Category Archives: Outsourcing

All Outsourcing Contracts Should Include Benchmarking Clauses

A recent article over on SourcingMag.com that addressed “why vendors don’t like benchmarking clauses” got my attention, because I believe that, since you’re outsourcing for better performance, that all contracts should have benchmarking clauses to help insure that you get that performance. So I read it, and then discovered that the “benchmarking clauses” being referred to were not really performance benchmarks, but market-cost benchmarks. All these types of benchmark clauses do is exert constant price pressure on the vendor and, as the author notes, create a lose-lose situation for the vendor. And that’s not good.

It’s one thing to expect a vendor to improve performance year after year, and you should, but another to expect them to lower their price every time their competition lowers prices. After all, the competition might not be as good or might not be as familiar with your business, and, therefore, might not give you the same value. Moreover, you should be content to pay whatever price you agree to on day one provided the vendor continues to deliver value. And as long as the vendor improves year-over-year with shorter responses times, higher throughput per FTE, better processes and technology, etc. that vendor is delivering value.

So go ahead and put a benchmark clause in your contract that not only requires performance reviews on a regular basis but reasonable year-over-year improvements as well, because you should expect that. But don’t try to cheat your vendor out of a fair price for services rendered. Not only do they have bills to pay too, but they won’t be very incentivized to beat expectations and get you to best-in-class as soon as possible if all you do is nickel-and-dime them.

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Cross-Cultural Risk Factors in Offshore Outsourcing

SourcingMag.com recently ran a decent article on “Cross-Cultural Risk Factors in Offshore Outsourcing” that overviewed three risk factors that can have a serious impact on the success of an offshore outsourcing relationship that are worth a review.

  1. Corporate Culture Differences
    There’s a chance the client’s corporate culture and the vendor’s corporate culture could be at opposite poles. One could be bureaucratic and the other entrepreneurial; one could make decisions top-down and the other on consensus; one could encourage employees to step-up while the other beats them down; etc. A lack of alignment will present serious obstacles in interactions and have significant bottom-line impacts for both organizations.
  2. National Culture Differences
    Cultural conditioning runs deep, especially in countries like China where the roots of their culture stretches back millenniums. Your people could be autonomous while the vendor’s people are group-oriented. Your people could be absolutist in their ethics and conduct and your vendor’s could be situational. You could want results while they want to save face. If you don’t understand these risks, you won’t be ready for the inevitable pitfalls you will encounter.
  3. Cross-Cultural Competencies of Key Players
    A wide range of players is involved in your organization and that of your supplier. Some will work from their domestic base of operations while others will travel or go on expatriate assignments. But all will be neck deep in the challenge of trying to achieve business objectives in a culturally diverse global environment. In addition to the technical, managerial, leadership and interpersonal skills required for their jobs, the people occupying these roles need to have cross-cultural competence if they are to be successful and not put their company at risk.

Thus, before you enter into any outsourcing agreement, you should perform a cross-cultural due diligence. For more on how to carry one out, see the “Cross-Cultural Risk Factors in Offshore Outsourcing” article. For more on the types of cultural differences you may encounter in China, Germany, India, Japan, Korea, Mexico, and Thailand, see the SI series on Overcoming Cultural Differences in International Trade.

Overcoming Cultural Differences in Trade with …

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Is AstraZeneca Building the Center of Excellence Model for Emerging Country Sourcing?

A recent article on the Shared Services & Outsourcing Network on “What Drives a Best Practice Sourcing Strategy” contained an interview with Karen Mansell, the Head of Corporate Procurement and Business Process Outsourcing at AstraZeneca. While most articles of this sort don’t get my attention, as I already know what should drive a best practice sourcing strategy (just like you, as a regular reader of leading supply chain blogs), there was one paragraph that did get my attention as I was skimming through it.

Six questions in, the SSON asked about changes in sourcing behaviour as a result of AstraZeneca’s new outsourcing strategy, and related deployment methodologies, which puts everything on the table as an outsourcing candidate, including R&D. The response referenced AstraZeneca’s low cost country strategy and their presence in China and India. A low cost country sourcing strategy to India and China normally wouldn’t get my attention, as just about everyone is still jumping on that bandwagon whether it’s the right choice or not, but the article noted that AstraZeneca is looking at growing capability in all their emerging markets, especially from an original delivery centre point of view.

As a result, AstraZeneca is re-evaluating what supplier management looks like coming out of those areas and trying to put some supplier management on the ground, alongside the preferred supplier relationship. They’re trying to get closer to the supplier base, understand what innovation and insights look like, marry them up to business requirements, and drive aggressive supplier development programs.

This is the foundation for emerging markets done right! Get on the ground, get close to your supply base and improve their capabilities so you can manufacture for, and sell into, the local market. Then it’s not just outsourcing, it’s emerging market development, and that will be much more profitable in the long run. Logistics costs are only going to run-up again and labor costs are going to keep rising as the “emerging” markets of India and China take their place as the second and third largest global economies as the century progresses.

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Kate Vitasek on Game Changing Rules for Outsourcing (Vested Outsourcing)

Today’s guest post is from Kate Vitasek, a lead researcher and faculty member of the University of Tennessee’s Center for Executive Education and the founder of boutique consulting firm Supply Chain Visions.

For the past two years, I have had the opportunity to participate in a University of Tennessee research program, funded by the Air Force, to formally study companies that were employing performance-based approaches for outsourcing. The research has uncovered that there is a set of unwritten rules companies can apply to develop mutual symbiotic performance partnerships where both parties in the outsourcing relationship unlock win-win solutions to achieve much higher levels of performance and cost savings.

We have distilled our lessens and approach into what we call Vested Outsourcing — because it is typified by an outsourcing relationship where both parties have a stake in maintaining the arrangement and where both parties work together to create a performance partnership which takes both the company outsourcing and the service provider to new levels of cost, service and profitability not realized by traditional outsourcing models.

While no two Vested Outsourcing partnerships are alike, all good ones achieve a performance partnership based on optimizing for innovation and improved service, reduced cost to the company outsourcing, and improved profits to the outsource provider. This is what we call the performance pyramid. This trend towards performance partnerships has evolved to where outsourcing companies and service providers work together to develop a performance-based solution where both parties’ interests are aligned — and both parties receive tangible benefits (either through tangible or intangible incentives).

The heart of a Vested Outsourcing contract is an agreement on desired outcomes that explicitly states the results on which both companies will base their outsourcing agreement. A Vested Outsourcing agreement clearly defines financial penalties, or rewards, for not meeting, or exceeding, agreed upon desired outcomes. In the agreement, regardless of what is being outsourced, the outsourcing partner has the ability to earn additional financial value (e.g., more profit) by contractually committing to achieve the desired outcomes. Simply stated: if the outsource provider achieves the desired outcomes, they receive a bonus.

While many organizations tout they have “partnerships” — our experience and research found that most organizations have an internal desire to optimize their own self interests. This is often known as a WIIFMe approach (What’s in it for Me). How could they not when we are ingrained with “winning” from early childhood and most business schools and law schools focus on “winning”.

The very word partner implies that there are two sides. The progression towards a Vested Outsourcing agreement must focus on creating a culture where both parties are working together to ensure the ultimate success of each other. The mentality should shift from an “us vs. them” to a “we” philosophy, or what we call a What’s in it For We (WIIFWe) philosophy. For many companies, a win-win approach is a learned behavior — and they have to unlearn their conventional approaches and ways of thinking. In a Vested Outsourcing relationship, the organizations must work together upon a foundation of trust where there is mutual accountability for achieving the destined outcomes.

Five key rules set the stage of a sound outsourcing partnership.

  1. The business model is established based on outcomes versus defining transactions.
  2. The company outsourcing needs to feel comfortable describing the “what” and delegating the “how” to the outsource provider — and the outsource provider must be comfortable signing up to take the risk to deliver the “how”. Both organizations must constantly seek to overcome roadblocks in the processes, infrastructure, technology and people that prevent mutual success.
  3. Carefully aligned, clear and measurable performance objectives are used to monitor the desired outcomes.
  4. A balanced pricing model that includes mutual incentives and rewards, optimized for cost versus service trade off.
  5. The relationship is based on insight, versus oversight governance, that empowers both parties to pursue improvements that will deliver better performance, higher profits, and lower total cost of ownership.

The five key rules of a sound outsourcing partnership set the stage for companies to take their outsourcing relationships to the next level — a true vested performance partnership.

In Vested Outsourcing, the organizations work together upon a foundation of trust where there is mutual accountability for achieving the outcomes. Through the careful alignment of performance objectives, accountability, and control, the service provider, while absorbing additional risk, is empowered to pursue improvements that will deliver improved performance, higher profits, and lower total cost of ownership.

Vested Outsourcing uses the power of free market innovation to improve the outsourcing relationship. This can be challenging to achieve, but the Vested Outsourcing journey should always strive to arrive at this idealized end state to achieve the performance pyramid — where both the company outsourcing and the outsource provider are consistently applying a WIIFWe foundation and applying all five of the Vested Outsourcing rules.

Companies with a desire to explore Vested Outsourcing further, can visit the Vested Outsourcing website, hosted by the University of Tennessee, and download an excerpt of the upcoming book being published by Palgrave Macmillan titled Vested Outsourcing: Five Rules that will Transform Outsourcing.

Thanks, Kate.

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Overcoming Cultural Differences in International Trade with Korea

Today’s post, which is partially based on materials from Dick Locke’s seminars on International Purchasing, is edited by Dick Locke, Sourcing Innovation contributor and President of Global Procurement Group and Global Supply Training.

This post is going to examine some of the cultural differences that you may encounter (as an American or Canadian Sourcing / Procurement Professional) if you are doing business with Korea. We start by discussing each of the eight key cultural considerations outlined in our introductory post and then highlight a few other points that you should be aware of.

As per our initial post, this discussion is high-level and general in nature and, as Dick Locke points out in his classic text on Global Supply Management, while it is too easy to stereotype a country, individuals in each country will vary from the stereotype. You need to take time to get to know the people you will be dealing with because their behavior may be nothing like the usual behavior of the country in which they reside and there is always a chance that you might run into people who are trained to act like you … while in your presence.

While Korea, and more specifically South or the Republic of, has a lot of similarities with the Asian countries that surround it, it also has a lot of differences. Having built the third largest Asian economy in less than half a century, starting with low-cost high-quality export production and then a move into high-tech high-value-add in the 90s, they tend to move at a rapid pace. Also, as (recent) history has taught them that compromise leads to defeat and second place spells disaster, they are extremely competitive. They are always looking for an advantage, quick profits, and a quick sale … which is generally more important to them than the development of solid, long-term, business relationships (which the Chinese and Japanese prefer to focus on). As a result, you should be careful of exclusivity and focus on shorter-term awards based on past-performance.

  • Power DistancePower distance is moderately high in Korea. They have a vertical society that strictly observes protocol. You must show a Korean the respect he deserves based on status, age, and rank … or risk being outcast. However, unlike many other Asian cultures, this does not prohibit you from being tough in negotiations … they expect it.
  • Uncertainty AvoidanceHofstede’s classic work indicates that they are high on uncertainty avoidance, but this is not really the case. Of all the Asian countries, they are among the most willing to experiment and take risks, as long as the reward is there. They are also very creative and inventive.
  • IndividualismDue to the structure of their society; their core beliefs of kibun, hahn, and Confucianism; and their obsession with the survival of their society, they are not very individualistic when compared with the Western world. However, their tenacity and outgoing nature makes them more individualistic than many other Asian countries.
  • Polychronic vs. Monochronic TimeKorea is very monochronic. Punctuality is very important and they abhor wasting time. They are always striving to beat the Japanese and this requires getting the most out of every minute.
  • Personal / ImpersonalIn Korea, personal and family relationships are very important. As a result, good, personal, relationships are important for business. However, while Korean businessmen will shake hands, it is critical to remember that touching is generally an affront in their society, so no “pats on the back” unless they do it first, you’re at a social event and inebriated, and you’re willing to apologize for it immediately and the next day.
  • Buyer / Seller RankYour rank as a buyer is quite low in Korea compared to other Asian countries. They are strongly focussed on profit and have an innate distrust as foreigners.
  • Importance of HarmonyWhile Korea is still strongly influenced by the teachings of Confucius, and the correctness of social relationships that bring harmony, they are also strongly influenced by hahn, which describes the build-up of pent-up energies, unrequited yearnings, and general frustrations that developed under conditions of extreme hardship and oppression. As a result, they are more prone to violence than other Asian countries, very nationalist, and very, very competitive. So while harmony is important, especially since it also relates to kibun, it is not nearly as important as it is in Japan, or even China.
  • Importance of FaceKibun, which roughly translates as face or reputation, is a very sensitive issue for them, on part with Japan. They see it as correct behavior necessary for social balance and it is part of their strong sense of honor.

Finally, it is very important to socialize with Koreans if you want to build a business relationship. Accept every offer for evening entertainment (and read up on their dining customs first), even if you need two teams to keep up with them.

Finally, as I strongly recommended in my first post, if you plan to start doing business with any new international country, including Korea, you should do a thorough job on your homework. You can start with:

  • Dick Locke’s course on the Basics of Smart International Procurement (which is offered through Next Level Purchasing and counts towards the SPSM2 certification or ISM Continuing Education Hours), or
  • a customized seminar from Dick Locke’s Global Procurement Group. Dick Locke and his associates each have decades of experience doing business with over two dozen countries, including the fifteen biggest importers and exporters to and from the United States, and Korea. A single day with an expert like Dick Locke could save you months of headaches.

Again, a big thank you to Dick Locke for serving as editor for this special series of posts and providing some up-to-date materials and information for the purpose of this series.

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