Category Archives: Outsourcing

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.

Ariba Vision 2020: I Hope It’s Just a Ruse!

This post addresses the four predictions in Ariba’s “Vision 2020 – The Future of Procurement” report that were totally off base. SI is not sure whey they came from as they’re not even close to any reasonable expectation of Supply Management reality in 2020.

05. Data predicts the future

Yeah, and monkeys might fly out of my butt!

We will never reach the point where we can be confident that a supplier’s performance will always fall within our customers’ requirements. We will never predict all defects. And we will never predict all disruptions before they happen. Predictive analysis will get better, our value models will get better, and supply chain reliability will increase, but it will never be perfect and never known in advance. Just like we likely won’t see true AI within our lifetime as current approaches just don’t cut it. (And if we do, the machines will realize how inferior we are, and as soon as we forget to encode Asimov’s three laws of robotics into a single robot, we’re doomed!)


Data, data everywhere
and all our minds will shrink
data, data everywhere
sanity on the brink

08. Outsourcing explodes

Actually, outsourcing will suffer a massive implosion as freight costs make moving goods globally prohibitively expensive and exploding labor costs in emerging economies make outsourcing key service functions more expensive than keeping them in-house in major metropolitan centers. What will actually happen is an emergence of Global Service Centers that are part of the organization and employ the right talent for the job at the right locales. Tactical functions will be executed in low cost locales. Strategic functions will be executed where the organization gets the most value. And while some functions will be outsourced to massive third party Global Service Organizations, they will be managed by a Global Service Center that will push out or pull in as market conditions dictate.

10. So long, sourcing geeks
Not by a longshot. While most tools will become so intuitive that even a novice will be able to execute most sourcing and procurement events, there will still be situations where advanced modeling and analysis will still be required and where only sourcing geeks with a keen understanding of the business needs and the strategic analysis required will be able to perform that analysis. While it’s true that the number of sourcing geeks needed may shrink in relative terms, the skill sets required by these geeks will actually increase.

12. Budget fuss fizzles out
As Woody Woodpecker would say, ha ha ha Ha ha, ha ha ha Ha ha, ha ha ha Ha ha, heh-heh-heh-heh-heh-heh-heh-heh-heh! Budget fuss is never going away. Finance drives the business and budgeting is so ingrained in financial professionals that there will always be fuss and muss. While more CPOs will be involved in the budgeting process since day one, they will still have to make their case over and over and over again, no matter how obvious it is.

This ends our review of the 31 predictions in Ariba’s “Vision 2020 – The Future of Procurement” report. Our next, and final, post will discuss the report as a whole.

If You Have to Hire, Maybe You Should Hire At Home (Bonus NPX Take Away 2)

Yes, the doctor is back on his home-sourcing horse, but there are good reasons. It’s now literally cheaper to “off-shore” in Oklahoma, Alabama, and Michigan than to go to Maharastra, Andhra Pradesh, or Rajasthan. At both the Hackett Group Conference and the NPX gathering put on by The Mpower Group, I heard a number of top executives from Fortune 500 companies note how it was cheaper to bring certain operations and services back home than keep them in India where labor rates are still increasing in the double-digits year after year.

And if this isn’t enough to convince you, this fact should really make you think twice. Not only are American companies hiring at home, but now Indian companies are hiring American citizens on American soil to fulfill the outsourcing contracts granted to them by American companies. And this is happening in Procurement, Finance, and Legal. That’s right! There are so many unemployed lawyers now that it’s cheaper for Indian firms to hire unemployed American lawyers than to try and recruit lawyers that know American law because they are few and far between, in great demand in India outsourcing shops, and command ever increasing salaries.

So hire at home before India (and, in short order, China) scoop up all your talent!

Ariba Vision 2020: Yesterday’s News

The following three predictions from Vision 2020 – The Future of Procurement were totally off the mark and, in SI’s view, could only have been made by someone living in a Procurement cave for the last 10 years as any organization that thinks these define a future state of Procurement has a lot of catching up to do.

03. Work goes mobile
Work has been mobile among the IT crowd for about a decade now and among the (management) consulting crowd for over five years. Just because some organizations are slow to catch on to the fact that modern technology allows you to work anywhere, anytime and keep in touch 24/7 through real-time video conferencing does not mean that it is visionary for an organization to finally latch on to this fact. Furthermore, any organization that takes another 10 years to latch on to this realization is probably not going to be in good shape in 10 years.

19. It’s complicated

Uhm, it’s been complicated for over a decade. It’s been complicated ever since the first Fortune 500’s first started to outsource critical manufacturing processes to India and China a couple of decades ago. And while the risks and complications will continue to change as the focus shifts to different emerging economies, it’s not going to get any riskier or complicated as a whole. There’ll be more awareness of the risks, which will appear to materialize more frequently as more operations are shifted global, but the risks and complications will be fundamentally no different than they were 20+ years ago.

20. It takes a network

Just like it’s been complicated since global sourcing started to materialize among the Supply Management leaders in the late 80s, it’s taken a network ever since the manufacturing giants (in automotive and consumer goods in particular) started outsourcing assemblies to tier 1 suppliers that integrated components from tier 2 suppliers. And the major Consumer Goods companies realized in the 90’s that in house was not enough. P&G laid the foundations for Innocentive in the 90s at the same time Unilever was focussed on developing better supplier networks across its global markets.

The next post will address Today’s Blues.

Do You Know What Disaster Will Strike You Next?

Of course you don’t, but you can calculate the risks of one disaster vs. another and one site vs. another with some simple research into natural disasters.

Earthquakes
Earthquakes are more likely near the edges of tectonic plates than they are in the interior, especially if the plates are moving together and pushing on each other (and there is a history of earthquakes and activity). You can quickly identify areas at high risk by looking at a tectonic map, such as the one over on ThinkQuest. One quickly sees that high risk areas are the west coast of North and South America, South East Asia, Japan, and the island domains north of Australia, as per the Global Seismic Hazard Map over on Countdown.org.

Volcanos
You can get a list of volcano activity reports from the Smithsonian Institute which maintains a USGS Weekly Volcanic Activity Report. Most are usually in the Ring of Fire, which encompasses the high-risk earthquake zone around the Pacific. GeoCodeZip.com Google maps them for easy viewing.

Tsunamis
Coastal areas near sesimic hazard (earthquake) zones in the oceans are at the greatest risk of Tsunamis, which tend to build up in power and force as they approach shallow water and land. This says that some of the riskiest areas are on the Ring of Fire in western North and South America, Japan, and south-east Eurasia in the island domains North of Australia. More information on Tsunami Risk Zones can be found over on the International Tsunami Information Center.

Hurricanes
The greatest risk centers for hurricanes are coastal areas near the equator where hurricanes are normally a problem. The east coast of the US is particularly susceptible to hurricanes. The Global Weather Oscillations site specializes in in hurricane risk probability zone forecasts for the US and the risk zones for the coming year can be found on the Global Weather Cycles web site. The National Weather Service tracks the 10 global hot zones over on the National Hurricane Center site and a review of historical data will tell you how risky a certain area is.

Tornados
Tornados can occur anywhere in the world (including Antarctica, although this is the one continent where a tornado has not been documented) when the atmospheric conditions are exactly right. However, the most at risk zones are the middle latitudes between about 30 degrees and 50 degrees North or South where cold polar air meets warmer subtropical air and generates convective precipitation along the collision boundaries. As a result, taking weather patterns into account, the most at risk areas are the United States, western Europe, South Africa, the eastern and western coasts of Australia, New Zealand, the eastern and western borders of China, the eastern coast of Argentina, Japan, South Korea, and the Philippines. Good information on tornado climatology as well as a great map of global risk zones is found over on the National Climatic Data Center site.

Ice Storms
Blizzards can be bad, but generally don’t do much in the way of lasting damage. Ice storms, on the other hand, can do severe damage to infrastructure on a wide scale by downing power lines, and grids, damaging structures from the sheer weight of the ice, and even taking down trees. The most at risk areas tend to be Canada, the US, the UK, and most of Northern Europe and Russia.

Floods
Floods are not limited to the coastal variety, and can happen anytime the water level rises too quickly. Thus, in addition to worrying about flooding in coastal areas as a result of a tropical storm, hurricane, tsunami, or storm surge (tropical cyclone), flooding inland can occur from intense thunderstorms, sustained rainfall, or rapid snow melt. Thus, all of the coastal areas identified in your hurricane and tsunami risk lists are at risk at flooding plus any area with a history of flash floods, sustained rainfall (like they get in India during Monsoon season), or rapid snow melt (in Northern Canada) are at risk of floods.

Wild Fires
Wild Fires can occur on any continent at any time whenever the conditions are right and are likely to follow heat waves, droughts, and cyclical climate changes (such as El Nino) and high-pressure ridges. They are most common in climates that are sufficiently moist to allow regular vegetation growth but where extended dry, hot periods are also present. This keep parts of Africa, South America, South Eastern Eurasia, and Eastern Europe at high risk, but parts of the Southern US, Mexico, India, and Australia also enter the high risk zone on a regular basis.

In other words, there’s no excuse for not knowing which suppliers are at risk of which natural disasters and how great that risk is. (Some historical research will give you frequency of disasters in the area and a local climate institute likely has probabilities of occurrence for the event, such as once every twenty years.) So while it may be hard to say how risky your supply chain is from a holistic perspective (as some financial or political risks may not be identifiable until the last minute), it should not be hard to say how risky it is from a natural disaster perspective.