Monthly Archives: June 2012

The Common Gotchas in Outsourcing are Well-Known, But Do You Know How to Handle Future Pricing?

The Outsourcing Center recently ran an article on the 5 “gotchas” when negotiating an outsourcing agreement that pretty much covered the same-old, same-old, when it noted that, if not carefully structured, the following five areas of an outsourcing agreement can not only drain value from your business case but decrease the probability of having a successful outcome. Specifically, without a good focus on the

  • Statement of Work (SoW),
  • Service Levels,
  • Delivery Locations,
  • Termination Language, and
  • Future Pricing

if things go bad, your agreement, and any value you expected to derive from it, can go to hell in a handbasket very, very fast. Why?

  • A poorly defined SOW can allow the service provider to take shortcuts and avoid doing intended responsibilities.
  • A poorly defined Service Levels agreement can result in worse, instead of better, customer service.
  • A poorly defined delivery locations clause can allow the provider to deliver from anywhere, and all of a sudden instead of being serviced from Poland, on CET, you’re being serviced from Nepal on NPT and you’ve just gone from UTC + 1:00 to UTC + 5:45 and forget about reaching anyone during a standard North American working day.
  • A poorly defined termination section can result in your inability to pull the plug if service gets bad.
  • And a poorly defined future pricing section that allows for year-over-year increases based on “labour rate increases” could have you taken to the cleaners if “labour rate increases” are not appropriately defined.

But in the future pricing discussion, the article did a great job of pointing out three specific areas you should look out for (and what you should do about them).

  • Year-over-Year Pricing
    In general, unless the service being provided is very labour intensive and requires highly skilled labour, prices should decrease. In a call center, average cost per resolution should decrease year-over-year. In a back-office processing outsourcing arrangement, the cost of processing an invoice should go down year-over-year. Etc. The provider should get more efficient over time and pass on some of those savings to you.
  • Cost of Living Allowance (COLA)
    If the agreement is long-term, it’s ridiculous to think that any provider will totally lock in pricing for services when labour rates are often unpredictable. You have to include a cost of living allowance. But you don’t have to make it almost discretionary. The COLA should be tied to a well-known and accepted government or public index (such as one provided by a major organization like the ISM), the specific services to which the COLA is permitted should be defined, and the percentage of the unit cost that is subject to COLA must be defined as well. (Remember, if you’re paying by invoiced processed, part of the processing costs are technological, and they should decrease year-over-year.)
  • Variance Pricing
    As the article notes, many outsourcing contracts contain variance pricing based on resource usage. An assumed number of resources are built into the annual price, and then adjustments are made up or down based on actual monthly usage. You need to watch how that will work for your organization. Some providers will start off with a lower base price to meet an initial price point or undercut the competition, but then have a relatively high additional resource charge (ARC rate) for more volume. The cost of additional resources should be flat in the worst case, and decrease if requirements increase considerably (as the profit margins the outsourcing provider should need to make should decrease with volume utilization).

So pay close attention to your future pricing unless you want your projected savings to turn into actual losses.

e-Procurement Systems are Great, but Let’s Not Confuse Transparency and Corruption

A recent Supply Management article (yes, Supply Management, how shocking) caught the doctor‘s eye when it said that EU nations should increase their adoption of e-Procurement to provide greater transparency and reduce the potential for purchasing processes to be corrupted. Bzzt. Adoption of e-Procurement will definitely increase transparency as all participants will be able to see what’s going on, but let’s not fool ourselves that it will reduce the potential for purchasing processes to be corrupted. It’s still easy for an individual to corrupt a process if he or she wants too, especially since most awards will be made on a weighted scorecard these days.

And since your first reaction is no, definitely not, because Provider XYZ told me that proper, full disclosure, implementation makes corruption almost impossible, after I tell you bullshit, I’m going to show you how easy it is to corrupt a process if the individual running is corrupt and wants to corrupt the process.

Let’s say you define a weighted scorecard as follows:

Metric Weighting
Cost Competitiveness 40%
Supplier Rating 20%
Product Rating 20%
Service Rating 20%

Let’s say you have suppliers Alpha, Beta, and Echo bidding. Let’s also say, after a preliminary, unconfirmed, analysis, you have the following rankings, which were supposed to be derived from a thorough evaluation based-upon a detailed check-list for each category, on a scale of 1 to 10:

  Alpha Beta Echo
Cost Competitiveness 9 8 7
Supplier Rating 8 9 7
Product Rating 8 7 6
Service Rating 7 7 6
Total 8.2 7.8 6.2

And let’s say that Echo has promised you a free Caribbean vacation (in exchanged for “speaking” at their annual meeting or whatever), some “on-the-side” (read “under-the-table”) consulting revenue, or whatever it takes for you to want them to win — and you want them to win. You can’t do anything, right? Wrong! You defined the scorecard, which, by the way, happens to have three categories where the metrics are very subjective. A few more nines here and there on the subjective metric sheets for Echo and a few less for Alpha and Beta, and, bingo, we have this table:

  Alpha Beta Echo
Cost Competitiveness 9 8 7
Supplier Rating 8 7 9
Product Rating 7 7 9
Service Rating 6 7 8
Total 7.8 7.4 8.0

Hello Echo! And don’t tell me that since the categories and weightings will be predefined, that the chances of there being enough room to manipulate any supplier to the top will be slim. If the buyer wants a certain supplier before the event beings, he can do an off-line assessment, figure out which metrics that supplier happens to be good in, and weight those particular metrics higher (after concocting appropriate rationalizations for long-term reliability being important for printer paper or whatever). The point is, the tool can only affect transparency. The only way to reduce corruption is to instill better processes that are harder to corrupt and the only way to get rid of it is to hire the incorruptibles. Get it now?

Can You Zig-Zag Your Way To the Top?

A recent article over on the ISM site on Moving Lateral to Move Up provides good food for thought on how to advance your Supply Management career and make your way to the C-suite. Taking into consideration that succeeding as a supply management professional means understanding how the complete supply chain works and how the systems all work together and that it is crucial to develop expertise and experience in purchasing, operations, logistics, material resource planning (MRP) applications, cost reduction, logistics and trade compliance if you want to work your way into the C-suite, the article suggests that one way to do this is to make a lateral move.

Specifically, it says that moving from director of procurement to director of planning may be a lateral move at the moment but will provide longer-term potential. Using the same logic, moving from director of planning to director of logistics and then from director of logistics to director of trade compliance will be a great boost to your supply management career and it won’t be long before you’re in the corner office. Right? Maybe. Maybe not. If you jump around from one director position to the other, you might find that you are pegged as a career middle manager (and the first on the list to board the B-Ark) because, if you had more potential, why didn’t you become a senior director or junior vice president. Experience, like education and knowledge, counts but so does career progression.

Now, if you moved from director of procurement to director of planning for a one year term to cover someone’s parental leave upon the request of a senior manager, as pointed out in the article, and then moved to a senior director of logistics, that would be a good thing. Management would see that you’re a team player, as you took over a role that needed to be filled, someone looking to expand their horizons, as you had three different roles, and, most importantly, someone who can progress up the corporate ladder.

But the article makes one good point, before you make a lateral move, you need to determine if it is the right one. So how do you do that? The advice the article gives can be condensed into the following check-list:

  • does it fit in with your long-term career goals,
  • are the skills and experienced valued by the organization(s) where you want to work,
  • has a senior leader in the company asked you to consider the role,
  • does the opportunity energize you, and
  • will you learn new skills.

And it’s definitely where you start, but don’t forget to ask

  • is it really the best option I have now,
  • have I been at the same level too long, and
  • what is my exit strategy?

the doctor believes that it is possible to quickly zig-zag your way up the corporate ladder, but only if you are really serious and smart about it. Not all lateral opportunities will be right, and staying at the same level too long could be used against you. It’s a balancing act, so be sure to take out the scales.

If You Really Want Diversity, Hire People Who Embrace It

Flipping over to the eSide, we see that it recently ran an interesting article on Getting Supplier Diversity Going — From the Middle Up that presented a number of good low-cost suggestions for kicking a diversity program into gear. These suggestions included:

  • Volunteering to Speak at Supplier Diversity/Training Events
    and hoping that someone sees your initiative
  • Creating a Supplier Diversity Brochure to be Distributed Throughout your Company
    and those who like to read such company material will start to tune into the issue
  • Creating a Diversity Council
    that has quarterly meetings to discuss the issue and people will show up (especially if it means avoiding other work or free food)
  • Getting Senior Management to Speak at Your Supplier Diversity Training Events
    and if management conveys sincere support for the effort, employees serious about staying with the company for a while will start to listen
  • Inviting A Diverse Supplier to Showcase Its Products at Your Facility during lunch
    and those who are bored, hungry, or friends with the rep will show up and take note
  • Having a Government Training Event at Your Facility
    and … oops, sorry, this is only going to bring you good press … there usually isn’t as much respect for the public sector as you’d like to think in private organizations
  • Hosting a Supplier Diversity Luncheon
    with multiple suppliers, kicking the showcase up a notch and taking it to the next level
  • Creating an Annual Diversity Recognition Event for Supply Management Professionals
    and watching as our egos work to your advantage
  • Sponsoring a Diverse Supplier’s Attendance at a Local or National Training Event
    and having them rally for your cause (in the hopes they’ll be invited again)
  • Coordinating a quarterly raffle
    and … oops, this is borderline bribery and not in the best interest of the organization if an award is made to a supplier who does not provide the best value to the organization just so that the Supply Manager can get a free ticket or ten (as you should really only award to a diverse supplier if such supplier can bring the best value, or if there’s a tie and one supplier is diverse and one is not)

By now you probably think the doctor was being sarcastic when he said that the article presented a number of good low-cost suggestions for kicking a diversity program into gear. Even though he ripped on all of them, eight out of ten of the ideas are good. The problem is not the ideas. The problem is your people. In today’s economy, people are generally overworked, underpaid, and barraged with new initiatives all the time, most of which require time and effort they just don’t have. As a result, their first reaction to anything new is “uh-oh!”. On top of this, you have the problem that this is a sensitive issue that has to be addressed lightly and the potential problem that some people in our society still don’t want, or even like, diversity.

The reality is that if you don’t have people in your organization that are at least open to diversity, they’re not going to embrace any initiative you throw at them, no matter how many of the eight great ideas above you throw at them. (For the record, except for the government training event, that could backfire, and the raffle, that sounds like bribery, the doctor thinks the rest are great.) Even if they’re overworked, or lazy (which is another problem in today’s workplace), if organizational talent is open to diversity, a good diversity initiative will bring them out of their shell and such a program will generate, with effort, some amazing results. But if your organizational talent is not open to diversity, you can, as they say, try until the cows come home and not get any results, or, even worse, if your organization is full of backwoods types that don’t like diversity and change, generate hostile resentment to the initiative. So make sure any effort you undertake starts with HR. HR really has to get it right.