The ins and outs of outsourcing: An evaluation guide for selecting the right vendor

By Troy Pospisil, Co-Founder and CEO, InCloudCounsel

In the past year, outsourcing routine, but mission critical workstreams to B2B vendors has proven particularly useful, and – in a virtual world – oftentimes necessary, to maintain business continuity and free internal teams to focus on strategically significant, value-generating work.

From payroll to background checks and cyber-security and legal document review, the benefits of outsourcing are clear—when everything goes right. However, nearly a quarter of all outsourcing relationships fail within two years, and half fail within five. Having a systematic vendor selection process in place is key to ensuring a successful vendor relationship.

Critical Selection Criteria for B2B Service Providers

One of the biggest problems in vendor selection is the lack of good selection criteria. Without this, enterprises risk picking the wrong vendor and outsourcing to a provider that’s a poor match for their needs, which can lead to a number of business and operational headaches.

The criteria for assessing providers falls into three main categories: the people, the products, and the business itself:

• The People

• The Products

A company may have a beautiful website that paints a compelling story about their products’ or services’ capabilities, but the vendor needs to be able to back up those claims. Before you entrust critical functions to a vendor, delve deeply into what’s behind their marketing.

A good rule of thumb is that products or services for your specific use case should comprise at least 20% of the service provider’s revenue—or it should represent a significant growth area. The provider’s management should be able to convince you that they understand how to solve your particular business problem, and that should translate into demonstrable R&D investment. For example, if your use case only represents 10% of that company’s revenue, you’re not going to get more than 10% of that company’s R&D investment or management attention unless you’re a growth industry for them.

• The Business

Financial durability, longevity, and data security are just some of several critical factors to consider when evaluating a vendor. Before you consider hiring a B2B service provider to take on a key function of your business, you should carefully evaluate the health of their business. Don’t be shy about asking to see a potential service provider’s balance sheet or income statement – if you’ve signed an NDA, the provider should be able to share it with you.

Closely related to the issue of financial durability is the question of company longevity. Any provider you hire must be committed to building their company for long-term sustainability.

Further, as today’s cybersecurity landscape continues to evolve, make sure that your service provider’s security measures at the very least meet the standards you have in place at your own company. Look for a company with a strong commitment to security and be sure you understand how they will handle your data. Best practices include regular independent assessments, including penetration testing, compliance with security standards such as Privacy Shield, SOC, and ISO 27001, and strong security features such as single sign-on (SSO) and two-factor authentication (2FA).

Preparing for the vendor selection process

Even before you start evaluating vendors, there are a few steps that will help you run an organized, methodical selection process and choose vendors who can deliver the right products and services for your business, on time and on budget:

• Step 1: Identify your business needs. What problem are you solving by outsourcing this process? How will you measure the impact of a solution and whether it’s met your business needs?

• Step 2: Identify your criteria. What specific criteria, technical or otherwise, must the solution meet in order to fit your needs?

• Step 3: Identify the team. Determine who will be involved in vendor evaluation as well as in the final decision-making process.

• Step 4: Create a scorecard. Develop a written method for evaluating and ranking members.

• Step 5: Map the finish line. Determine exactly how and when you’ll make a final decision and stick to your deadlines.

Partnering with the wrong service provider can negate the many benefits of outsourcing. Take the time to prepare for the vendor selection process, and ask the tough-but-important questions about the service provider’s team, products, and business. If you’re thoughtful about your selection process, you’ll find that outsourcing routine activities can result in more than cost savings: it can free up thousands of hours you can use to focus on the work that produces true strategic value.