A recent report from U of T, Georgia Southern, the Cranfield School of Management, and the IACCM titled on Unpacking Oliver: Ten Lessons to Improve Collaborative Outsourcing that was based on the Nobel Prize winning work of Oliver Williamson had ten great tips for successful outsourcing. The following five are particularly relevant:
- Outsourcing is a continuum, not a destination
To Outsource or Not to Outsource is an eternal question that never has a final “yes” or “no” answer. It’s a never ending trade-off of cost, quality, risk, and value. The best answer today might not be the answer tomorrow and probably won’t be the best answer in five years. It’s a constant re-evaluation.
- Understand the transaction attributes and their impact on risk and price There’s product cost — which is a composition of raw material, labour, and overheads, transportation cost, import and export costs, storage costs, losses due to transit times, disruption costs associated with higher or lower risks, and so on. Any decision that increases or decreases one of these costs will likely increase or decrease risk.
- Use a contract as a framework – not a legal weapon
Contracts don’t have the same meaning in many countries as they have in the US or the UK. In many countries, the relationship means a lot more than the contract, which only serves to define an outline of the responsibilities of both parties.
- Your style of contracting matters; be credible
If you use “muscle” for a quick win, you’ll lose in the long term as the supplier will not be inclined to go beyond the minimum requirements of the agreement.
- Build trust; leave money on the table
Good faith will go a long way to insuring that the supplier not only adheres to the agreement, but works with you to find new ways to save cost and go beyond the mandated service levels.
For a summary of the other five tips, see this great summary over on Supply Chain Brain.
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You can follow the advice in the HBR article that outlines some things you can do when you’ve got to cut costs, but only if you do it very carefully. In short, the practical guide to reducing overhead offers up six tips that will reduce your costs, but only if implemented properly as a couple of them will actually increase costs if implemented incorrectly. This post will discuss the six cost savings ideas offered up by the article and the right way to go about them.
- Consolidate Incidentals
By the time cost-cutting becomes a must, the company has already done away with most discretionary spending and non-critical perks and activities and further cuts would be difficult, if not dangerous. (Such as slashing the training budget when you need highly capable staff.) In this situation, look for further savings through the consolidation of incidental spending. For example, hold training events and trade shows on the same day(s) and cross-schedule the use of outside resources across departments.
- Take Overdue Personnel Actions
Restructure the jobs of any individuals who are not fully engaged, confront under-performers, and eliminate the dead-weight or problem personnel. Be careful not to overburden already fully engaged resources, assign responsibilities that the resource isn’t trained for, or eliminate too many positions at once. Not only can each of these actions can cause resentment, but the latter can have those who remain fearing for their job security and looking elsewhere.
- Reduce Spending on Department Management
Many administrative departments will use as much as 20% of their budgets on supervision and coordination. If staff are competent and capable, and if responsibilities haven’t changed much in a year, supervision and coordination is probably costing more than it’s saving. In this case, supervision can be reduced by at least 10%, if not more. Just be careful to appropriately re-assign duties or confusion will set in.
- Gain Control of “Miscellaneous” Spending
Given that even the best organizations tend to max out at 75% to 80% of Spend Under Management, it’s almost always possible to find 15% to 20% of spending that hasn’t been managed closely which is ripe with savings opportunities. It could be supplies, telecom, or electronics devices.
- Hold Down Pay Increases
Specifically, limit pay increases to top performers and award additional compensation based on performance, giving the top performers the bigger cut. Cutting pay increases across the board or eliminating bonuses will alienate top performers, the 20% of staff who are responsible for 80% of the bottom line contribution.
- Repropose Rejected Cost-Savings Ideas
Chances are that a number of good cost savings ideas were rejected over the past few years because of constraints, other priorities, or required investment. Review them and select those with a short-term ROI.
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