Category Archives: Outsourcing

Should You Move Your Production Back to the US?

In the outsourcing craze, there was a mad rush to move manufacturing to China and services to India. In the latter case, with the rising costs in the big, mature, outsourcing centers, it’s now cheaper to open call centers and back-office shops on home soil in the US and UK than to move them to India, where they are so desperate for talent that they are now hiring Americans in America to fulfill American outsourcing agreements. In the former, the price of production, especially with logistics costs and a weakening American dollar, is rising monthly. For some industries, it may soon be cheaper to produce at home, if it isn’t already. Especially when the total lifetime cost of ownership is taken into account.

Consider this recent article in Fortune which notes how some American businesses, fed up with the poor quality of having their products made in China, are moving production back to the US. In “why we left our factories in China”, we find out that Sleek Audio, a small business that makes in-ear headphones for iPods and other audio devices, fed up with low quality, too much travel, communications problems, shipping delays, rising costs, and — worst of all — a ruined shipment of 10,000 sets of earphones that cost millions and nearly brought the company to its knees, decided to quit China and move manufacturing back to the US. Their up-front costs are about 15% to 20% higher on-shore, but since they are now able to produce a higher-end product (that can command a higher price), they can justify the cost.

Now it’s true that some companies get great prices and great quality from Chinese factories, but the reality is that these are usually the large multi-nationals that can afford to have someone on the ground full-time to oversee production. If you can afford to oversee production and insure your production runs get the appropriate timing, priority, and quality checks that you need, you can get good quality. But if you don’t have someone on the ground full time, then you may not even realize there is a problem until the next day as most small operations don’t have a phone manned at 2 AM. And since your production run is usually squeezed between bigger ones, there may not be much attention paid to quality or other issues important to you.

In other words, if you’re a Global 3000 multi-national, then it’s likely that production in China still makes sense for the organization for the time being, but if you’re a small or mid-sized manufacturer, it might be time to pull production back home — especially with the economic incentives being offered by many states to revitalize the economy.

And now the UK is a low-cost country too.

Well, not really. But you can now run call centers at parity in the UK when compared to the costs associated with running a third party call center in India. As per this recent article over in Global Services on how a “UK company reverts outsourced work from costly India”, New Call Telecom is opening a new call center in Burnley, England (a borough of Lancashire) because operational costs are on par with what they’d pay in Mumbai and New Delhi. Furthermore, since the average handling time of a call in the UK is 25% less, they will cut headcount costs as well. And the headcount they do hire will be “sticky”, unlike the Indian employees who leave for lunch and don’t come back when the call center across the street makes them a better offer.

So, now that it’s cheaper to open new call centers in the US and the UK, and now that Indian companies are hiring American citizens on American soil to fulfill the outsourcing contracts granted to them by American companies, is there really any reason to go to India? Maybe. But it is still getting more expensive by the day and will never offer home-soil advantages, especially in services.

Now, there is the problem that, because many companies outsourced all of their services, they no longer know how to even run a call center, but there is a solution for that. Insource some Indian experts to do it for you. And if you insource to Arkansas and set up some cameras, you can have the next great reality series. While NBC airs Outsourced, about ex-pat Americans shipped off to India to run call centers, FX will be airing Insourced about the life of an Indian call-center manager, who never left the country, who is shipped off to live with some hillbillies in the Ozarks.

For Good Outsourcing Contracts, Keep Litigation in Mind

A recent article in the Sourcing Interests Group newsletter that described “a litigation perspective on outsourcing relationships” is right when it states that a litigation perspective will improve your results with outsourcing agreements. Given that outsourcing agreements are typically long in duration, it is important to craft the best agreement possible. A litigation perspective will help. Why?

Without a litigation perspective, a typical outsourcing agreement is:

  • general
    Since it is impossible to predict every circumstance that may arise, most drafters of outsourcing agreements stick to general terms, broad service descriptions, and generic service level improvement requirements. This is bad because generality results in uncertainty, uncertainty breeds disagreement, and disagreements threaten the stability of outsourcing relationships.
  • full of vague terms
    Such as material breach; gross negligence; willful misconduct; direct, indirect, consequential damages; best efforts; generally accepted standards; and commercially reasonable efforts which sound very legal but which are typically unclear in case law.
  • sparse (or devoid) of communication protocol
    While most outsourcing agreements will contain clauses for dispute resolution, they will be sparse, or devoid, of clauses describing proper communication protocols for communicating, addressing, and responding to issues as they arise. Disputes only arise when issues are not adequately addressed as they arise.

However, with a litigation perspective, a typical outsourcing agreement is:

  • specific
    While the agreement will still contain general clauses for modifying procedures to deal with unexpected situations, it will contain provisions for dealing with situations that can be anticipated in advance, such as a spike in data processing, the inability for the service provider to handle increased order processing, or a change in regulations that restrict a service provider from performing one or more functions. For example, in the first case, if data processing requirements increase beyond a certain threshold in a given month, the organization will pay overtime rates to get it done. If the service provider can’t handle a rapid spike in customer orders, the organization will have the right to bring on a second service provider to assist. And if an unforeseen change in regulations preclude part, or all, of the functions from being performed by the service provider, the organization may cancel the affected parts, or all, of the agreements, without notice and penalty.
  • built on clearly defined terminology
    Instead of just saying that the service provider is liable for “direct damages”, the agreement will say that the service provider is liable for “direct damages, which include but are not limited to the additional cost of securing an alternative service provider” or instead of just saying the service provider is responsible for damages that result “willful misconduct”, which may or may not include a deliberate breach of contract, the agreement will say the service provider is responsible for damages that result from “willful misconduct, which include but are not limited to intentional tortious acts”.
  • clear on communication protocols
    The agreement will contain a communication protocol where the organization can officially notify the service provider of issues that arise, and response protocols for the service provider to officially respond to the issues.

Communication protocols are important as they provide official communication trails and a way to “shape the record”. If an official dispute arises, and goes to arbitration or court, and the organization does not have a clear record of events, that includes correspondence officially notifying the service provider of a(n impending) breach, then its chances of winning its case (and receiving damages) are not good.

Moreover, if the organization maintains a good “real-time” written record of events, that includes official communications that follow the protocol, it has a better chance of resolving the disputes quickly, cost-effectively, and with minimal disruption as a provider is not going to want to risk an official dispute when the client organization has a strong case.

Considering that termination of the relationship likely will cause both parties serious economic disruption, its important to draft the best agreement possible. The best way to do this is to keep litigation in mind and consider how you would prove the elements of a claim if a dispute were to arise as this will lead to the creation of clear and unambiguous clauses.

Common Challenges of Indirect Procurement

A recent article on “How to Leverage Outsourcing” over on Efficient Purchasing did a good job of summarizing the common challenges of indirect procurement across sectors and industries. Regardless of what industry your organization is in, chances are it has many of the following challenges, as illustrated by a recent NelsonHall study:

    • Effective Interaction with the Business Units
      While many executives are satisfied with the caliber of the personnel in their indirect procurement function, many are not satisfied with their ability to manage indirect procurement across the organization and control spend levels. Working with business units requires “softer” skills and the ability to act as “sourcing consultants” to the business.
    • Achieving Broader Category Coverage
      Indirect procurement is constrained by resources and by the huge range of indirect purchases made by a large organization. As a result, it is virtually impossible for an organization to have category coverage and market knowledge across all areas of indirect spend.
    • Efficiency
      The amount of indirect spend that is e-Sourced and the amount spent on indirect procurement personnel as a proportion of indirect spend under management is low in many organizations.
    • Process Improvement and Standardization
      There are generally huge issues around inconsistency of sourcing across subisdiaries or georgraphies in an average organization.
    • Lack of Time and Resources
      As a result, supplier databases and catalogs / punch-outs / product portals are generally out of date.
    • Lack of Management Information
      Detailed spend analysis is often unavailable for indirect spend.

Out-dated IT
Many companies, which take their time updating IT for direct spend, take even longer to update systems for indirect spend.

Now, the authors would have you overcome these shortfalls by outsourcing, but the reality is that many are overcome by implementing better technology and better processes, starting with spend analysis. If an organization can quickly identify which categories will yield sufficient savings to make a sourcing project viable, then it can integrate high-opportunity projects into the strategic sourcing plan, put mid-opportunity projects out to auction, and simply ignore low-opportunity categories as the 20/80 rule generally applies to indirect Procurement as well. Of course, if the department can’t get better systems, better processes, and more / better personnel, then it may have to consider outsourcing for results.

IT Outsourcing: The Two-Headed Beast

A recent article on “IT Outsourcing Category Management” over on Efficient Purchasing did a great job of capturing the nuances of the category in that the drivers will be dependent on whether it’s a first or subsequent sourcing event and so will Procurement’s role. In the outsourcing scenario, the number one driver is access to competence. Cost reduction and flexibility take a back-seat with Procurement, whose role is to facilitate the process, that is led by IT, and ensure a competitive environment. In a subsequent event, cost reduction becomes the number one driver and innovation, completely absent in the first phase, jumps into the back-seat. Procurement jumps into the driver’s seat, leading the effort to find qualified suppliers that can reduce costs and increase value.

However, the two events are not completely different. In both scenarios, Procurement must master stakeholder management, do its homework properly, understand risks and the nature of likely disruptions, accurately model cost, and get a grip on the value a supplier could bring to the table. The last part is key, since while 67% of IT leaders rely on outsourcers to turn ideas into new and improved processes, as per a Warwick Business School study, only 33% measure the impact of innovation delivered by service providers, which is key component of delivered value. Plus, as per an IDG Outsourcing Survey, IT Outsourcing has only led to cost reduction and flexible staffing in one third of engagements!

And contracts are a major headache for the unprepared. In addition to detailed descriptions of the services, service levels, and service management process, that need to be provided, a significant number of commercial terms and legal terms generally need to be provided as well. Plus, contract templates should be included in the bidding event as this will let potential providers know what is expected of them. As a result, many projects have to be planned six to twelve months in advance as it often takes four to eight months just to stipulate the scope of services and SLAs, which needs to not only define the services, but the transition plan and an exit plan should the contract not be renewed.