Monthly Archives: August 2011

Outsourcing is in Decline – But What’s the Real Reason?

A recent article in The Economist on the trouble with outsourcing noted that the latest TPI quarterly index of outsourcing suggested that the total value of contracts for the second quarter of 2011 fell by 18% compared with the second quarter of 2010. Dismal figures in the United States dragged down the average, and this can be, at least, partly explained by the economy, but is this the whole story?

According to the article, TPI suspects that part of this is due to the fact that much of what can sensibly outsourced has already been outsourced. While it’s a good theory, I disagree. Maybe most of the companies with a willingness to jump on the outsourcing bandwagon have already done so and outsourced everything they can, but there are still a lot of companies who haven’t jumped on the outsourcing bandwagon. But more importantly, with the recent rise in Global Services Organizations, it’s possible to outsource pretty much everything that a company does.

Another reason could be, as the article notes, that some of the worst business disasters in recent times have been caused, or aggravated by outsourcing. This makes sense, but it’s just as easy to screw a product or service up in-house if the right processes, checks, and balances are not in place. But it is true that, when outsourcing goes wrong, it is the devil to put right.

SI agrees with the editor and believes that companies are rethinking outsourcing. Not only are they replacing huge long-term deals with smaller, less rigid ones that are more easily managed, and terminated if things go wrong, but also considering other viable options such as setting up their own Global Services centers, if they are large enough, or taking advantage of low costs at home when the backyard is empty and incentives plentiful. There are still situations where outsourcing makes sense, but not as many, and they are not as cut and dry as they used to be. Companies have to do an analysis, and to make sure they are not the next name on the disaster list, have to be careful about the decision they make. It’s a new age of outsourcing, and it should prove to be a smarter one.

What’s a BHAG (and why is it important)?


Today’s guest post is from Robert A. Rudzki, President of Greybeard Advisors LLC, who has (co-) authored a number of acclaimed business books, including Beat the Odds: Avoid Corporate Death and Build a Resilient Enterprise, On-Demand Supply Management, and the just published text on Next Level Supply Management Excellence that is a follow up to the now-classic Straight to the Bottom Line.

In the classic leadership book Built to Last (James C. Collins and Jerry I. Porras), the concept of BHAG was introduced. A BHAG (Big Hairy Audacious Goal) is a common element among long-lasting, successful companies and organizations. A BHAG engages people. It is tangible, energizing and highly focused. People “get it” right away; it takes little or no explanation. President Kennedy’s pronouncement that “We will land a man on the moon” is a famous example of a BHAG that literally captured the minds and hearts of an entire nation.
On a similar note, management guru C.K. Prahalad tells executives to think big. “Set ambitious goals and then figure out how to mobilize the resources to achieve them — rather than the other way around. Most companies limit themselves because they focus primarily on what they believe they can afford.”

Do you have a BHAG for your supply management organization? If not, you should. It’s a valuable component of an overall transformation plan.

What about so-called SMART goals, a concept many companies have adopted? SMART goals are Specific, Measurable, Attainable, Realistic and Timely. There is not necessarily a conflict between BHAG and SMART goals. Think about it this way: BHAGs are often at the department or company level, provide overall guidance and excitement, and typically are multi-year endeavors. SMART goals help translate the overarching BHAG into near-term goals on a personal level.

BHAG and SMART: important elements in the arsenal of a good leader.

Note: part of this column was excerpted from Chapter 1 of the book Next Level Supply Management Excellence by Robert Rudzki and Robert Trent.

Thanks, Bob.

Is An African Country Your Next LCCS Destination?

Now that India and China are leaving the low cost country collective, moving up on the global economic stage, chances are that you’re going to have to identify a new low cost country to start investing in to keep manufacturing and call center costs low. And unless you’re in the US or the UK, where you only have to look in your own backyard, you may have to rule out home-country sourcing as your low cost country sourcing destination. So where should you go?

Egypt and the Middle East were rising, but with the recent political unrest, it’s probably going to be a while before that’s a good choice. Poland is solid, but at only 38 Million people, only so many countries will be able to set up shop. Argentina, Columbia, and Chile are going strong, but are being greatly overshadowed by Brazil. What’s left? Africa. Even though some countries are in turmoil, and there are piracy problems off the coast, there are 1 Million people in the 54 countries that comprise the continent who are ready and willing to join the global labour force. Plus, India and China are starting to invest there heavily. With the two economies projected to be the dominant economies by the latter half of the century already pouring money and effort into making Africa the next emerging marketplace, you know it’s just a matter of time. Plus, with big multinational companies like GE also investing in the region, it’s very likely that at least a few African companies will be part of the next BRIC.

Plus, as in India and China, urbanization is off to a rapid start and, as per this article on “the hottest emerging markets” in World Trade, it is expected that over half of the population will live in cities within 20 years and that the top 18 cities will have a combined spending power of 1.3 Trillion. That alone puts Africa’s projected GDP in the top 10 within 20 years.

As in India, infrastructure and energy production is a problem, but a number of countries have a plan to improve and are working on it. Plus, the fact that these countries are resource-rich in a time of rising commodity costs means that there is money to invest in improving infrastructure and energy investments. It might take a while, but Africa is going to get there. The question is, who’s going to win when they do?

How Many Different Kinds of Pens and Paper Do You Need?

I know that any Procurement that saves £18 Million a year should be a win in any book, but I was just flabbergasted that the UK government needs 3,500 catalogue items in office supplies. Office supplies. Yes, this is much better than the 15,000 they were buying before, but come on, 3,500? One type of pen, one type of pencil, one type of paper, one type of B&W printer toner (because you standardized the printers, right?), etc. Yes, when you iterate through each type of office supplies, it adds up. But I’d have a VERY hard time coming up with 1,000 different necessary items. What’s the other 2,500+ for?

Should You Be Using CEI?

Chances are, like every other organization on the block, your Finance department is tracking DSO and if the DSO metric is close to the corporate goal of, say, 30 days, declaring everything to be wonderful and right with the customer base. But is this really the case?

As a recent article over on CFO.com that points out “the trouble with DSO”, an acceptable DSO might not be acceptable at all. First of all, DSO can be manipulated. Secondly, increases in DSO can indicate a situation where a company is “forcing” sales by accepting poor receivable terms, or selling its product at a discount to create sales. (Not good at all!) Thirdly, not only will most customers not pay a net 30 day invoice early, some customers will pay on day 30 like clockwork and should probably be excluded from the DSO calculation.

According to the authors of the aforementioned article, what is really important is collections relative to accounts that have come due, not the current receivables unlikely to be paid early. In order to capture this, the authors are recommending a different metric, the Collection Effectiveness Index (CEI). In this index, 100 is a perfect score, but 100 can be exceeded if a company asks for, and gets, cash in advance. The calculation of CEI is as follows:

 

Beginning Receivables + (Credit Sales/days) – Ending Total Receivables

Beginning Receivables + (Credit Sales/days) – Ending Current Receivables

 x 100

 

It’s an interesting calculation, and I see one advantage for Procurement. During the calculation, the analyst will have to identify those customers with amounts due in “current”. If a customer shows up in this bucket month after month, they probably aren’t a good customer to have. And if a customer never shows up in this bucket, they are probably a good customer to have. This will help Procurement prioritize customer requests as the requests from good customers should get priority, as that is what can keep an organization afloat in trouble times.

Any different thoughts?