Outsourcing – II


Vendor Selection Criteria

We have heard of sagas of consulting firms advising their clients on the selection of the software vendor based on their unique parameters. Also, we know that the vendor selection is a very cumbersome process – leading to a different distinction of toil and turmoil. In this light, I have tried to address the quantification of the various selections attributes for the rationale of the vendor selection criteria.

The vendor selection is based on:

Reputation of the vendor: The background of the vendor plays an important part in the selection criteria. Financial stability, track record plays a major part. References form the other clients helps greatly in the selection of the vendor.

Associated Costs: Quality and Pricing are proportional. There has to be a cut-off in the exponential curve where the optimum level between the two can be found. The main costs associated with the vendor are the cost for software, service, and maintenance. The cost of the hardware is optional. The return to these investments is value addition in terms of currency value and the return of investment – the sooner the better.

Contracting Criteria: The contracting life cycle that is introduced during the entry phase forms another basis of selection. Criteria as the negotiation for the early termination of the contract, extension of the contract, withdrawal of the contract in between without loosing much monetary value is a must.

Culture of the vendor: A culture of a company is determined by the calling protocols among the employee, discipline maintained through time, ability to work long hours, informality within a group, dress code and the private space. The vendor must have a similar pattern for the culture for the vendor.

Experience of the Vendor: Experience of the vendor in handling the similar size and type of the contracts, distributed across boundaries is another criterion for the selection.
Resource Availability: The resources should not only be available for work to start, but the resources must possess the requisite skill sets – both technical and business to carry on the work.

Administration by the Vendor: The administration of the vendor to match the billing requirements for the client based on resource-time or fixed costs is a criterion for selection. Other important criteria are the management of risk- both external and internal especially the security features.

Hidden Costs for the Vendor: The overhead costs form the important part in selection of a vendor. The cost for transfer of knowledge, cost of attrition of the vendor, cultural mismatch between the client and the vendor, cost of scaling up the projects, cost of managing the vendor are all the basis of hidden costs.

Vision for the Vendor: Strategy taken by the vendor to expand and dominate the market is a criterion for vendor selection. Market Growth in that segment, market strategy for expansion, functional evolution as the want to evolve in business knowledge, maintenance plans for client support, financial vision for the next few years, ability to adopt a new technology, strategy for marketing – all these are the sole criteria for the selection based on the vendor adoption.

Trust for the Vendor: In this factor of selection, three types of trust are considered- knowledge-based, identification-based, and deterrence-based. Knowledge-based trust is generally found in short term contracts or in the initial phase of business relationships when both parties do not have much knowledge about each other. In the context of outsourcing, identification-based trust of identification can be achieved when client and vendor have less specific interests and more common interests to undertake a particular project. Deterrence-based trust is usually based on the calculation of rewards and penalties.

Note :
1. Ratings are based out of ten
2. For a close call of variation of less than 0.1%, reputation of the vendor is used for comparison
3. The weigh are based on empirical studies, and may have a variation of +/- 10% from the given weigh based on the clients needs

How to use the matrix?

Clearly, the attributes defined are the base criteria for the selection process.
For each of the client, the attributes will have a different weigh. The attributes are further subdivided into levels which have a different weigh based on the want and discretion of the client.

Each of these sub-attributes is given a rating out of ten, which is weighed under the sub-attribute total. This total is again calculated under the main attribute weigh to give the final results. In this example, clearly “Vendor 2” wins the deal apparently.

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