Research Group: Businesses Must Change How They Evaluate OutsourcersResearch Group: Businesses Must Change How They Evaluate Outsourcers

The tried-and-true ways that IT departments have used to evaluate vendors doesn't hold water in today's specialized, outsource-intense environment, research firm Yankee Group says in a report issued Wednesday.

"Application and business-process service vendors are becoming more vertical and increasingly specialized," says Carrie Lewis, a Yankee Group senior analyst and the author of the report. This should be reflected in how business decision makers evaluate vendors and result in a shift to a new set of evaluation criteria and metrics.

Traditional evaluation focuses on the vendor, Lewis writes in "The New Rules Of Due Diligence" report, and includes criteria such as the vendor's financial viability, its track record, and the scalability and reliability of its technology. But with specialization that outsourcing brings to the table, along with such elements as offshore delivery of services and a wider range of vendors to choose from, those measurements aren't enough.

The most important new criteria, Lewis says, is to gauge the vendor's knowledge of both the buyer's specific industry and its business processes and practices. At a minimum, the vendor should have forecasts of industry growth and have a handle on important regulatory issues. Knowledge of "industry regulations is a telling factor about what a vendor knows of the industry," she says. "That's one way to test their knowledge of the industry."

Health-care providers, for instance, should query a vendor on the impact of the Health Insurance Portability and Accountability Act. Credible vendors should also be aware of upcoming or pending regulations to demonstrate their grasp of the industry.

Other new metrics companies should use to determine a vendor's suitability include market share and proof of delivery, the report says.

Vendors that own the lion's share of a vertical outsourcing market bring more to the table than just economies of scale. They also typically lead the market in setting standards, crucial for long-term viability of any solution, Lewis says.

"As processes get more vertical, vendors are going to have a greater share of that market," she says. "And the more important the business process you're thinking of outsourcing, the more important market share becomes. You don't want to outsource to someone who may or may not be around in three to five years."

Proof of delivery should also be on any company's checklist as it evaluates vendors. "They should be able to do a simulation ... here's how it's going to go ... in a lab setting," Lewis says.

The days of simply profiling customers' solutions are over, she notes, because delivering services is becoming more complex, with offshore outsourcing growing. "The risk is higher when a vendor uses an offshore solution," Lewis says, making it even more important that companies get a demonstration from a vendor.

"The big issue is to look beyond the vendor," Lewis says. "Enterprises must make sure that the vendor has expertise in their market, and, in order to do that, companies have to include some new metrics in the process."