a confidential nature and the customer should ask the supplier to sign a confidentiality agreement before such information is disclosed. It may be that, later in the process, the supplier will want the customer to sign a similar agreement to protect it from disclosure of its confidential information, such as that relating to its detailed methodologies and costings.  

5) decide whether to follow and how to run a competitive tender process or whether to approach one or more individual suppliers separately. There are a large number of advantages and disadvantages of a competitive tender process which clearly include the possibility of negotiating improved terms and better charges on the one hand, while on the other, incurring increased costs of negotiating with a number of suppliers. In the private sector the most appropriate procurement procedure to be followed will depend primarily upon the business objectives of the customer although it will also depend on the sophistication or otherwise of the marketplace. This may only become apparent after initial market testing.  

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.