In a third example, a proxy bid helped a global mobile service provider quickly assess — and reject — an unsolicited bid for IT services from a large service provider. At first glance, the proposal looked compelling, and the executive team instructed the IT department to initiate negotiations with the aim of quickly signing a contract to benefit from the substantial cost savings offered. However, Compass' analysis revealed that the service provider's proposed pricing was in fact higher than prevailing market rates, and that a portion of the services being provided by the in-house support group were outside the scope of the service provider's proposal — an omission that would have resulted in even higher fees after the contract was signed. Following these results, the executive team rejected the unsolicited bid and issued an RFP that paid particular attention to a detailed service scope description. Compass reviewed subsequent bids from four service providers, analyzed the proposed service scope and pricing, and provided the customer with both the prevailing market pricing for the services and the costs a best-performing internal operation would incur to deliver a similar set of services.

The former enabled the customer to evaluate the financial proposals in comparison with other outsourcing contracts; the latter provided an understanding of the underlying costs of delivering the services. With these insights, the organization successfully negotiated a contract that offered long-term financial savings for the service provider and a reasonable profit potential for the service provider. So, in this instance, the proxy bid helped the service provider stay out of a bad deal, and also defined the key elements of a successful long-term sourcing strategy.

The growing popularity of the proxy bid methodology reflects the fact that customers are getting better at analyzing their internal operations and their sourcing requirements to determine what should be outsourced and what should be kept in-house. As these capabilities improve, clients have shown willingness to invest in building internal sourcing management capabilities and to assume their share of responsibility for an outsourcing relationship's success or failure. At the same time, they're less prone to simply handing operations off to a third party. So, in a sense, the proxy bid is an example of this increasingly hands-on approach on the part of buyer.

From a strategic perspective, the proxy bid can help the parties get beyond micromanaging prices and allow them to examine the big picture of the relationship. By easing much of the effort required to develop the RFP and negotiate specific terms, the customer and service provider have more time to focus on the key governance issues that define the outsourcing relationship, such as service issues, process management and organizational alignment.