Category Archives: Outsourcing

Procurement Trend 05. Return to Regional and Local Sourcing

Just two very trying anti-trends remain. We’re one post away from fearlessly finishing our formidable burden, but the sour taste in our mouths still remains as we must continue to provide those factually-challenged futurists with counter-examples to the trends of their forerunners who saw this coming a decade ago. (Check the very early SI archives if you don’t believe me. Go ahead. Check. This post will still be here.) We want to abash them for their apathy, but we will leave their hard-earned humiliation for LOLCat, who wants to point out to these Rip van Winkles that when it comes to sleeping through life, No One Out-sleeps a Cat!

So why do these garbage hauling patrons of Quark keep pushing us trends from their flights of fantasy? Besides the fact that some of them obviously spent the best part of last decade hauling garbage, it’s probably because they look around, see the laggard organizations still struggling with the insourcing/outsourcing balance, and assume they can still sell last decade’s leftover snake oil in today’s marketplace. Thus, if most organizations are losing hand over fist in their outsourcing arrangements, maybe it’s time to pull them back, especially if

  • energy, and thus transportation, costs are going higher and higher
    and since oil, natural gas, and coal reserves ARE limited, and the dwindling supplies that remain are getting harder to extract, cost have nowhere to go but up, up, and away
  • labour costs are rising in emerging and emergent markets
    and the faster they emerge, the faster labour costs increase
  • nearby markets have low transportation costs and high automation can
    contain labour costs

    since the shorter the distance, the less energy required to cover the distance; plus, intelligent automation decreases the amount of manual labour required to product any product

So what does this mean?

Understand the Total Cost of Outsourcing

Remember, it’s not just landed cost (unit cost and transportation cost), it’s also import/export costs, communication and remote management costs, on-site visits, liability costs, return costs, and other related costs. If many of these costs are rising, then outsourcing is probably not the right idea. If only one or two of these costs are rising then it depends how much, and how fast, and what the alternatives are.

Understand the True Opportunity in Near-sourcing / Insourcing

Near-sourcing will have many of the same costs, but transportation, remote management, and return costs will often be lower. Plus, if you pick/invest in a more advanced plant with newer automation technology, the higher labour costs are probably negated by the lower overhead costs, and the opportunity costs that are often lost waiting for delayed shipments, prototypes to land in your hands for testing, and emergency issue-resolution sessions (across time-zones 8 to 12 hours apart) are often minimized as well. However, a lack of automation can result in significantly higher labour costs, a lack of appropriate trade agreements with respect to the products being purchases can result in higher import or export fees, and energy costs could be higher as well (if renewables don’t enter the equation). The whole cost model has to be evaluated (and compared to the whole cost model associated with outsourcing).

And make a decision based upon true (future) costs

One should never make an insourcing, near-sourcing, or outsourcing decision on today’s costs – make it on expected costs over the next five years. Use the market data that you are collecting for market trend analysis and predictive analytics to figure out what the costs are going to be over the next five years and then choose the optimal production strategy based upon the amortized five-year cost. Consider the hard and soft costs associated with relocating production and/or services, making a change for a very short term gain will not result in any savings being realized. Do the math and make the right choice.

Procurement Trend #19. Service Providers Excel

Sixteen anti-trends still remain but we again assure you that we are getting to the end of the series and all is ok as LOLCat is still dreaming of his grandfather’s adventures as an archaeologist cat uncovering lost tombs, and waiting for this series that is regurgitating topics of his past lives to fade into history. We will continue to lay bare each and every one of the futurists’ lies, and when we’re done, you’ll be in a better position to learn the truth and seize upon the real trends that lie ahead and the opportunities they contain.

So why do the historians keep pegging service providers excelling as a future trend? Have they spent too much time in the janitors’ closets breathing paint fumes from improperly sealed paint cans while practicing their speeches that no one really wants to hear? Hard to say, but some of the reasons probably include:

  • Outsourced Services are still improving

    in both traditional Business Processing Outsourcing (BPO) and non-traditional service sectors.

  • Service Providers are mastering tech faster than their clients

    and often get a lot more experience with a platform in a shorter time frame as they are running projects for multiple clients on that platform.

  • Everything is going out

    because overpriced overly-optimistic consultants have strapped themselves to the outsourcing bandwagon in an effort to make sure that they never fall off.

So what does this mean?

Outsourced Services

Service Providers can often do things better than you, but if they do, you need to adapt or lose control. You don’t want to lose control, because one of your jobs is Supplier Relationship Management. However, at some point during the adaptation, you will, if you are doing it right, become better at managing the process than the outsourced provider, but you will still be locked into a multi-year service agreement. So you will have to transition from learning through managing through teaching. And once the service providers masters your teachings, as they will have more opportunity to practice and perfect, they will again get better than you and the cycle of the student becoming the master and the master becoming the student will continue.

Technology Progression in the Outside World

While this is one of the reasons that service providers outpace you, this is a great learning opportunity for you. Most companies don’t pick the right technology the first time around — and instead implement expensive systems in even more expensive projects that turn out to be massive failures. Then they learn from their mistakes, implement the right technology, and provide you a free lesson on what works if your processes match theirs if you choose to seek it out and learn from it.

Out, Out, and Away

Because your managers are still living two decades in the past where cost reduction was defined as outsourcing, you can, unfortunately, expect more pressure in the organization to not only outsource your tactical work, but to outsource as much tactical work for other departments in the organization as can possibly be outsourced. So you need to either prepare for this, or build the business case as to why the work should stay in and how keeping it in house will either deliver savings or add value.

Procurement Trend #25: More Stakeholder Collaboration

Twenty-two dull, swampy, trends from the days of yore still remain, so let’s go full steam ahead. The sooner we get through these, the sooner you stop getting fooled by snake-oil salesmen.

So why do so many historians keep pegging more stakeholder collaboration as a future trend, while helps poor LOLCats everywhere regress to past lives? There are a number of reasons, but among the top three today are:

  • knowledge-based outsourcing requires knowledge

    and one cannot outsource even a tactical function and expect results without an understanding of what is required for success

  • process based outsourcing requires process managers

    and one cannot outsource even basic processes, such as the regular purchase of on-contract indirect items, group purchasing of items not strategic enough for sourcing, or even building management without regular oversight of those processes

  • transitioning to better ways requires team input

    it’s hard enough for Procurement to outsource tactical Procurement processes without a solid understanding of those processes, so imagine the difficulty in helping the company outsource other back-office or front-office functions without a good understanding of those functions, which will require input and cross-departmental collaboration from other organizational team members

So what do you do about this?

Knowledge-Based Outsourcing

As per our prior discussion, you need to institute knowledge management and web-based collaboration tools ASAP to insure that all appropriate knowledge is captured, organized, reviewed, delivered, improved, and learnt from. You need knowledge to initiate the process, to manage the process, and to capture the results of the process so that it can be effectively repeated — inside or outside the organization, as circumstances desire.

Process-Based Outsourcing

As more back-office and front-office functions get outsourced, more and better change management is going to be required. When functions get outsourced, everything changes, and that change has to be managed. Not only does the transition has to be managed, but so does the process oversight, because at some point the provider might have to change or circumstances may change and the function needs to be brought back in house. The Procurement team will have to be become well-versed in change models such as Kotter’s 8-Step Change Model or ADKAR and also learn how to integrate them with team management.

Team Management

As indicated above, success is going to depend on the creation and effective management of cross-disciplinary teams that can effectively document, transition, and manage the processes being outsourced and, in some cases, being taken back in house because the wrong processes were sent out. The team will have to be become intimately familiar with team performance models, such as the Drexler/Sibbet, and become good at integrating these models with the chosen change management model.

Procurement Trend #29: More Outsourcing

Twenty-six trends to go,
twenty-six trends to go,
so many things we need to know,
so onward we will go.

We’re in the midst of discussing in detail each and every trend we debunked in our Future of Procurement series so that you understand not only why the historians are still talking about these trends, but why they are still relevant to many Procurement organizations that are stuck in the past with the historians.

The goal is that, at the end of this thirty part series, you will not only know what you need to do to prevent staying in the past with your organizational “peers”, but what you need to do to not only stay in the present but start marching towards the future, which is coming faster than you think.

So why do so many historians keep pegging it as a future trend? There are a number of reasons, but among the top three today are:

  • Because outsourcing is not just manufacturing anymore, it is design
    as more and more companies outsource bigger and bigger pieces of their product’s lifecycle
  • Because outsourcing is not just tech support anymore,it’s software development
    as more and more companies outsource custom software development, implementation, and integration
  • Because outsourcing is not just back-office functions anymore, but front-office functions as well
    as even functions like Public Relations, Advertising, and Legal are thrown over the wall … all the way to India!

So what does this mean?

Design

Procurement needs to work closely with Engineering and the Supplier and foster an atmosphere of collaboration as close working relationships will be required to insure that the vision of Engineering is reached in the best way possible. With competition so fierce in just about every industry, the design of a product is critical to buyer acceptance and a company’s success, so Procurement needs to put on its SRM (Supplier Relationship Management) hat and make sure there are no bumps in the relationship.

Software Development

Procurement needs to work closely with whatever department is commissioning the work to make sure detailed functional specifications, that include a description of core business processes is produced; that regular quality assurance and acceptance testing takes place; and that regular checkpoints are put into the process and adhered to. Serious issues need to be identified before they prevent product delivery or result in significant cost overruns, which currently happens in the majority of software development projects. Many industries have proven time-and-time again that you can’t just throw a software development project over the wall and expect success. Software project failures have been responsible for many of the biggest supply chain failures in history (and if you do not believe the doctor, go check out Supply Chain Digest’s Top Supply Chain Disasters of All Time), so Supply Management knows all to well the disaster that can happen with an IT project that is not appropriately managed.

Front-Office Functions

Soon, outsourcing of Legal, Public Relations, and Marketing Support will be as common as outsourcing of Finance, Accounting and tactical Procurement functions are today. Procurement needs to work with key stakeholders to define core requirements, goals, frameworks, knowledge capture, and reporting structures to make sure that the third parties represent the business the way it wants to be represented and that everything is captured and communicated. This may not be an easy task, but it is a critical one.

You’re Understaffed. And You’re Not Alone. Now What? Part V

You are very well aware that you are understaffed and that you need to do something about it. You’re also aware that you may need to, or want to, outsource your category, project, or staff augmentation requirements. And, after our last two posts, you know that you better make sure that the category or project first passes the sniff test and lends itself to vended outsourcing before you get ready to ship it out.

But you still don’t know if outsourcing is the best decision. How do you determine that? You compare it to your most viable insourcing option. And how do you make that comparison?

Return On Investment

More specifically, what is the ROI of going outside versus staying inside? If you’ve appropriately qualified the project, then you should have an expected return, which you used to determine whether or not the project was incentive-friendly. The base ROI is easily calculated as expected return / expected cost.

The ROI inside will be calculated similarly. What is the expected cost of augmented staff and what return do you honestly think that person will achieve. Remember that, unless that person is a seasoned professional with lots of expertise in that category or project, that person is not likely to achieve the same return as a professional working for an outsourcing provider that tackles that type of category or project day-in and day-out. Plus, as they won’t have the same level of experience, or the same tools at their disposal as an outsourcing professional at the outsourcing service provider, and will have to deal with your organizational politics, policies, and ramp-up, it will take them longer. So even though the hourly rate of an internal resource may be lower, when you consider that more hours will be required for a lesser reward in the average, the ROI is not likely to be as high as you might initially think.

In other words, while an outsourcing firm will always make the argument that outsourcing is the clear-cut solution, it’s not always. If they are willing to put their best on the line and the category or project is suited to them, it will usually be the case that outsourcing is the right decision. But if they don’t have an appropriate expert, it’s going to take them more time to deliver a lesser reward, which you might be able to top by bringing in a hot-shot pinch-hitter for a one-off project.

In other words, there’s no one-size fits all answer and each project will have to be judged on the merits of keeping it in versus the merits of sending it out. And if you need help with that analysis, get a third party consultant to help you make that decision.