What are the most important factors for successful outsourcing? They are all about the vendor that buyers select.

Survey participants say choosing the right vendor (63%) is the most important factor. In fact, respondents from the smallest companies and most of the medium-sized companies feel this is much more important than their second choice—the subsequent ongoing management of the outsourcing relationships with the vendor.

In contrast, representatives from the larger companies rated the ongoing management of the relationships nearly as high as selecting the right vendor.

Interestingly, the participants from companies with between 500 and 999 employees said their second most important concern is having a properly structured contract rather than the ongoing relationship that the contract covers. In other words, if you don’t spell out to the vendor what you want in the first place, the relationship will quickly sour, no matter how well you think you can manage the entire process.

“You must define the problem and the scope,” explains Mahipal Komatreddy, vice president of engineering for Transport Edge, a division of WFS Corp., who outsources software development to India.

“It is paramount that you develop a comprehensive contract to govern the relationship,” says Bob Rosetta, senior sourcing manager with the strategic technology sourcing organization at JPMorgan Chase. “The contract should be structured in a flexible fashion to allow for changing business conditions.”

Surprisingly, respondents from companies of all sizes feel the three issues related to the outsourcing vendor—selecting the right one, managing the relationship, and properly structuring the contract—are more important than understanding your firm’s goals and objectives.

This sentiment was not unanimous, though. Insists Keith Pallesen, sourcing consultant for GMAC Mortgage: “It’s not only selecting the right vendor. It’s selecting the right vendor that best meets your needs.”

However, while money and holding onto as much of it as possible is no longer the number one motivation for deciding to outsource in the first place, it still is the top priority among buyers when they choose an outsourcing partner. When all survey participants were asked what are the three most important factors in selecting an outsourcing vendor, 65% said price, followed by commitment to quality (51%) and flexible contract terms (39%). What’s more, the smaller companies are more likely to make price the key factor when negotiating a deal with an outsourcing company.

However, medium-sized companies are moving away from just worrying about what the vendor is charging. For example, companies with 1,000 to 2,499 employees and 5,000 to 9,999 actually rank price and commitment to quality about evenly. “Cost should play one-third of a role,” insists Al Garcia, the vice president of information technology at Comac Inc. “It cannot dominate. Non-tech people always want costs (to be the most important factor). But, it’s trivial if your circuits are down. It wipes out all of your savings.”

GMAC’s Pallesen agrees...somewhat. He says that regardless of what your priorities and needs are when considering an outsourcing vendor, cost should always account for no less than 30% of your decision.
But, you should not ignore what the vendor is charging either. “If a company has great technology and its costs are too high, it won’t be awarded work.” he insists.

JP Morgan’s Rosetta suggests that buyers should complete a high level evaluation of the supplier’s capabilities before inviting them to participate in a sourcing process. This pre-qualification will reduce the overall cycle time of the process. Once the vendors have been selected to participate in the RFP, the buyer needs to complete a thorough due diligence process, including a complete financial assessment. You need to gain an understanding of the vendor’s management team and their culture, he emphasizes.

Then ask yourself: Do you feel you can partner with this management team?