Category Archives: Outsourcing

A Great Guide to Outsourcing Risk Management, Part I

Not that long ago, SourcingMag.com published a great six part series, authored by Alsbridge on “managing risk in outsourcing” that covered a best-practice approach to reducing your outsourcing risk that is a must-read for anyone considering outsourcing as part of their procurement function, even if (and especially if) it is just the tactical part. Although the article, and the series, focusses primarily on the aspects of IT outsourcing, the reality is that tactical improvements primarily originate from automation and better systems, so you really need to understand the IT trade-offs before you can make an educated and informed decision.

It’s also important to remember that the reality is that even though there is little to be saved on tactical process automation or improvement relative to what can be saved from a well executed strategic sourcing event on a high-dollar category, the reality is that a botched automation of your tactical procurement processes, especially as part of an outsourcing project, can cost you dearly as your team will have to spend all their time fixing the mess … and the opportunity cost of doing such is phenomenal. Moreover, if your systems are not aligned, you’ll never capture all of the savings that your expert sourcerors negotiate. (There’s a reason that most companies capture less than 50% of negotiated cost savings … and that reason is inadequate systems and poor monitoring.) Thus, before you outsource any aspect of your procurement operation, which you should consider doing if an outsourcing provider can offer you better technologies and processes at a lower cost of operation, it’s important that you understand what you are going to outsource, how you’re going to get a return on your investment, and how you’re going to manage the outsourcing project to make sure the savings materialize. In other words, before you embark on a procurement outsourcing project, you need a good strategy.

Where Do You Start?

Start by identifying all of the potential failure points in your plan, determining the probability of failure and the associated cost if a failure occurs, and then develop risk mitigating plans for those risks that have more than a slight chance of occurrence or a high recovery cost. Then you can move on to your search for a service provider partner.

So How Do You Select The Right Service Provider?

Do some research, starting with the industry leading blogs (like Sourcing Innovation) and the free resource sites (like the SI Resource Site) available to you to identify potential providers. Then embark upon an RFX project to help you identify the provider who can meet your needs at the best price point.

Make sure the RFP completely spells out what you want to outsource; the processes you want followed; the people, process, and system interactions you desire; the change management processes that you follow; the frequency with which you inspect system updates and innovation; current process cycle times; and the cycle-time and cost reductions you are expecting; the service levels you require; and the degree of year-over-year improvements that are expected from your service provider. It’s important that the RFP spells out everything the vendor needs to know, otherwise, they won’t be able to put their best foot forward and will have difficulty being successful. It’s not up to them to fret the details, it’s up to you. Penalty clause or not, it’s still your mess to clean up if your vendors don’t get paid the right amount on time or, even worse, they all get overpaid by 10% and you have to fight for refunds and it’s still your liability if financial statements are wrong because the provider screwed up. If you can prove complete ignorance and best-effort to insure financial statement accuracy, you might escape jail, but that will be of little consolation if the resulting fines bankrupt your company and you’re out on your ass without a job. The simple fact of the matter is that the more detail you can provide in your RFP, the better a potential partner can determine whether or not they can provide the solution you need and how much it will likely cost to do so. And if you don’t know how to put together a good RFP, you can always Get Help from an expert. Once the RFPs are in, you start with the evaluation, which is the subject of Part II of our series.

Centering the Pack: Ron Southard, Randy Littleson, Justin Fogarty

Slowly but surely, the Seven Grand Challenges of Supply and Spend Management cross-blog series is lumbering along. Since my last post, Ron Southard of Safe Sourcing, Randy Littleson of The 21st Century Supply Chain, and Justin Fogarty of Supply Excellence have offered us their (introductory) posts on the subject.

Ron starts off with a tale of technology, noting that to some extent, too much thought leadership in these technologies is being invested in games, consumer gadgets and the like instead of less sexy tools focused on reducing the cost of goods which will instantly improve profitability and foster economic growth creating new jobs. Especially when the technology exists today to attack the problem of escalating costs of raw materials, shipping, retail price increases and other associated supply chain costs, as it has for years. And it’s only getting better. As I am attempting to illuminate in my B2B 3.0 series, innovative companies have been, and still are, introducing technologies that put buyers on even footing with consumers — and the only thing standing in the way of a better business model is adoption. (I urge you to check out the inaugural Sourcing Innovation Illumination Introducing B2B 3.0 and Simplicity For All as well as the upcoming Illumination on why Simplifying B2B for Suppliers Enables Buyers, to be released next Tuesday.) You can be sure, based on his initial post, that his contribution is going to be a good one.

Randy decided that five challenges alone were enough to fill your plate, and gave us his list, which contain a couple of doozies:

  • Connecting Outsourcing and Lean
    Lean requires synchronization, and outsourcing, at least today, makes synchronization a challenge.
  • Controlling That Beyond Your Control
    A huge challenge for brand owners will continue to be balancing the issues of being in control when they are not directly in control of all aspects and to continually adjust to changing conditions “on the ground” that impact costs.
  • Sustainability
    This is a real and serious issue that will only increase in priority on a global basis. Since it fits in with one of my seven grand challenges, I have to agree!
  • Identifying Supply Chain’s Role
    Too many companies are taking far too tactical a view on their supply chains. I agree, and so does Bob. So what are we going to do about it?
  • Volatility
    … things are moving at a faster pace and customer expectations continue to climb while their loyalty is less. Volatility is on the rise …

Justin decided to skip the challenges get all prophetical, but at least he took a page out of my B2B 3.0 handbook. Noting that it’s obviously difficult to envision exactly how the medium will look from a UI or feature/function standpoint on the 30 year time frame … I think it’s safe to say that finding potential suppliers will be easier via powerful discovery tools and networks. And that’s just the start. Starting with communities like MFG.com and CustomPart.Net, and moving on-to custom mash-up search engines like the Supplier Search Engine, the movement is already starting. As for suppliers … they’ll have a greater ability to evaluate their buyers and potential customers. Tomorrow’s B2B 3.0 will be interactive, and will allow for true collaboration, not just data-push. Companies like Co-exprise and Apriori are starting to make that happen in new and innovative ways for direct and custom-part manufacturers. And the new world provides tremendous opportunity for buyers and suppliers who embrace discovery and discussion, as Vinimaya is demonstrating with its new enterprise search technology. The opportunity is there, but, more importantly, as Justin astutely points out, those companies that fail to adapt to increasingly connected world, the challenge may be staying afloat.

Also, in addition to Bernard Gunther’s commentary on Opportunity Analysis that went up Monday, Bob Ferrari has posted parts two and three of his series as well!

Move over crowd-sourcing, here comes ITO 2.0!

The outsourcing journal recently had a good article on “OpenWater Networks” and how it partnered with Augmentum to build its Enterprise 2.0 Service Network – a “Social Network” for work – using “IT Outsourcing 2.0” or ITO 2.0. What is ITO 2.0? It’s the outsourcing of IT work to where the best brains are. Which is the way it should be.

I really liked some of the common sense quotes in the article from Timothy Chou. When he says that if you outsource to someone who is cheaper but not as smart as you, you have to spend a great deal of time managing them and that you (have to) look over everything down to the tiniest detail, he couldn’t be more accurate. It’s also true that this causes you to lose your economic advantage. However, it’s not true if you hire someone smarter than you (who has a PhD, for example) because you (can) let them flourish on their own. Just like when you hire an executive chef, you don’t have to tell him how to cook – you just have to tell him that you want a chicken dish that’s sweet and spicy and then let him work.

The advantages of this method, when compared to ITO 1.0 – which takes you to where the warm bodies are cheapest, are that partners are free to demonstrate their expertise, there is (essentially) no duplication of work, and innovation can flourish. As long as you make sure everyone speaks a common language from day one, the method can utilize the talents of all involved – especially if you augment the method with regular face-to-face communication. OpenWater personnel, in San Francisco (California, USA), make regular visits to Augmentum’s sites in Shanghai and Beijing (China) and Augmentum developers routinely visit the Openwater offices in California. This encourages the move away from e-mail, where context is loss, to the “service networks” that OpenWater is developing. This not only helps OpenWater and Augmentum build innovative software that would have cost them 10 times more money and 10 times more time if they had done it under ITO 1.0, but insures that the products are actually consumable – as, to borrow a phrase, they’re eating the dog food they make.

So how does this differ from crowd-sourcing? In crowd-sourcing, everyday people using their spare cycles to create content, solve problems, [and] even do corporate R & D and the company takes advantage of the collective to augment their internal capabilities. In ITO 2.0, the company is going out to the collective and specifically seeking out the best and the brightest. It then uses the network to share information and form relationships with these individuals to advance the common goals. In essence, the major difference is crowd-sourcing is ad-hoc and more in tune with open source while ITO 2.0 is more organized and more in tune with standard corporate methodologies. And the major similarity is that both revolve around the same underlying principles of using the network and the best and brightest to get the work done (wherever they are) – and that’s a good thing.

Stacking the Supply Chain

Industry Week recently ran an article that asked the question “How does your supply chain stack up?” Written by the Director of Corporate Partnerships from the University of Tennessee, the article summarized the main lesson learned by the Department of Marketing and Logistics since they started offering supply chain assessments in 2006.

To date, the department has performed eight supply chain audits for companies across a diverse range of industries that ranged from 100M in annual sales to 30B. Although the firms were very diverse, they found that, to their surprise (but not mine), that all of the firms faced exactly the same supply chain problems.

Specifically, they found the seven following commonalities:

  • Too much product complexity
    Too many models and lack of a good process to eliminate underperforming products.
  • Too much slow-moving and obsolete inventory
    Sales doesn’t want to reduce price because they’re measured on margin – but products lose value over time while incurring inventory holding costs.
  • Supply chain considerations not part of the product design process
    Design teams rarely consider inventory, transportation, or warehousing issues – just to name a few.
  • No supply chain strategy
    Many supply chain organizations are so consumed with the daily battles of cost control, inventory management, and customer service that they don’t plan for the future – sometimes with disastrous results.
  • Ineffective matching of supply with demand
    In most companies, sales is driven by revenue generation while operations strives to cut costs.
  • Physical network problems
    Many organizations do not have an optimal network design. Warehouses need to be appropriately placed and transportation optimized.
  • Global issues and outsourcing problems
    Outsourcing decisions are made everyday, but few firms consider the total cost of an outsourcing decision.

Addressing just one of these problems can lead to millions in savings. For example, a hard goods manufacturer achieved 600M in cash-flow improvements through inventory and asset optimization and another manufacturer found 5M to 10M in savings simply by restructuring its distribution network.

So what can you do? Lots. And even though the article stopped short of specifying what you can do, this blog entry is not. If you have these problems, you can start by looking into these potential solutions:

  • Product Line Consideration
    Look to today’s modern auto-companies. Instead of giving you 30 different options, and letting you choose from 2^30 or 1B different configurations, some only sell three or four standard configurations of a car: the base model, the value model, the extended model, or the luxury model. Assembly is efficient and product complexity is minimized.
  • Pre-Launch Price Reduction Planning
    Model the inventory holding cost up-front, analyze historical price trends, and pre-determine dates where remaining inventory will be reduced, marked down, and cleared. If the product happens to be composed largely of raw materials that are increasing in price (i.e. steel) and has a scrap value that increases over time, you can take this into account as well and determine a formula that is to be run on predefined dates to determine the appropriate price decreases. This is very important if you are in electronics, where you can predict that in 6 months the product will have lost 20% of its value – that tells you that a 10% reduction in 3 months might be better than having to fire-sale the product in 7 months.
  • Include supply chain in product design
    When different options have dramatically different material, inventory, warehousing, or transportation costs – supply chain can point this out.
  • Sync the Plans
    Every time the business plan is updated, update the supply chain plan as well to meet the goals of the business plan. Don’t have a supply chain plan? Get one!
  • Forecast with Foresight
    Make sure forecasting is done by an integrated Sales & Operations Planning team that includes the head of sales, the head of marketing, and the head of supply chain – and that every department works off of the same forecast.
  • Network Modeling
    Model your current network, and re-run the network flow model at least once, if not twice, a year to optimize flow – and do a complete network re-design exercise every three years to determine the optimal network design and if any changes need to be made.
  • Outsource Intelligently
    Don’t outsource anything you haven’t optimized internally first – displacing a problem doesn’t solve it, it just makes it worse. If you need help getting your house in order, bring in an expert to help you.

Designing for BPO and Shared Services

SourcingMag.com recently printed an article from Alsbridge on “Designing Your Organization for BPO and Shared Services”. With one exception, it was quite good.

According to Alsbridge, there are three main components to the shared services model:

  • the service management organization, or BPO,
    which performs the shared services on behalf of the retaining organization,
  • the retained organization
    which is the organization “left behind” that retains all tasks not outsourced to the service management organization, and
  • the governance layer
    that manages the customer/supplier relationship, including service level agreements (SLAs), performance reporting, billing, and issue resolution.

This is dead-on. It’s good to see someone making it clear that the governance layer has to be treated as a separate entity. Some people seem to think there’s only two components: the service management organization and the retained organization, and that the retained organization should be responsible for managing the service management organization. This, of course, is very problematic. Typically, your retained organization consists of employees who didn’t negotiate the contract and don’t have the authority to tell the service management organization to “do their job and get it right” if the service management organization isn’t performing up to expectations, and they definitely don’t have the authority to withhold payment until the terms of the SLAs are met.

Of course, the point of the article was how to go about designing the 3-part model. According to Alsbridge, you should use a top-down design that defines, in succession:

  1. vision and strategy
  2. design criteria
  3. operating model
  4. shared-services organization structure
  5. retained organization structure
  6. job descriptions
  7. role profiles

while simultaneously using a bottom-up design, guided by the governance council, to flesh out the organization structures and job descriptions – if you want to arrive at the proper model.

The article takes deep dives into each of these steps, starting with vision and design principles, for which it gives the following examples.

Vision
We will deliver a shared service organization that

  • increases the quality, efficiency, and speed of Procurement transaction services
  • improves reporting
  • delivers significant cost savings

Design Criteria

  1. organize to ensure flexibility and responsiveness to customer requirements
  2. minimize cost in delivering agreed service levels
  3. ensure clear roles and accountabilities
  4. structure to maximize work process effectiveness, quality, and excellence while exploiting economies of scale
  5. create a rewarding, challenging, and stimulating working environment

And, at this point, you realize that the article missed step 0, which I believe to be absolutely critical if you want to get it right.

Why are You Engaging a BPO?
Before you even start the process, you should have a good understanding of why you want to outsource part, most, or all of an internal function to a BPO. You need to understand what you are doing well, what you are not doing well, what could be done better, and why, and then figure out what tasks you plan to outsource and what tasks you plan to keep in house before you even begin the organizational design process. This is because the skill-sets need to do tactical procurement versus strategic supply-base identification versus contract negotiation are totally different and your organization design needs to reflect the tasks being done appropriately. How you plan to split up the work will affect your vision, your design principles, your criteria, your operating model, your shared-services organization structure, and your retained organization structure, because, let’s face it, sourcing and procurement is not like HR and Accounting.