Category Archives: Outsourcing

Six Questions To Ask Yourself When Outsourcing

A recent article over on the Sourcing Interests Group Site on “Rocks to Turn Over in Outsourcing Arrangements” contained a number of questions an organization could ask when looking to maximize value from the relationship. The following six are especially pertinent.

  1. Do we share information the other party needs to be successful?
    One cannot outsource an activity and expect the outsourcing organization to be successful unless all of the information the outsourcing organizations needs to be successful is also shared. For example, if an organization outsources customer support, it must provide the third party with all of its policies, product details, available resolutions and average wait times (for repair, replacement and refund).
  2. How can we encourage more active planning for, and achievement of, innovation?
    An organization that outsources a function and does it right does a process analysis and redesign so that the outsourced organization implements an efficient desired state of the process in place of the inefficient current state. However, while this will be an improvement, it will not necessarily be an optimal implementation of the process. There should be a constant quest for process improvement and innovation.
  3. Is there commitment and follow-through when decisions are made?
    Decisions are ineffective if not acted on.
  4. Are key leadership roles understood and filled?
    Consistent leadership and executive support are necessary for any organizational initiative to be effective.
  5. Are adequate incentives in place to motivate collaborative behaviour and effective performance?
    Chances are that there will be metrics up the wazoo but very little motivation in place to improve them. In order to insure success, there should be incentives in place for the organization to go above and beyond the committed service level.
  6. Do we trust our counterparts to meet their commitments effectively?
    If you don’t trust the outsourcing provider, the outsourcing provider won’t trust you and instead of thinking about how to improve service to your organization, they’ll be thinking about how to make sure they don’t get screwed out of any money they were expecting to get. And instead of spending time trying to innovative and improve a process, they’ll be spending all their time documenting activity and compiling metrics and monthly reports to verify that they met performance commitments and are due to receive (additional) payment.

Outsourcing is not a guaranteed success. In fact, to see any improvement at all, it’s a lot of work. The rewards can be there, but it has to be done right. These are six great questions to ask if an organization wants to determine whether or not it is on the right tracks.

Is It Time To Vertically Integrate Your Supply Chain?

Will reading a recent Wired article over on CNN Tech on why nobody can match the iPad’s price, I began to wonder if maybe it was time for multinationals to start vertically integrating their supply chains again. Now that the perfect storm of cost, supply risk, and market turbulence has hit, it would appear that the outsourcing and right-sizing craze of the nineties and early noughts has revealed its dark underbelly. The shiny paint of internal cost reduction has cracked and pealed and all the hidden costs associated with logistics, delays and stock-outs, and lack of buying power on the part of your suppliers are now exposed.

The article, which notes that none of Apple’s competitors can meet the $500 that it asks for an entry level 16 GB wi-fi iPad, notes that Apple is able to achieve this feat for two reasons:

  • It’s unique retail strategy:
    It sells primarily through its own retail stores and, thus, doesn’t have to share a big chunk of the profits with third party retailers.
  • It’s unique vertical integration:
    The article notes that Apple is the most vertically integrated company in the world – it operates its own retail chains, all hardware and software is designed in-house, and it runs its own digital content store. As a result, it doesn’t have to pay licensing fees to third parties (as even the A4 chip is owned by Apple).

This results in a company that is able to not only able to use a vast ecosystem to design, build, and sell its products, but that is able to control that ecosystem as the last company in our industry that creates the whole widget (Steve Jobs, Wired.com).

Makes you wonder if its time to integrate those key pieces of the supply chain that you spun out over the last two decades because some consulting organization, looking for an excuse to further drain your bank account, convinced you it was a good idea. Or at least take a significant (share-based) interest in a few key suppliers so that you can guide them towards a successful path and, when it makes sense, buy raw materials on their behalf.

Another Reason to Source Close to Home

According to this recent article over in eyefortransport, “maritime privacy costs [the] global community up to $12 Billion a year” (with excess insurance costs alone eating up to $3.2 Billion). In addition, at the end of 2010, around 500 seafarers from more than eighteen countries were being held hostage by pirates, despite the fact that over 238 Million in ransom (including a ransom of 9.5 Million for a South Korean oil tanker) was paid to Somali pirates last year. Ouch!

Furthermore, despite the facts that navy presence (from more than thirty countries) has reduced the rate of successful hijackings, pirates have doubled the number of attacks and expanded their range. In addition, even though merchant seafarers deserve our protection, 85% of pirates pursued and captured end up being released because the countries who catch them don’t have the jurisdiction to prosecute. And over 2600 seafarers have been held hostage in the last three years alone. The 19th century belonged to the mafia. The 20th century belonged to the mob. Looks like the 21st century belongs to the new pirates. Is the risk to life really worth sourcing lead point toys and melamine milk from global destinations?

Hidden Savings in Outsourcing Invoices

Global Services just ran a great article on “9 ways to find hidden savings in your outsourcing invoice” that is quite useful if your organization has just begun its outsourcing journey. A good Supply Management Organization knows that invoices often represent a great cost reduction opportunity. But invoices from outsourcing providers have additional opportunities for savings above and beyond the norm. These additional savings opportunities include:

  • secret offshore staff
    you might outsource your support to an organization that, in turn, offshores the work; you could be paying 60K a year for a 30K resource; be sure to get lists of all resources assigned to your account and their associated rates to make sure you are being billed accordingly
  • temporary labour
    not only might the rates be higher than contracted rates, but the charges, even if the rate is correct, might be for work that is not chargeable — for example, a provider behind on a task might hire temporary labour to catch up, but if the task is a fixed-cost task, it should not be billed by the hour
  • shelfware
    is the organization (still) being billed for software that is not being used
  • pass-through expenses
    are all of the pass-through expenses valid? if approvals are required, were they pre-approved?

And these are just the tip of the iceberg. Be sure to check out “9 ways to find hidden savings in your outsourcing invoice” for five more — because outsourcing only saves money if it costs less to outsource than to do it in house.

It’s Not Risk Management If You Just Trade One Risk for Another!

Especially if the second risk is just as risky, or, even worse, more risky than the first.

After reading a number of articles that claim IT Outsourcing reduces cost AND risk, including this recent piece over on Global Services on “Operational Risk, IT, and Outsourcing”, I am getting nervous about the mad dash to the cloud that these articles are directly or indirectly promoting.

While SaaS is often the best choice for many SMEs and large scale industries without a lot of technical know-how, it’s not always the best choice, and some systems are a lot safer to outsource than others. It’s one thing to outsource an ERP/MRP, especially if you don’t store your bank account access information in the ERP/MRP, but another thing to outsource user account management if such management contains credit card information and/or detailed financial profiles that are sufficient for an average criminal to commit identify fraud in his sleep. In the first case, just about any SaaS provider will do. In the latter, you need one who not only hosts in a secure data centre, but understands security and built security (and encryption) into the application (and database) from the ground up — especially if they are hosting in a shared data centre that uses a true multi-tenant architecture. Otherwise, a hacker could break in through a weakness in the application layer, dump the database, and get unencrypted credit card numbers, bank account numbers, SINs, etc. if the application wasn’t designed right from the bottom up. This could be financially devastating to you and your customers (who, for starters, would never buy from you again and who would probably take you to court).

The requirements for outsourcing and maintaining financial systems are much greater than for Supply Chain and Inventory Management. So what if they get your inventory database. Unless you’re storing nuclear material, who cares if they know for sure that you have 250 outdated PCs, 100 rolls of steel, and a warehouse full of binders. If they were doing a competitive intelligence project and really wanted to know that much about you, they’d check one of the import/export trade data monitoring services (or just watch what went in and out of your warehouse from across the street) and know it anyway.

Before you outsource financial systems, you have to be sure that the provider and the hosted application is at least as secure as the applications and environment you’d build in house, or the outsourcing effort will come at the expense of increased risk. And if risk increases, the decrease in cost may be inconsequential.

And if you don’t have the technical savvy to make a fully informed decision, bring in a consultant who has that knowledge. Trust me when I say it will be one of the best investments you ever make.

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