Category Archives: Outsourcing

Nearshoring Adds Security to Your Supply Chain

I was very happy to see this recent article in Industry Week on “moving sourcing closer to home” because I’m not a big fan of global sourcing just because someone in the C-suite wants to say “me too” on the golf course. You source globally when it makes economic sense from a total cost of operations perspective. Even though labor might be cheaper, by the time you add transportation, import tariffs and fees, export tariffs and fees, value added taxes, extra inventory carrying costs, expediting fees, losses from stock-outs, the real savings are usually a lot less than you think they are. You need to remember yin-yang of the business universe and your international procurement skills, do your homework, and make the right decision.

Chosen properly, appropriate nearshore locations can bring increased cost competitiveness, more lead-time security, and a balanced geographic portfolio that reduces the risks associated with overly aggressive low-cost country sourcing strategies (which can include stock-outs when you don’t realize shipments never shipped until three weeks after the fact, costly currency fluctuations, unstable economic environments, and even nationalization). So be sure to consider near-source locations in your global sourcing strategy, even if they appear to cost a little more. The reduction in risk associated with producing just some of your product closer to home might be worth it in the long run.

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If Software Development Outsourcing is Too Agile, You’ll Be Kayaking Over the Waterfall

A recent article on “how agile methodologies help software development outsourcing” over on SourcingMag.com had some very good points on how agile software development can help you with your software development outsourcing. However, having lived through the Agile Craze in IT, I know that you can overdo it and actually hinder your development processes and development outsourcing.

 

Let’s start by review the positives put forward by the article:

  • Methodology Fit
    The ability to make continuous process changes and improvements is a boon to two organizations trying to synch their processes for the first time.
  • Bridge the Communication Gaps
    Frequent release-and-review cycles can help to bridge communication gaps.
  • Perfection is Iterative
    No one gets it right the first time. Only the lucky get it right the second time. Just about everything of significant technological complexity in this day and age takes at least three attempts to get right — and when you’re talking software, thirty attempts (behind the scenes) isn’t uncommon …
  • Building Expertise
    You can move your development to an organization that has built a number of similar systems in the past.
  • Responsiveness to Change
    Requirements and processes change continuously … more frequent iterations allow for faster revisions of requirements and code-bases.
  • Quality
    Faster feedback generally means that problems are identified – and solved – sooner in the development process.

Now we’ll look at the negatives that can result if you’re not careful:

  • Methodology Fractured
    While the ability to make rapid changes can be beneficial when trying to synch processes, they can also break processes that are working well.
  • Deepening the Communication Chasm
    Frequent release-and-review cycles that lead to constant improvements can give you the illusion that the communication gap is bridging when in fact the chasm underneath is deepening. The successive improvements could be due to trial-and-error and luck and not have anything to do with communication improvements. Plus, an over-focus on feature-function might cause you to ignore relationship building, which is critical if you are ever going to truly bridge the communication gap, especially with offshore development organizations in India, China, and Poland, for example.
  • Running-in-Place
    The faster you respond to change, the faster the change requests start coming in. If you’re not careful, you’ll start to cycle through changes until you’re back with what you started with — after months of wasted effort.
  • Lack of Robustness and Flexibility
    If you only measure quality by “how close the end-user design is to what you envisioned”, or “how many of your test cases run bug free”, you might miss the fact that the code is an unmaintainable mess of spaghetti that you’ll never be able to maintain, update, or modify again. Very Bad Code is a regular by-product of overly-aggressive agile development cycles with too many iterations. Building good code requires building a good, stable, underlying architecture that does not change. Just like you can’t use the frame of a three-story house for a 6 story office building, you can’t use an architecture for low-volume EDI message exchange for a high-volume real-time XML exchange. If you adopt a high-frequency agile development cycle and don’t take the time to get the right framework and software architecture up-front, the developers end up having to hack the code every iteration to make their changes and after five or six iterations you have a tangled mess that even a development guru won’t be able to make heads or tails of.

So while agile can be beneficial to your development outsourcing, it has to be used in moderation or the drawbacks will far outweigh the advantages.

 

 

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Is the Downturn an Upturn for Offshoring?

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A recent press release from the Conference Board announced the results of the fifth annual survey on offshoring trends that was done in conjunction with the Duke Offshoring Research Network. The survey found that more than 50% of companies had a corporate offshoring strategy last year, up from just 22% in 2005 and that 60% of companies currently offshoring have aggressive plans to expand existing activities.

Wow! Twice as many companies are now planning to offshore, and almost two thirds of companies offshoring are planning to increase their offshore activity! Risk be damned. The threat of peak logistics costs rolling around again in ten years or less be damned. The threat of losing a shipment to the Somali pirates and being stocked out for three months be damned. The threat of IP theft be damned. We’re offshoring anyway!

Let’s be clear … I’m not against offshoring when it makes sense, but I think many companies have been overdoing it and I fear that, in efforts to cut costs quickly to “get through this recession” they are going to take overdoing it to the next level. It’s not about the lowest cost today … it’s about the highest value over the lifetime of the project. When you offshore when the economy is down, costs can only go one way — up! Wages will rise as the new “low-cost” locale gets used to a higher quality of life. Raw material costs will only increase as demand in the region skyrockets. Shipping costs will only increase as the ocean carriers approach capacity again. And unless you’re outsourcing to a mature region with mature plants and experienced people, quality will be an issue, IP theft will be an issue, and lack of innovation will be a big issue. Investing in the right innovative partner who can help you find ways to take costs out of design and production while improving quality will usually provide you more value in the long run than the lowest cost provider today will provide you (because their costs will go up while their contributions stay flat).

Now, I do agree that companies with a well-thought out corporate-wide offshoring strategy can achieve significantly better performance in cost savings while meeting target service levels and improving relations with providers and overcoming internal resistance if they do it right, but I also believe that many companies just aren’t there yet. If the offshoring craze heats up again and they jump in head-first without the experience and planning required for success they will fail before they succeed. Given the weakened financial state of many companies right now, I just don’t think many can afford even a single failure.

So if you must jump on the bandwagon that is looping around again, get some help before you do. Start with Dick’s seminar and course on International Sourcing through Next Level Purchasing (now the Certitrek NLPA) to get a grip on the basics and then bring in a professional consultancy that does this every day to help you. Because, as Arie Lewin, Professor of Strategy and International Business at Duke says, “simply offshoring more functions isn’t the solution … to achieve real savings, companies need to get the processes right“.

Protecting Against New Supply Chain Threats with your Contracts

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CIO Magazine recently ran a great article on “8 contract tactics that protect against new threats in offshore outsourcing” that is definitely worth a read. Given, to name a few,

  • the current economic conditions,
  • rising geographic instability, and
  • increased vendor instability,

now, more than ever, you need to review existing contracting approaches and adopt new strategies for these emerging threats. To this end, CIO outlined eight tips to help you negotiate your next contract or re-negotiate your renewal that every buyer and contract specialist should take to heart.

  1. Extend force majeure to encompass new threats.
    Insure that such clauses do not forgive a lack of responsible precaution as well as excluding natural disasters beyond either party’s control.
  2. Extend criteria for eligibility for termination for cause.
    Include termination provisions that provide an early rapid response to changing supplier conditions that present potential disruptions, linked to visible triggers such as a significant reduction in a supplier’s credit rating, admission of fraud, or misleading financial statements.
  3. Extend change of ownership provisions to include break-ups.
    If a key division is broken off and sold, that could be more damaging to your service level than a change in ownership.
  4. Establish clear ownership of assets and documentation.
    Don’t overlook the soft intellectual property assets such as software, documentation, and proprietary processes.
  5. Add clauses and terms to address emergent concerns.
    Transition-out requirements, audit provisions, and termination costs are often overlooked but becoming increasingly important.
  6. Take advantage of lessons learned.
    Don’t overlook necessary audit provisions.
  7. Seek concessions in re-negotiations.
    It’s a weak economy. Don’t forget that.
  8. Secure adequate legal advice.
    Many of the new scenarios and contingencies in contracting bring additional legal risk and complexity and will likely require consultation with a legal advisor.

Practical Tips for Reasonable Service Levels when Outsourcing

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SourcingMag.com recently ran an article on “getting the service levels you expect with outsourcing” that resulted from a Gartner interview and contained some good tips that are worth repeating.

  • Define Realistic Expectations
    If you’re an efficient organization, don’t expect 30% savings from outsourcing. It’s going to take time for them to learn your business, and even when they do, the economy of scale they offer will only go so far.
  • Realign Expectations Annually
    Demands change. Markets change. You need to make sure your expectations change accordingly.
  • Define the right measurements and metrics.
    Make sure they measure against your goals.
  • Make sure you have a consensus opinion from senior management.
    This insures you define appropriate goals and relevant measures.
  • Prepare.
    Make sure everyone understands where service is going to be increased, decreased, and what they need to do to support the transition.
  • Outsourcing is not a solution.
    If you have a problem, you have to solve it before you can outsource it … otherwise, you’re outsourcing a failure waiting to happen.
  • Build in Flexibility.
    Long(er) term agreements need to be structured to anticipate the change that’s inevitable in business and technology.
  • Relationship Management, and Respect, is Critical.
    You can’t just hand the process off and expect a miracle.