Category Archives: Outsourcing

David Clevenger on “Line-Item Outsourcing”

Today’s post is from David Clevenger, Vice President of Corporate United.

Having spent most of my professional life in the supply chain field, I have become a fairly outspoken proponent of outsourcing. My commitment to these ideas are based not in the cost saving potential of these arrangements, but rather in what I have always perceived as the value of having someone else invest in competencies not relevant to one’s direct business.

A recent post by the doctor (Why Are You Paying PR Firms to Develop Your Marketing Plans?) led me to leave a comment on his site regarding what I felt were misguided views on strategic outsourcing. In turn, the good doctor has asked me to expound upon my own thoughts in a guest post; an act that has led me to question my own sensibilities.

In sitting down and really thinking through whether outsourcing strategic relationships is a viable path for any business, I have been forced to consider whether or not recommendations I have made to clients for more than a decade have been as sound as I once thought them to be. In considering these interactions, I am reminded of what drives so many organizations in the direction of outsourced solutions: cost savings.

I have long felt, and continue to feel, that outsourced arrangements initiated with the primary objective of cost savings are destined to fail. Instead, it is important to investigate the more relevant cases for identifying a third party to replace in-house resources.

  • Competency: In short, the presumption here is that a specialist in a given field will have greater focus on a given area than a member of an organization for whom the function is not a core competency. This is not to say that the employees of companies assigned to roles in IT and HR are not competent in their field, rather that their organizations are not as focused on those functions as IBM and Hewitt, respectively.
  • Investment: Because human resources is not the core competency of, say, a manufacturing organization, it makes incrementally less sense for that company to invest in the best people and tools for that function. Instead, the manufacturer is wise to invest their resources in advanced production techniques or distribution models.
  • Relevance: An important question to ask when considering an outsourced arrangement is whether or not your customers care. Think of it from a consumer’s perspective; when you are shopping at The Gap does it matter to you that their data centers are managed by IBM or CSC? Identifying what’s relevant to your customers is a good litmus test for deciding whether or not something belongs inside your walls.

Once a company has reached the conclusion that a given function lends itself to outsourcing, and that an appropriate business case can be established, the difficulty begins.

The challenge outlined in the original post is a common one, i.e., what should this provider do?

The example cited in the original post delineated the responsibilities of a public relations firm, specifically between developing a communication and managing communications. In that post it was argued that an outsourced provider was less qualified to do the former and better suited to the latter.

While I may have taken exception to the specific tack taken in that example, there are two excellent questions raised as a result of the discussion:

1. When is an indirect function strategic?

Another common error associated with outsourcing is painting all activities related to a specific function with a broad brush. Let’s use legal services as an example. Activities like immigration law are relatively commoditized and non-strategic, and other specialties like contract, labor, and product liability law have been mastered by niche firms; general counsel is a different animal altogether. This is a role that most [large] companies will absolutely want to have in-house because an intimate level of familiarity with the business is key to their ability to serve effectively in their role. This role may include the identification of outsourced partners to represent the company, but is probably too strategic to outsource.

2. When are elements of a function not appropriate for outsourcing?

The mere fact that an outsourced provider can accommodate a “soup-to-nuts” solution, doesn’t mean that you have to take them up on it. While, as I mentioned, I support outsourcing in many forms, the question of competency must be raised in dissecting the ability of the outsourcers themselves.

The answer to these two questions result in a solution that I call “line-item outsourcing”. This is the practice of selectively outsourcing the pieces of a function that are non-strategic, while maintaining control over those things not done effectively by the outsourced provider. While this practice can be applied across functions, let’s use facilities management as an example. Facility managers are responsible for an enormous amount of activity ranging from financial issues around leasing and capital management, to the oversight of hundreds of vendors performing functions as disparate pest control and elevator maintenance. For nearly every company in the world, performing these tasks does not represent a core competency, and further represents a major administrative burden. As a result, organizations like CB Richard Ellis, Jones Lang LaSalle, Cushman & Wakefield and others have thrived.

These organizations are without peer when it comes to property management, development and operations. As a result, many companies are content in allowing them to take over these and all related functions; but what about buying? Under this outsourced management umbrella there are contracts for janitorial services, HVAC maintenance, security monitoring, food services, landscaping, lot sweeping, snow removal and literally dozens of other functions. Being highly competent at managing properties does not make these providers equally capable of sourcing great contracts for these services.

By taking a “line-item” approach to outsourcing, companies can optimize these relationships by (i) outsourcing only the parts of the functions that can be done more efficiently and effectively by another provider and (ii) maintaining responsibility for the elements of those functions at which the outsourced provider does not excel.

Ultimately, the responsibility to make outsourced relationships blossom falls back on the customer. As a general rule, it’s not in your best interests to employ a call center in India if you have no intentions of getting on a plane once in a while to ensure that it’s being appropriately managed. Furthermore, don’t outsource complete functions when the strategic components of that function should be kept in house. Finally, do not presume to think outsourced providers are any more universally capable than your own organization…no matter the bill of goods they are attempting to sell.

Outsourcing can be a positively game-changing approach for any business, but not unless it’s taken up with the care and vision that decisions of this magnitude warrant.

Thanks, David.

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Some Companies Will Move To China, Others Will Move Closer To Home

As noted in this recent Supply Chain Management Review article on “the short tail” (near sourcing trends create winners and losers), analyst Jeff Rubin estimates that the cost of transporting imported goods into the United States is now equivalent to a 9% tariff on imports. Nine Percent! That’s a significant cost considering it’s supposed to be “low cost country sourcing”. In addition, the cost of fuel is now about 40% of carrier operating costs — it used to be about 15%. And the U.S. dollar has significantly decreased in value against the Yuan, Yen, and Euro over the last three years, close to 20%. In fact, the decrease is so significant that, as I noted in a recent post, the “United Nations Conference Is Calling For A New Global Currency”.

When you put it all together, near-sourcing is starting to look pretty good, and a lot of smart companies are going to do it. And they’re going to win big.

Furthermore, so are a number of other companies as well. Who’s going to benefit, besides the companies that near-source to save transportation related costs? The SCMR article points out three types of companies who can win big with the coming shift:

  • Near-Sourcing Transportation & Service Providers
    Truck and rail is poised for growth, and so are 3PL firms that manage near-sourcing transportation.
  • Warehousers and Packagers
    Companies that can offer warehousing and packaging services to near-sourcing companies are also poised for growth.
  • Domestic Raw Materials & Manufacturing
    Near-sourcing means local production, and that means local manufacturing and raw materials.

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Don’t Forget: NAFTA is an FTA

Why am I reminding you? Because this article on how “compliance is not just about avoiding risk, it is also about ROI” noted how a recent survey from Management Dynamics found that companies realize substantial savings from FTAs. Specifically, 40% of survey respondents said they are saving $500,000 or more per trade agreement.

NAFTA allows you to source from two countries. (Specifically, Canada and Mexico if you are in the U.S.) Furthermore, when you add these FTA savings on to what you can save from near-sourcing (significantly reduced transportation costs, reduced warehousing costs due to reduced inventory requirements due to reduced lead times, reduced currency risks, etc.), your savings potential becomes very significant.

Not to mention, if you adopt C-TPAT, import and export can become relatively quick, easy, and inexpensive compared to import and export from other countries. C-TPAT certified importers have fewer inspections and fewer delays. This not only results in in better visibility and lead-time predictions, but in shorter transit times which reduces overall supply chain costs.

So don’t forget, NAFTA is an FTA … and it can save you a lot of money if you near-source.

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Overcoming Cultural Differences in International Trade with Germany

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 Germany. 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.

Germany, one of the most influential nations in the EU, has a very distinct culture that is simultaneously easy and hard to sum up, but if I had to try, I’d start with one of the sayings they like to hear most. Alles lief wie am Schnürchen. (Everything went like clockwork.)

  • Power DistanceWhen discussing power distance in Germany, we need to discuss context. There is a very strong push for social equality in Germany, which makes the power distance very low. However, hierarchy is mandatory in a German company, and this often results in exaggerated deference to one’s superior or CEO.
  • Uncertainty AvoidanceA core value of Germans is ordnung which roughly translates to order or system. They despise uncertainty, and, even moreso than the Japanese, will like to dive into the details again and again and again. This is a culture that will read boring, factual, serious advertisements no matter how long they are … the more facts, the better! (In comparison to Japan where the average advertisement length is a mere 15 seconds.)
  • IndividualismGermans are highly individualistic. While they may never disagree with the group in a formal meeting, this is a result of their hierarchical corporate structure which is encumbered by manuals, systems, and extremely well defined hierarchical paths. Outside the office, you’ll likely have difficulty getting any of them into a queue. (While the Brits like their lines, Germans generally don’t. Remember the story about pedestrians waiting for a green light to cross a road that’s closed to traffic …)
  • Polychronic vs. Monochronic TimeGermans are the most punctual of all peoples. It is a great offensive to even be two minutes late. You can just as easily set your watch by meetings as you can trains.
  • Personal / ImpersonalGermans are a very private people who do not wish to become immediately familiar with strangers. They don’t like small talk, like to get close before greeting (so never, ever shout across a room), and reserve smiles for true friends. In a company, the boss is a very private individual who generally sits alone behind a closed door. However, they do tend to form very deep friendships, and are very personable if you reach that point.
  • Buyer / Seller RankWhile the buyer is generally treated with respect, this does not necessarily imply that the buyer will receive a higher rank, as implied by a number of sources, including Hofstede and Lewis. First of all, to keep the respect, the buyer will have to follow the rules of German business. (One of those rules is always be prepared, even though they will always be more prepared than you with counter-counter-counter arguments.) Secondly, and perhaps more importantly, this is not a society where customer service gets high marks. Retail store hours are dismal compared to the rest of the world (if you fly in Friday night and forget your toothbrush, better buy it at the airport … or do without until Monday morning). Last time Mr. Locke had an outdoor business lunch, he was charged a deposit on plates and silverware!
  • Importance of HarmonyWhile Germans are among the most frank, direct, and blunt people in the world, they also are a stickler for consensus before a decision is made. So, in a way, harmony is very important, but only in the decision itself … during the process, they may flat out disagree with each other and argue every option until every point has been considered and debated, repeatedly.
  • Importance of FaceIn Germany, face is important from a cultural perspective. While they may openly disagree with you, they will likely save any arguments they have between each other for private meetings. And while they will be quick to criticize you, as that’s just their way of being helpful (as they don’t want you to make mistakes or follow a sub-optimal process), they can be quite sensitive to criticism themselves (as that means they overlooked something and did a less than acceptable job; in Germany, it is expected you will always do your best). Thus, you should go to great lengths to avoid criticizing a proposal from them unless you can prove you are right, and present your argument in the logical, flowing manner that they are comfortable with. In other words, if you disagree, Beweise her oder Maul halten! (Put up or shut up!)

The most important thing to remember when attempting to do business in Germany is that, to them, business is serious. It’s not a joke (and jokes will not go over well). They have a strong belief in honest, straight-forward negotiations and expect you to have the same. This doesn’t mean that you can’t be aggressive, as long as you are open about it and can logically argue why your proposal is fair.

Finally, as I strongly recommended in my first post, if you plan to start doing business with any new international country, including Germany, 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 Germany. 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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So You Think Shared Services Are the Way to Go

Continuing on yesterday’s theme of Service Management Mistakes, the Shared Services & Outsourcing Network also has an article that describes “10 more mistakes made when starting shared services” that points out some questions you should ask before you consider making a move to a shared or outsourced services model.

  1. Will the Service Centre Accurately Estimate Your Needs?
    If you’re a small operation, it’s possible that the needs and requirements of the larger clients of the Shared Services Organization (SSO) might force themselves to the front of the delivery queue. Does the SSO understand what you will need, when you will need it, and what your priority tasks are?
  2. Are its allocation and chargeback models coherent?
    This is crucial to insure that you will be paying a fair price for the services received since you should be charged on actual utilization and not expected utilization.
  3. Does it have sufficient implementation-focussed governance mechanisms to insure success?
    A strong governance team is critical before transition to an SSO, during transition to an SSO, and after transition to the SSO to make sure that services continue to be executed efficiently. Not all issues will rear their ugly head during the prescribed implementation timeframe … some might wait a few more weeks, or a few more months.
  4. Is there an adequate change management architecture?
    Many projects fail due to underestimation of the amount of effort that will be required for change management and the support that will be required. Does the SSO have a well defined change management strategy that they will use to support the transition?
  5. Are interfaces addressed?
    Improved process can lead to great efficiency gains … which can be lost in a sea of disruptions unless you understand where the inputs are coming from, where the outputs are going to, and what other business units will be affected. Make sure that you don’t create more problems in your attempts to fix the ones you know of.
  6. Are you planning to transfer the right processes?
    A good SSO can managed transactional and knowledge processes. While they might not be able to strategically source your direct categories, they might be able to negotiate better savings on your telecommunications and office supplies contracts with greater leverage, or just collect the information faster.
  7. Do you have a clear SLA?
    While sensible SLAs are crucial to success, they have to be clear and comprehensible. According to Dick Locke, who has an entire state on his side, as a contract, they should have a reading ease of at least 40 and be comprehensible to someone with only an 11th grade education.
  8. Have you internalized the wisdom?
    While there’s no shortage of extremely useful guidelines to get you started, there’s no one-size-fits-all methodology for migration to SSO — be sure to have an experienced advisor on your side before attempting a transition.
  9. Have you identified the real constraints?
    While there will always be constraints with respect to finance, space, bandwidth, etc … accepting the constraints put in front of you without at least challenging them (in an effort to overcome them) will mean the difference between a world-class SSO relationship and one that merely gets the job done. Which organization would you rather be associated with?
  10. Have you accurately estimated the working costs?
    Have you costed the relationship to the nearest cent? Are you sure? There are operational costs, usage costs, management costs, oversight costs (which include communication and travel) and change management costs, for starters. Do you have to buy more software? Do you have to do custom integration work? Do you have to do process redesign? etc.

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