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Outsourcing: How To Select the 'Right' Vendor
OTHER PARTS OF THIS ARTICLEPt. 1: Outsourcing: Effective Vendor Management StrategiesPt. 2: This PagePt. 3: Outsourcing: KPIs Determine Success with Vendors
Traditionally, price has been the sole factor managers considered in selecting contractors, but basing the decision on lowest cost will cost more. There are dozens of tools and ways to help managers decide which service provider to use, but one proven strategy for vendor evaluation is best value procurement (BVP), which looks at factors that include qualifications, expertise, schedule, quality, and performance-based criteria.
Typically, managers assign a value to each factor, which also can include price, experience, expertise, and safety records. These values are tabulated for each potential supplier or contractor with one scoring the best.
In this context, the value of services becomes a comparison of benefits to costs. A manager selects a contractor by researching qualified providers using a well-defined scope of services. This allows the manager and the contracting authority to determine criteria that reflect qualitative, technical and sustainable aspects of the tender submission, as well as price when reaching a final vendor decision.
The BVP approach is based on the conviction that minimizing or eliminating risks when allocated information is effectively used for a proper choice. This means the more information that is available and the better it is used, the better the future can be predicted and the fewer decisions or risks must be made.
The process of choosing the factors to guide procurement toward the best value has three stages:
Identifying the scope of services. This process as described above is completed by a cross-functional team, as well as stakeholders within the organization.
Choosing factors. Managers who have done criticality analysis know a variety of factors can determine asset criticality, and the same concept applies here. What are the factors to consider for outsourcing maintenance activities? Common factors include cost, expertise, customer service, response time, quality and safety.
Assigning values. When evaluating critical equipment not all factors carry the same weight. At this point the cross-functional team weighs each factor based on what the group feels is most critical or important, then cascading down. Doing so removes the emotional aspect of rating providers.
Type of contract
The contract details the responsibilities the service provider will be held accountable for. Facility or procurement managers often review the activities of the contractor and its employees to ensure they adhere to the terms of the agreement. This might include inspecting the work or getting feedback from others in the organization about how the work is being done and how well the contractor interacts with company employees.
The key then is the type of contract to have in place to avoid conflicts and miscommunication. Contracts should focus on agreed-upon services, deliverables and KPIs.
Lump-sum contracts are favored when both parties negotiate and accept a clear scope of services, schedules, deliverablesand performance measures.
Cost-plus contract represent a percentage of the labor and materials costs, which cover the ongoing costs of operations and the service providers profit margin
Time and materials contracts are another option but are not recommended. One of the negatives with this type of contract is the unknown. The service provider could increase time and material costs without the knowledge of the contract holder or being held accountable for a budget
Unit-pricing contracts, also referred to as hourly rate contracts, are a combination of reimbursable expenses plus fixed labor rates.
The specific approach to managing facility risks varies depending on the size and scope of the facilities. The most visible part of facility risk is the day-to-day operation. Managers outsourcing maintenance services need to review key areas of potential risk:
Data. Managers need to decide what system to use to capture work history data — the contractor’s maintenance management software or the software used in-house? Maintaining accurate records is one of the toughest facility management challenges, and it’s one of the most important aspects of ensuring that data is available when needed. Who is responsible for validating the information? If and when the contract with the service provider expires , which party owns the transactional history? If the contractor is using its software, managers need to create a system to audit the services and maintenance work done to ensure that everything is being properly maintained and the department can track services performed, materials used, and labor utilization, among other items.
Environmental. Assuring that the contractor is compliant with federal, state, and local environmental and safety laws. The department needs policies, procedures and audits in place to ensure compliance.
Equipment. Managing equipment to minimize risk involves three key considerations: operation, storage and maintenance. Using specialized equipment can cause risk not only to the operator but those around. Contractors must provide documentation that equipment operators are trained and qualified to operate the equipment. Storage of the equipment, such as heavy equipment needs to be secure so no unauthorized operation can occur. The equipment also must be maintained. Typically, this duty is the responsibility of the contractor.
Liability. Insurance, specifically liability insurance, is critical to protect the organization and the contractor.
Outsourcing: How To Select the 'Right' Vendor