Selecting the right IT vendor is critical to the success of your outsourcing initiative. The right vendor can provide your business access to specialized skills, improved service efficiency, and reduced costs.

However, choosing the wrong vendor can result in subpar service quality, missed deadlines, and runaway costs. 

Let's walk you through the best practices for selecting IT vendors — from defining vendor requirements to negotiating contracts and setting out beneficial working relationships.

Other articles in the IT Outsourcing 101 series: 

• Which IT services should be outsourced?
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• Managing vendor relationships
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• How to achieve best practices in your IT services
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• Measuring vendor performance and giving feedback

What is IT outsourcing? 

IT outsourcing is a strategic business practice where a company partners with a third-party service provider to manage its IT functions and services. These may include software development, network infrastructure management, data center operations, IT support, cyber security, and other related activities. 

The primary objective of outsourcing IT services is to streamline business processes, reduce operational costs, and gain access to specialized IT expertise. It allows organizations to focus on core competencies while leveraging the capabilities of external vendors (also called a best-of-breed approach) to improve their service delivery and maintain a competitive advantage.

Understanding your use cases 

Almost every enterprise company outsources some IT services in an effort to control costs, gain access to specialized expertise, increase service efficiency, and focus on its core business. However, deciding exactly which IT service should be outsourced is a critical business decision that requires careful consideration. 

Understanding your own use cases and IT bottlenecks is the first step in selecting an IT vendor, as it will greatly narrow down the number of providers you need to consider. For example, if managing cloud infrastructure is your biggest bottleneck, you may want to start your outsourcing journey by selecting a cloud service provider for that need. On the other hand, if cybersecurity or help desk support are your primary bottlenecks, you’d start with those. 

One of the main draw-cards of a multi-sourcing approach to developing your IT offering is that you can choose a specialized vendor that is literally the "best-of-breed" in their chosen field. In other words, it’s all about finding the best possible vendor for each specific use case.

Defining vendor requirements 

The next step in selecting the right IT vendor for your organization is defining the requirements of said vendor. It sounds obvious (and in a way, it is) but having a systematic approach to defining your requirements will set you up for success the further down the vendor selection process you go. 

When defining vendor requirements, four of the most important considerations are:

1. Service Level Agreements (SLAs) 
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2. Vendor expertise 
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3. Scalability 
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4. Vendor Location 

Service Level Agreements (SLAs)

Service level agreements (SLAs) are the backbone of any outsourcing relationship. SLAs define the level of service that the IT vendor is expected to deliver and the consequences if they fail to meet those expectations. The SLAs should be well-defined, measurable, and achievable. When outsourcing IT services, you must ensure that the IT vendor's SLAs align with your business requirements.

Choosing an IT vendor with inadequate SLAs can lead to a frustrating and unproductive outsourcing relationship, leaving you with unplanned downtime and costly repercussions. On the other hand, choosing a vendor with clear and comprehensive SLAs will help to ensure that your outsourcing experience is positive and productive.

Vendor expertise

The vendor’s expertise is another critical factor to consider when selecting an IT vendor. The vendor you choose should have a team of experts with relevant experience and knowledge of your industry. This will ensure that they understand your unique business needs and can deliver services that meet those needs.

Choosing an IT vendor without the right expertise can lead to delays, mistakes, and miscommunication. Conversely, partnering with a vendor that has the right expertise can help streamline operations and lead to more efficient outcomes.

Scalability

“Scalability” refers to the IT vendor's ability to expand or reduce services based on your business needs. When selecting an IT vendor, you need to consider whether they have the capability to scale their services to accommodate your changing needs.

Partnering with a vendor that cannot scale their services can lead to costly downtime, delays, and missed opportunities. Conversely, selecting a vendor that can adapt to your changing business needs will ensure that your outsourcing experience is positive and productive.

Vendor location

A vendor’s location is another essential factor to consider when selecting an IT vendor. While outsourcing IT services to a vendor in a different location may provide cost savings, it may also create communication and logistical challenges.

Choosing an IT vendor that is located close to your business can help reduce these challenges and improve communication and collaboration. This, in turn, can help ensure that your outsourcing experience is productive and successful.

Risks involved in vendor selection 

Outsourcing some or all of your IT services to an external vendor naturally comes with a degree of risk. However, a high-quality vendor will bring benefits that significantly outweigh the potential negatives and will do their best to reduce the risk to your business as a customer through the quality of their work, their performance, and meeting or exceeding their contractual obligations. 

In this section, we’ll talk a little bit about those three risk areas: quality risks, performance risks, and contractual risks – and what you can do to mitigate them. 

Quality risk

“Quality risk” is one of the most significant risks to any business outsourcing to an external supplier. If a vendor does not deliver quality services or products, it can lead to various problems for your business, including decreased productivity and dissatisfied customers. 

At the end of the day, you’re responsible for the orchestration of all services that make up the delivery of the product/service your business sells, regardless of whether it’s in-house or outsourced.  Your customers aren’t concerned with who performs your IT services—only whether the service or product they pay you for is delivered. 

Low service quality from an IT provider can, therefore, negatively impact a business's reputation, resulting in lost opportunities for new business and even loss of current business. 

To mitigate quality risks, it’s important to conduct extensive research before selecting a vendor. Check their reputation within their own IT niche and review their portfolio and testimonials from past clients. Additionally, ensure that you have clearly defined service level agreements (SLAs) that outline the expected quality of services, the measures taken in case of unsatisfactory service, and the vendor's responsibilities and obligations.

Performance risk

Another significant risk in vendor selection is performance risk. If the vendor fails to deliver their services on time or with consistent quality, it can cause significant disruptions to business operations, leading to financial losses and decreased productivity. Performance issues may also cause a delay in product releases or software updates, which can negatively impact customer experience.

So how can you avoid performance risks? Firstly, ensure that the vendor has the necessary expertise and particularly resources to meet your business needs. Evaluate their performance history, including their ability to meet project deadlines and the quality of their work. Also, establish clear expectations for project timelines, including deadlines and milestones, to monitor the vendor's performance.

Contractual risk

The contractual risks associated with selecting the wrong vendor can have far-reaching consequences. For instance, if the vendor fails to meet contractual obligations, it can result in legal disputes and significant financial losses. Some vendors may use complex contractual terms or limit their liability, which can leave businesses vulnerable to significant risks.

To avoid contractual risks, businesses should carefully review the vendor's contracts and terms before signing them. Additionally, ensure that the contracts are written in plain language and are easy to understand. Have an attorney review the contracts before signing them to ensure that your business interests are adequately protected.

As you can see, it’s essential to identify and mitigate the potential risks involved in vendor selection to ensure that the vendor selected can deliver the services you expect at the quality they promise. By being aware of the risks and taking appropriate measures to mitigate them before the work commences, you can minimize (to the best of your ability) the risks of vendor selection and enjoy a successful outsourcing engagement.

Evaluating vendor proposals

Great! So you’ve done your due diligence in defining your vendor requirements, become aware of the potential risks involved when selecting vendors, and now it’s time to position those proposals side-by-side and make the final decision. 

Systematically evaluating proposals is an essential step in selecting the right IT vendor for your business. Technical capabilities, cost, references and testimonials, and vendor responsiveness are crucial factors to consider when evaluating vendor proposals. By taking the time to evaluate vendor proposals thoroughly, and ask clarifying questions at every stage, you can ensure that you select a vendor that is the right fit for your business.

Technical capabilities

When evaluating vendor proposals, it is crucial to assess their technical capabilities—can they walk the proverbial walk and deliver the high-quality IT services you require? Check their experience, skills, and certifications, and ensure that they have a track record of delivering similar IT projects successfully. Also, ensure that their technology stack aligns with your business needs and that they have the necessary infrastructure to integrate with and support your business operations.

Some technical certifications and partnerships you can look out for when selecting a vendor include: 

• Microsoft Partner status 
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• AWS Partner status
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• Google Partner status
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• Microsoft Cloud certifications 
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• AWS Certifications 
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• Google Cloud certification 
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• Partnerships with other service providers 
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• Memberships to industry associations

Cost

Naturally, the cost is one of the main considerations when evaluating vendor proposals. The vendor's proposal should provide a clear and transparent breakdown of the costs involved in the project. You want to ensure that you are getting value for your money and that there are no hidden costs or fees. Another important cost to define is overtime, or out-of-hours requests, as these may be priced differently. 

You may want to be wary of vendors who offer significantly lower prices than others in a similar geographical area. Low pricing may indicate that they could be cutting corners and are not able to deliver the quality of work you expect, or that their business is unprofitable and at risk. 

References and testimonials

Before selecting a vendor, check their references and testimonials. Not only the ones on their website, either. Some other places you can search for reviews or testimonials are: 

• G2 
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• Capterra 
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• Glassdoor (for the employee perspective) 
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• LinkedIn or your personal industry network

You could also ask the vendor to connect you for a call with a current and previous customer to discuss their experience. 

A thorough review of references and testimonials will give you an idea of the vendor's capabilities, work ethics, and their ability to deliver quality IT services.

Vendor responsiveness

“Vendor responsiveness” is another crucial factor to consider when evaluating vendor proposals. The vendor's response time and communication style can impact your business operations. Ensure that the vendor is responsive and communicates effectively throughout the sales process, as it’s a good sign of continuing responsiveness throughout the project or cooperation. 

Negotiating contracts with IT vendors 

The goal of contract negotiations is to create a win-win situation for both you and the vendor. You want the best deal possible and a positive relationship with the IT vendor, and the vendor wants a profitable, long-term relationship that’s enjoyable for both parties. It doesn’t have to be a battle, but a conversation about the best way forward for everyone. 

Depending on the size of the IT service provider, they may or may not have a legal team run the contract process. In larger firms, you will most likely work with your contact person and potentially a member of their legal team. In smaller firms, contract negotiations may be handled by a member of the management team or a team lead. 

In general, best practices for negotiating contracts are the same no matter the type of service provider. In other words: set expectations early on, get contracts water-tight, and always have an out.


In a few steps, here’s what to make sure you have squared away in the contract negotiation phase.
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• Outline the collaboration/communication expectations
  Communication is key to successful relationships, and outsourcing relationships are no different. Establishing clear communication channels and expectations at the outset can help prevent misunderstandings and conflicts down the line. Both parties should agree on the frequency and methods of communication, and establish who will be responsible for various tasks. One way of ensuring seamless communication is to integrate the service provider’s tools and systems (like help-desk or ITSM software) and those of your own IT teams. As an enterprise, you may need to oversee the services of several IT service providers, which means integration is key to smooth and worry-free collaboration. For more on multi-vendor management, you can find a download link to our free guide at the end of this post. 
  
  
• Define deliverables and deadlines
  Both parties should agree on the scope of work, timelines, and quality standards. The contract should include a detailed description of the services to be provided, along with clear deliverables and deadlines.
  
  
• Establish payment terms
  Payment terms should be clearly defined in the contract, including the payment schedule, methods of payment, and any penalties for late payments.
  
  
• Define exit strategies
  Sometimes, things just don’t work out. Businesses should establish clear exit strategies in case the relationship with the IT vendor does not work out as planned. The contract should include provisions for terminating the contract early, as well as provisions for transitioning to a new IT vendor.

Conclusion

Outsourcing IT services is a smart move for companies looking to streamline operations, save costs, and tap into specialized knowledge. However, it's crucial to pick the right IT vendor for a successful partnership. This involves clearly defining vendor requirements, such as SLAs, expertise, scalability, and location. 

Of course, outsourcing IT services does come with some risks, such as quality, performance, and contractual issues, but these can be minimized through careful vendor selection, transparent SLAs, and ongoing performance monitoring. 

Ultimately, outsourcing IT services is a major business decision with the potential for big payoffs, but finding the perfect vendor is key to unlocking those rewards.

Further reading: Everything you need to know about Multi-Vendor Management

For an in-depth look into managing multiple IT service providers and creating a truly collaborative IT service ecosystem that scales with your business, download our latest guide today. 
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