Monthly Archives: June 2011

Outsourcing is More Than Throwing It Over the Wall

While outsourcing may be on the rise, it’s still not the holy grail of cost savings. The number of companies that bundled two more or more core F&A processes into an outsourcing deal may have doubled in 2010 (as compared to 2009), but it’s still no reason to rush into one. Even if it is, on the surface, getting cheaper (as the average contract value appears to have shrunk almost 40% since 2004), it will not necessarily save you money. First of all, there has to be money to save. If the organization has a global services unit that is best in class in a process, the organization is not going to save much by outsourcing. Maybe a few percentage points if the organization contracts to a best in class outsource provider that can leverage economies of scale, but that’s it. It is hardly worth the risk of losing the knowledge. Secondly, and this is the usual reality, if the process is broke, throwing it over the wall is not going to gain any efficiencies or savings, at least in the long term.

A recent article in CFO Magazine on how outsourcing matures, slowly did a great job of making this point with a quote from Mark Satchel of Skandia, a European investment firm that signed a 175 million dollar multi-year outsourcing deal with HCL Technologies. Skandia hired HCL to develop applications and manage the infrastructure of Skandia’s legacy systems, and absorb 250 of Skandia’s IT employees in the process. While it probably sounded great on paper, as it likely would have taken at least 25 Million in fixed recurring costs off the books, as well as the huge headache of managing legacy systems, which is something an investment firm wouldn’t be an expert in (or want to do), it was a poor decision.

Not only does such a deal “result in a great deal of inflexibility”, as Mark Satchel noted, but it doesn’t address the core issue. The reason that Skandia needed so many IT employees and a sophisticated data warehuse was because it was running on legacy systems. Skandia should have first modernized its systems and processes and then thrown it over the wall. Then, instead of having to go back and renegotate the outsourcing deal to contain the flexibility it needed to serve the “peaks and troughs” of its needs, including the need to update systems, it would have negotiated the right deal the first time. (And “the right deal” would have been considerably less as it’s a lot more cost effective to support new systems than legacy ones.) And Mark would have spent a lot less time wondering whether the gain on one side is lost on the other.

So before you throw that process over the wall, ask yourself:

  1. Is the process (and supporting technology) ready for outsourcing?
    If it’s not, fix the proces (and / or update the supporting technology) first.
  2. What can I reasonably expect to save by outsourcing?
    If only a few percentage points, it’s probably not worth it. If over 10%, then it’s definitely worth pursuing.
  3. What could happen and what flexibility do I need in the agreement to insure I don’t get caught holding the hot potato?
    Flexibile staffing? Variable throughput levels (because more invoices have to be processed over the holidays, for example)? The ability to include additional resources for system updates or replacements at pre-defined costs?

If you do, you’ll be better off.

If You Think Social Media Will Solve Your Problems

Then I’d like to sell you some plans for a cold fusion reactor to solve all of your energy needs! At only $999,995, it’s a steal!

But, in all seroiusness, no business in the world should want a social media expert on their team because being an expert in social media is like being an expert at taking the bread out of the refrigerator. It’s easy. The hard part is pulling a scooby and shaggy and making an amazing sandwich with that bread. And you can’t do that if all you’ve ever done is take the bread out of the refrigerator.

The reality is that social media is just another facet of marketing and customer service and IT’S STILL ABOUT GENERATING REVENUE THROUGH SOLID MARKETING AND STELLAR CUSTOMER SERVICE, JUST LIKE IT’S BEEN SINCE THE BEGINNING OF TIME.

Thank you, Peter Shankman for this wonderful article on why I will never, ever hire a “social media expert”! Thank you, Thank you, Thank you. Thank you!

Facebook is not worth 100 Billion. There’s no revenue in poking, prodding, tagging, flagging, and flailing around with a thousand people you never met. And Twitter certainly isn’t worth almost 10 Billion either. I don’t care that you thought that new spicy foods restaurant on the corner was the greatest ever until you ended up with food poisoning and spent the night worshipping the porcelain alter (which you described in glory detail, 140 characters at a time). Anyone who thinks these sites are worth billions is a nutjob still throwing off his clothes and running naked in the rain, waving his hands in the air, sure that this time it’ll be different, because this time it’s better! A whacko. A total loon.

And anyone who thinks you need a “Social Media Expert” to understand Facebook, Twitter, GroupOn, etc. is just as crazy. We should listen to Douglas Adams, round them all up, along with the wall street executives, politicians, and paper-pushing middle managers, and send them away on a spaceship just like the Golgafrinchans did. We’d be better off for it if we did. (Except we’ll learn their lesson and keep the “telephone sanitizers” because, let’s face it, some guys just won’t scrub their own telephones. [If you don’t get why, brush up on the history of the term.])

In the mean time, SI will never be hiring a “social media expert” either. And you should really, really check out Peter Shankman‘s wonderful article on why I will never, ever hire a “social media expert”! It made my day.

The Best Argument for Making Your Data Available Online 24/7

If your data isn’t immediately accessible online, either behind your firewall or behind someone else’s firewall or in the cloud, when your employees need it, then they are going to download it to their machines. If their machine is a laptop, and the data is not securely encrypted, and the laptop is stolen, then, as per this ZoneAlarm Blog Entry from earlier this year, it could cost your organization 1 Million (or more). (And even if the data is encrypted, and it’s valuable enough, someone will invest the time in breaking the encryption.)

But if your data is always available, and, better yet, the applications that do the processing reside on the servers the data is on, then your employees and contractors won’t need to download it to their laptops to process it. And you can even implement safeguards to prevent such. Then, when the laptop gets stolen, your loss will be the replacement cost and a minimal lost productivity cost (as you can replace it in hours), which will max out at a few thousand. Compare this to the situation where you have data breaches, IP loss, and forensics and investigation costs which can be 10, 100, or even 1000 times the replacement and lost productivity costs.

So encrypt your data, put it on a VPN behind a firewall, and make it available 24/7. It will be much cheaper, and safer, than having it unencrpyted on your employees’ laptops which will, inevitably, get stolen despite their best efforts to protect them.

Four Good and One Bad Suggestion For Preparing Your Supply Chain for Volatility

A recent article over on ChiefExecutive.net on Volatility: Predictions and Prescriptions presented five suggestions for dealing with the current market volatility that guarantees both minor and massive disruptions will continue to occur on a global scale, impacting your supply chain(s) to various degrees as they occur. Four of them were quite good. One wasn’t. Since it is important for a supply management organization to face the reality of increased volatility and plan for it to mitigate its risk, this post will review the suggestions presented in the article. Disruptions are going to happen. The only unknown is how bad the disruption will be. Since a disruption is always worse for an unprepared organization, it’s important that an organization do everything it can to be prepared.

The organization should start by:

  1. Expecting Disruptions
    They’re going to happen. Some you will predict. Some you won’t. The more flexible the organization is, the more capable it will be in dealing with the disruption. Plus, an organization that expects to be disrupted won’t be shocked by a disruption and won’t have the additional disruption of having to deal with the emotional impact of not being prepared for the initial disruption.
  2. Feeling the Malaise
    An organization that expects disruptions will, at first, feel uneasy and weary knowing that at least some of its best laid plans will come to ruin. But once the organization gets used to the feeling, and begins to savor it, the preparedness will save the organization in its hour of need because the disruption won’t seem so bad.

The the organization should take heed of the following four suggestions:

  1. Simulate Scenarios
    Once the organization expects disruptions, it can “game plan” how to deal with them. It can identify the different kinds of disruptions that can occur and scope out a sequence of responses to each. And although some disruptions can never be anticipated and “game planned”, if similar disruptions have been addressed, the organization will have a starting plan that should be workable with only a few minor tweaks.
  2. Diversify Geographies
    Many disruptions, such as natural disasters and political turmoil, are localized to a region or a country. A supply chain that multi-sources key products and services from different regions and countries should be in better shape to withstand a shock of a product no longer being available from a supplier in a certain region due to a natural disaster or political disturbance.
  3. Diversify Products and Services
    Not only should geographies be diversified, but so should raw materials, products, and services when applicable. Although the former will often be hard to diversify, as certain raw materials will not be substitutable, services are very easy to diversify and should be.
  4. Deleverage Balance Sheets
    While a leveraged supply chain can generate great returns in good markets, it can be downright risky in bad markets. In a volatile market, it is often safer to sacrifice some ROE in return for safer debt/equity ratios (or inventory/equity) over the longer term.

However, the organization should not listen to the fifth and final suggestion, which is downright destructive:

  1. Enable Rapid Downsizing
    Supply Management is getting more knowledge-intensive by the day and we’re in a serious talent crunch. The last thing you do is get rid of good people, especially those that can often generate savings of 10 to 100 times their annual salary on a single buy. While high fixed costs can be dangerous in times of reduced cash flow, it is much better to get rid of assets (and rent them back if you need to) then to get rid of good people.