Identify your needs. Identify the salient elements and factors that mean success and failure to your company, such as quality, delivery dates, acceptance criteria, and problem resolution. “You’re not only selecting the right vendor,” Pallesen points out. “You’re selecting the right vendor that meets your needs.”

To accomplish this goal, put together a scope of work, which defines exactly what you need and/or what you want the product or service to do when the task is completed. What do you want out of your relationship with the vendor? Then craft a statement of work, which contains the answers to these and other questions. Make this document as detailed as possible. These include performance, functional and specification type statements of work.

Develop an RFP (Request for Proposal). This is also known as the solicitation process. This can either be competitive or single sourced. If you can accurately define your needs and there are several companies in the market place that can meet your needs, then competition is an appropriate solicitation method. On the other hand if your need is strategic in nature and cannot be clearly defined or there is one or two companies who can provide the items or services, a single source solicitation can be beneficial. Here’s where you spell out in excruciating detail all of the terms and conditions, your scope of work, the evaluation criteria and the importance of the evaluation criteria and the anticipated pricing structure.

“When you look at your needs, look at the inherent risks of the requirements,” recommends Pallesen. “That will drive the development of the contract.”

If it’s a big contract and the potential vendor will use subcontractors, the vendor will need to explain exactly how these relationships work.

Evaluation Process. Put the proposals into two bins—those that address everything you are looking for go to the “in” tray while those that are incomplete are “out.” Analyze the technical aspects first. “You don’t want to be biased on costs upfront,” Pallesen says. Then look at costs.

Afterward, rank the technical results based on metrics you established for yourself when you created the requirements. “Companies must meet my requirements,” Pallesen says. “It’s not how I fit into their program. Remember. It must link back to what you need.”

Upon completing the technical evaluation, the sourcing group must perform cost analysis. Cost analysis is not just how much something costs to make. It is the overall financial condition of the offeror and includes the corporation’s financial standing, capacity capability, management capability, service capability and other analysis, the technical and cost evaluation.

Selection Process. At this point, you want to seriously consider just a few of the best proposals that have come back. If more than one company can potentially receive the award, he goes through his Best and Final Offer process. You might follow-up and seek clarifications. This process is especially critical when you are seeking to outsource services that are hard to quantify, such as labor or research and development, to name just two examples. “Remember, you must link this back to what you need,” Pallesen points out.

What role should cost/price pay? After all, according to the OI survey, cost/price is still king when selecting a vendor. However, Pallesen says cost/price should only account for 30% of your decision. “Never go less than 30%,” he stresses.

This depends upon whether the selection is technically-based or price-based. For example, you don’t want to select a neurosurgeon based on the lowest price, he says. You would first identify those that have the highest technical ability and weigh that against the cost.

Technical considerations should dominate and be around 70% of the weight. They include factors like the educational level of the vendor’s personnel, the history of the company and the company’s management and stability. “Whichever one of these factors is most important to you should be weighted the most,” Pallesen explains. “But, cost should be no less than 30%.”

Administrative Functions. Now, the relationship is underway and you should be asking (demanding) for reports on how the relationship is progressing. Require this monthly.

If a product or service is late, find out why, and how they intend to fix it. Pallesen also spends about 30 to 40 minutes per month with each of his outsourcing vendors.