Inside Outsourcing


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Inside Outsourcing

  1. 2. Inside Outsourcing The insider’s guide to managing strategic sourcing AUTHOR: Charles L. Gray and James Essinger PUBLISHER: Nicholas Brealey Publishing DATE OF PUBLICATION: 2000 NUMBER OF PAGES: 245 pages Book pic
  2. 3. <ul><li>How can organizations use outsourcing to its full potential, as a strategic business tool? </li></ul><ul><ul><li>Maximize your company’s efficiency, profitability, and cost-effective operations while allowing flexibility and building a greater customer franchise. </li></ul></ul><ul><ul><li>From decision-making to implementation – to identifying what a company does more creatively than its competition- the big idea becomes clear not only through theory but in this book’s practical and detailed examination of strategic outsourcing processes. </li></ul></ul><ul><ul><li>Backed up by case studies on Rolls Royce, Bethlehem Steel, Pharmacia Upjohn, Gillette, and DuPont, Inside Outsourcing offers points to help streamline your operations and maximize service quality. </li></ul></ul>THE BIG IDEA
  3. 4. First, what exactly is “Outsourcing”? <ul><li>It’s much more than just a fashionable term for getting a new caterer or cleaning service for the office. </li></ul><ul><li>Outsourcing </li></ul><ul><ul><li>A management strategy by which an organization engages in contractual agreements to assign major non-core functions to specialized and efficient service providers. </li></ul></ul><ul><ul><li>It is the strategic use of outside resources to perform activities traditionally handled by internal staff and resources. </li></ul></ul><ul><li>Organizations that rush into outsourcing without fully understanding what they hope to gain may find themselves in a battle with a vendor who will supply services that make things worse rather than improving them. </li></ul><ul><li>Organizations choose to outsource because they expect it to be a cost-saving solution, or because they need the expertise of a particular service provider. </li></ul>
  4. 5. First, what exactly is “Outsourcing”? <ul><li>An organization should outsource its non-core functions so it can focus on its core competencies. </li></ul><ul><ul><li>Good outsourcing ensures maximum value of delivery to the customer. </li></ul></ul><ul><ul><li>Good outsourcing frees managers to focus on core activities. </li></ul></ul><ul><li>Before getting into any outsourcing deal, it is first necessary to ask: </li></ul><ul><ul><li>What are our core competencies? </li></ul></ul><ul><ul><li>What is the nature of our customer franchise? </li></ul></ul><ul><ul><li>Can we fix ourselves internally before we consider outsourcing? </li></ul></ul><ul><ul><li>What can an outside vendor do that we cannot? </li></ul></ul><ul><ul><li>What kind of relationship with a vendor is most appropriate? </li></ul></ul><ul><ul><li>What kind of contract will we need with vendors? </li></ul></ul><ul><ul><li>How will we deal with people issues? Especially those made redundant by outsourcing? </li></ul></ul>
  5. 6. First, what exactly is “Outsourcing”? <ul><li>In 1999, the fastest growing areas for outsourcing worldwide were </li></ul><ul><ul><li>human resources management </li></ul></ul><ul><ul><li>media management </li></ul></ul><ul><ul><li>information technology </li></ul></ul><ul><ul><li>customer service </li></ul></ul><ul><ul><li>marketing. </li></ul></ul><ul><li>The UK, France, Germany, and Italy were the top countries where the practice of outsourcing grew most rapidly. </li></ul><ul><li>In industries such as media and publishing </li></ul><ul><ul><li>outsourcing has been a traditional practice where publishing houses outsource design and layout, printing, subscriptions and distribution services. </li></ul></ul><ul><li>Commercial relationships between purchasers and suppliers – all fall under the general term of Outsourcing. </li></ul>
  6. 7. First, what exactly is “Outsourcing”? <ul><ul><li>These are: </li></ul></ul><ul><ul><ul><li>Co-sourcing </li></ul></ul></ul><ul><ul><ul><li>Subcontracting </li></ul></ul></ul><ul><ul><ul><li>Partnering </li></ul></ul></ul><ul><ul><ul><li>joint ventures </li></ul></ul></ul><ul><ul><ul><li>third-party contracts </li></ul></ul></ul><ul><ul><ul><li>facilities management </li></ul></ul></ul><ul><ul><ul><li>managed services </li></ul></ul></ul><ul><ul><ul><li>management buyouts </li></ul></ul></ul><ul><ul><ul><li>strategic insourcing </li></ul></ul></ul><ul><li>Shreeveport </li></ul><ul><ul><li>A business and management consultancy that recommends outsourcing to make private businesses more competitive, helping streamline and increase efficiency in blue chip organizations as well as government initiatives. </li></ul></ul><ul><li>Types of outsourcing  </li></ul><ul><ul><li>Contracting out activities </li></ul></ul><ul><ul><ul><li>Short-term urgent solutions, delegating activities to another organization </li></ul></ul></ul>
  7. 8. First, what exactly is “Outsourcing”? <ul><ul><li>Outsourcing services </li></ul></ul><ul><ul><ul><li>Engaging specialized external service providers enabling the company to focus on what it does best while service provider contributes on a deeper strategic level </li></ul></ul></ul><ul><ul><li>Insourcing </li></ul></ul><ul><ul><ul><li>An alternative that improves operations of one area so work from other areas can be undertaken </li></ul></ul></ul><ul><ul><li>Co-sourcing </li></ul></ul><ul><ul><ul><li>The host organization supplies staff or managers; both supplier and host have responsibility over resources to meet the objectives </li></ul></ul></ul><ul><ul><li>Benefit-based relationships </li></ul></ul><ul><ul><ul><li>A long-term relationship based on both parties making an up-front investment and sharing benefits and risks. </li></ul></ul></ul>
  8. 9. <ul><li>Top ten reasons why companies outsource : </li></ul><ul><ul><li>Reduce and control operating costs </li></ul></ul><ul><ul><li>Improve company focus </li></ul></ul><ul><ul><li>Gain access to world-class capabilities </li></ul></ul><ul><ul><li>Free up internal resources for other purposes </li></ul></ul><ul><ul><li>Obtain resources not available internally </li></ul></ul><ul><ul><li>Accelerate reengineering benefits </li></ul></ul><ul><ul><li>Deal with a function that is difficult to manage/ out of control </li></ul></ul><ul><ul><li>Make capital funds available </li></ul></ul><ul><ul><li>Share risks </li></ul></ul><ul><ul><li>Obtain a cash infusion </li></ul></ul><ul><li>Top ten benefits derived from outsourcing: </li></ul><ul><ul><li>  Reduction in cost of obtaining service </li></ul></ul><ul><ul><li>Reduction in headcount of the organization </li></ul></ul><ul><ul><li>Flexibility in terms of service delivery </li></ul></ul><ul><ul><li>Access to expertise </li></ul></ul>Why outsource?
  9. 10. Why outsource? <ul><ul><li>Improved service </li></ul></ul><ul><ul><li>Extra management time </li></ul></ul><ul><ul><li>Focus on core services </li></ul></ul><ul><ul><li>Improved quality </li></ul></ul><ul><ul><li>Less need for capital investment </li></ul></ul><ul><ul><li>Cash inflow </li></ul></ul><ul><li>Other benefits that result from outsourcing and often are unexpected:  </li></ul><ul><ul><li>Outsourcing is a catalyst for change. It highlights areas for improvement. </li></ul></ul><ul><ul><li>Supports other business initiatives. </li></ul></ul><ul><ul><li>Initiates cultural change by educating people about creative service delivery options </li></ul></ul><ul><ul><li>Stimulates critical business analysis because of documentation of processes and costs </li></ul></ul>
  10. 11. Why outsource? <ul><ul><li>Focuses on costs of services when alternative sourcing becomes a reality </li></ul></ul><ul><ul><li>Provides a strong case for outsourcing in other areas of the business when it is working out well </li></ul></ul><ul><ul><li>Invigorates business by converting sluggish areas into dynamic successful ones and stimulating internal pride </li></ul></ul><ul><li>Before deciding which approach to outsourcing you want to follow, answer the following questions:  </li></ul><ul><ul><li>Have we defined our objectives clearly? </li></ul></ul><ul><ul><li>Have all our options been identified? </li></ul></ul><ul><ul><li>What are the risks in proceeding with each option? </li></ul></ul><ul><ul><li>What are the risks if we do not proceed with each option? </li></ul></ul>
  11. 12. <ul><li>Next, define your business case. </li></ul><ul><ul><li>It can be anywhere from a single page to 100 pages. </li></ul></ul><ul><ul><li>The content is what matters. </li></ul></ul><ul><ul><li>The business case must identify the problem and list actions or solutions and the cost of each option. </li></ul></ul><ul><ul><li>It must contain the following key sections: </li></ul></ul><ul><ul><ul><li>Executive summary </li></ul></ul></ul><ul><ul><ul><li>Strategic context </li></ul></ul></ul><ul><ul><ul><li>Current provisions/ existing conditions </li></ul></ul></ul><ul><ul><ul><li>Options </li></ul></ul></ul><ul><ul><ul><li>Benefits </li></ul></ul></ul><ul><ul><ul><li>Costs </li></ul></ul></ul><ul><ul><ul><li>Sensitivity analysis </li></ul></ul></ul><ul><ul><ul><li>Risks </li></ul></ul></ul><ul><ul><ul><li>The plan </li></ul></ul></ul><ul><ul><ul><li>Recommendations </li></ul></ul></ul>Make the case
  12. 13. <ul><li>Gather team members to research and make a baseline analysis to decide whether the outsourcing process is the right way forward. </li></ul><ul><ul><li>They should come from different areas of expertise: </li></ul></ul><ul><ul><ul><li>Legal </li></ul></ul></ul><ul><ul><ul><li>human resources </li></ul></ul></ul><ul><ul><ul><li>Finance </li></ul></ul></ul><ul><ul><ul><li>Communications </li></ul></ul></ul><ul><ul><ul><li>market research </li></ul></ul></ul><ul><ul><ul><li>Procurement </li></ul></ul></ul><ul><ul><ul><li>Specific function/area to be outsourced. </li></ul></ul></ul><ul><li>Prepare the outsourcing plan. It should address 12 key stages: </li></ul><ul><ul><li>Clarifying objectives/requirements </li></ul></ul><ul><ul><li>Planning the process </li></ul></ul><ul><ul><li>Determining suppliers and their levels of interest </li></ul></ul>Make the case
  13. 14. <ul><ul><li>Managing managers and key stakeholders </li></ul></ul><ul><ul><li>Communicating with staff involved inside and out </li></ul></ul><ul><ul><li>Shortlist suppliers and provide them with your requirements </li></ul></ul><ul><ul><li>Evaluate their responses and continue dialogue </li></ul></ul><ul><ul><li>Get senior managers signed up to the plan </li></ul></ul><ul><ul><li>Negotiate contract and service level agreements </li></ul></ul><ul><ul><li>Transition </li></ul></ul><ul><ul><li>Manage the contract in the manner agreed with the supplier at negotiation stage </li></ul></ul><ul><li>Key outsourcing wisdom: </li></ul><ul><ul><li>The amount of communication in an outsourcing process should never be underestimated. It is a people-intensive process. </li></ul></ul>Make the case
  14. 15. <ul><ul><li>Contract negotiations take longer than you estimate. Keep lawyers out of the negotiations for as long as you can. </li></ul></ul><ul><ul><li>Develop an evaluation method and criteria before making contact with suppliers </li></ul></ul><ul><ul><li>When board members “own” the deal or are fully involved in every step, they are more likely to endorse it and see it through. </li></ul></ul><ul><li>Getting senior management to sign up </li></ul><ul><ul><li>Furnish an initial shortlist of suppliers </li></ul></ul><ul><ul><li>Get an agreement to the scope of the exercise and later to the statement of requirement </li></ul></ul><ul><ul><li>Meet potential suppliers and visit reference sites </li></ul></ul><ul><ul><li>Select a preferred supplier </li></ul></ul><ul><ul><li>Agree to the contract. </li></ul></ul>Make the case
  15. 16. <ul><li>Presentations to the board are time-consuming. </li></ul><ul><li>Establishing a group to focus on planning and handling the whole outsourcing contract and interactions with the supplier will be required. </li></ul>Train the contract management team
  16. 17. <ul><li>Don’t let anyone out until an agreement has been reached where both parties are happy with the deal. </li></ul><ul><li>Agree on key milestones or deadlines for both parties to meet. </li></ul><ul><ul><li>The contract must spell out options available especially in outsourcing IT, where technology is rapidly changing, a contract must allow for flexibility. </li></ul></ul><ul><li>Key things to remember when producing an output-based specification: </li></ul><ul><ul><li>List the outcomes you want and what must happen. </li></ul></ul><ul><ul><li>Don’t make the outcomes greater than what the service provider can deliver. </li></ul></ul><ul><ul><li>Make sure you get to the heart of the matter. </li></ul></ul>Employ the “locked room” method
  17. 18. <ul><li>Define the type of relationship you want with your service provider: </li></ul><ul><ul><li>Agree on who does what </li></ul></ul><ul><ul><li>Have termination provisions for both the end of the service contract and during the contract </li></ul></ul><ul><ul><li>Service levels </li></ul></ul><ul><ul><li>Penalties or credits for non-performance </li></ul></ul><ul><ul><li>Specify how the contract may change and who will do what in such cases </li></ul></ul><ul><ul><li>Pricing mechanisms and “caps” on changes. </li></ul></ul><ul><li>When issuing a formal RFP or Request for Proposals make sure it includes: </li></ul><ul><ul><li>The specification you have been writing </li></ul></ul><ul><ul><li>Background, especially if there is a new trend in the service </li></ul></ul><ul><ul><li>Instructions for bidders </li></ul></ul>Employ the “locked room” method
  18. 19. <ul><li>A supplier should make life easier for you. </li></ul><ul><ul><li>If it does not submit its bid in the specified format, or its prices are totally unique and are not comparable to other suppliers, then reconsider. </li></ul></ul>Employ the “locked room” method
  19. 20. <ul><li>Split the legal issues into two categories: </li></ul><ul><ul><li>the contract and related documents to get the relationship started </li></ul></ul><ul><ul><li>other miscellaneous legal issues that may arise over the course of the relationship. </li></ul></ul><ul><li>A Memorandum of Understanding </li></ul><ul><ul><li>A short agreement that is a statement of intent between parties and is not legally binding but offers a moral obligation once signed. </li></ul></ul><ul><ul><li>It is written in plain, non-legal language the general objectives of both parties. </li></ul></ul><ul><ul><li>It is a cheaper and quicker way to establish early on if both parties can strike a deal or not. </li></ul></ul><ul><li>The contract must be precise and written in ordinary language to explain the terms and scope of work. </li></ul>Legal issues of outsourcing: Contracts and M.O.U.’s
  20. 21. Legal issues of outsourcing: Contracts and M.O.U.’s <ul><ul><li>It must clearly define roles, objectives, responsibilities, and expectations. </li></ul></ul><ul><ul><li>Any failure to deliver on either side should have clear procedures spelled out to remedy it. </li></ul></ul><ul><ul><li>The contract should be able to let the customer achieve value for money while allowing the supplier to make a reasonable profit. </li></ul></ul><ul><ul><li>Lay down specific targets and measures, as well as payment terms and conditions. </li></ul></ul><ul><li>The contract is an important risk management tool. </li></ul><ul><ul><li>It is the safety net for problems when they arise and will settle any disputes that occur due to human folly. </li></ul></ul><ul><li>The contract must be able to stand the test of time. </li></ul><ul><ul><li>Should the project last for a number of years and key individuals leave their positions, the terms of the contract should still apply. </li></ul></ul>
  21. 22. Legal issues of outsourcing: Contracts and M.O.U.’s <ul><li>Accommodate unforeseeable changes by treating the contract as a living document that can be open to re-negotiation. </li></ul><ul><ul><li>Both parties’ interests may change over time. </li></ul></ul><ul><li>Termination of the contract should be the last resort after a series of specific measures or penalties. </li></ul><ul><ul><li>The contract should provide a comprehensive description of events that allows one side to terminate it unilaterally. </li></ul></ul><ul><ul><li>It should describe a process that will trigger and complete termination, and cover the exit process, handover of assets, and transfer of staff. </li></ul></ul><ul><li>Confidentiality should be covered in the contract, since both parties will be providing information to each other of a commercially sensitive nature. </li></ul>
  22. 23. Legal issues of outsourcing: Contracts and M.O.U.’s <ul><li>For the supplier the most important part of the outsourcing arrangement is being paid. </li></ul><ul><ul><li>Delays can seriously affect its financial position and cash flow. </li></ul></ul><ul><ul><li>Clear provisions should be laid out on invoicing and payment terms and procedures. </li></ul></ul><ul><ul><li>Payment due dates and invoice deliveries should be set down specifically. A reasonable period of time should be allowed for the purchaser to investigate the invoice if it requires. </li></ul></ul><ul><li>Write your contract from the standpoint of already having had a disagreement. </li></ul><ul><ul><li>Do not rely on gentlemen’s agreements or a person’s word. </li></ul></ul><ul><ul><li>Poorly defined contracts later lead to ill will. </li></ul></ul><ul><ul><li>Draft a well-defined contract to avoid any disputes and expensive court battles later on. </li></ul></ul>
  23. 24. <ul><li>Outsourcing is a people-intensive undertaking </li></ul><ul><ul><li>It is vital to address human resource issues from the outset. </li></ul></ul><ul><ul><li>People are always fearful of change, and the more rigid and inflexible your organization, the less likely for employees to warm up to the new arrangement. </li></ul></ul><ul><li>Outsourcing tends to make purchaser’s employees redundant. </li></ul><ul><ul><li>Do not involve staff in the choice of service provider. </li></ul></ul><ul><li>A detailed transition plan outlining all aspects of human resources is a fundamental requirement of a well-managed outsourcing arrangement. </li></ul><ul><li>Staff will ask you two questions: </li></ul><ul><ul><li>What will happen to our jobs? </li></ul></ul><ul><ul><li>What will happen to our pensions? </li></ul></ul>Human Resources
  24. 25. <ul><li>Staff resist outsourcing because </li></ul><ul><ul><li>They feel loss of control over their jobs and lives. </li></ul></ul><ul><ul><li>They fear change, increased workload without any increased compensation. </li></ul></ul><ul><ul><li>They feel threatened. </li></ul></ul><ul><ul><li>They feel a clash of cultures, and the whole outsourcing initiative may not have been thoroughly explained to them. </li></ul></ul><ul><li>To overcome resistance and build trust, have internal briefings, bulletins, intranet websites, and a hotline helpdesk to address staff concerns. </li></ul><ul><ul><li>Involve employees and managers in the outsourcing process. </li></ul></ul><ul><ul><li>Explain the benefits of the deal and focus on the positive. </li></ul></ul>Human Resources
  25. 26. <ul><li>Some typical staff questions you will need to answer are the following: </li></ul><ul><ul><li>Why are we seeking a supplier/service provider? </li></ul></ul><ul><ul><li>How will the arrangement work? </li></ul></ul><ul><ul><li>What will happen next? </li></ul></ul><ul><ul><li>Individually speaking, will I have to relocate? How will I be involved in the process? </li></ul></ul><ul><ul><li>Are the unions involved in consultation about the outsourcing? </li></ul></ul><ul><ul><li>How will I be paid and when? </li></ul></ul><ul><ul><li>What will happen to my pension? </li></ul></ul><ul><ul><li>Will I be acquiring new skills? </li></ul></ul><ul><ul><li>Will we continue to work on existing projects or will we be transferred? </li></ul></ul><ul><ul><li>How do we handle the press? </li></ul></ul><ul><ul><li>When will I receive more information? </li></ul></ul>Human Resources
  26. 27. Implementation <ul><li>The following items must be in place to ensure the outsourcing effort is optimized: </li></ul><ul><ul><li>Clear and agreed objectives </li></ul></ul><ul><ul><li>Performance measures </li></ul></ul><ul><ul><li>Agreed sanctions for non-performance </li></ul></ul><ul><ul><li>Agreed frequency of reviews </li></ul></ul><ul><ul><li>Agreed dates for submissions for reviews </li></ul></ul><ul><ul><li>Escalation process </li></ul></ul><ul><ul><li>Feedback and lessons learned sessions </li></ul></ul>
  27. 28. The Shreeveport Survey <ul><li>Shreeveport Management Consultancy </li></ul><ul><ul><li>Recently surveyed the UK’s 500 biggest organizations. </li></ul></ul><ul><ul><li>The summary of its findings is a result of in-depth phone interviews with senior executives of these organizations. </li></ul></ul><ul><li>The main benefits of outsourcing were: </li></ul><ul><ul><li>a reduction in cost of obtaining the service. </li></ul></ul><ul><ul><li>a reduction in headcount of the organization. </li></ul></ul><ul><ul><li>increased flexibility of the business enterprise. </li></ul></ul><ul><li>The most frequently mentioned factors motivating the decision to outsource are as follows: </li></ul><ul><ul><li>Service cost reduction </li></ul></ul><ul><ul><li>Headcount reduction </li></ul></ul><ul><ul><li>Opportunity to focus more on core business </li></ul></ul><ul><ul><li>Competitive strategy </li></ul></ul>
  28. 29. The Shreeveport Survey <ul><ul><li>Access to expertise </li></ul></ul><ul><ul><li>Improved service delivery </li></ul></ul><ul><ul><li>Improved quality of products or services </li></ul></ul>
  29. 30. Outsourcing in general: <ul><li>An organization aiming to </li></ul><ul><ul><ul><li>Receive the maximum benefits from outsourcing </li></ul></ul></ul><ul><ul><ul><li>Must adopt a systematic approach to it. </li></ul></ul></ul><ul><ul><ul><li>Must above all set targets for the benefits to be achieved </li></ul></ul></ul><ul><ul><ul><li>Then measure them continuously. </li></ul></ul></ul><ul><ul><li>Outsourcing is a business strategy, not a one-off approach. It should be viewed from the context of other business initiatives such as information technology, business process reengineering or major restructuring. </li></ul></ul><ul><ul><li>A communications strategy to keep all stakeholders informed must be developed and implemented. </li></ul></ul><ul><ul><li>The baseline cost of the service must be accurately determined. </li></ul></ul><ul><ul><ul><li>Objectives to be achieved from outsourcing need to be set down for clarity. </li></ul></ul></ul>
  30. 31. Outsourcing in general: <ul><ul><li>Contract management must be devised with frequent meetings, and interactions. </li></ul></ul><ul><li>Common experiences in outsourcing: </li></ul><ul><ul><li>Not anticipating time required for outsourcing </li></ul></ul><ul><ul><li>Not preparing the service for outsourcing </li></ul></ul><ul><ul><li>Confining the initiative and excluding it from other business decisions </li></ul></ul><ul><ul><li>Failing to agree to firm objectives to be achieved </li></ul></ul><ul><ul><li>Preparing inadequate or incomplete specifications </li></ul></ul><ul><ul><li>Not costing the service properly </li></ul></ul><ul><ul><li>Not communicating appropriately with all stakeholders </li></ul></ul><ul><ul><li>Not instituting a means of managing the arrangement </li></ul></ul>
  31. 32. Outsourcing in general: <ul><li>The Findings: </li></ul><ul><ul><li>72% of the 500 surveyed organizations had positive things to say about the practice of outsourcing. </li></ul></ul><ul><ul><li>Shreeveport concluded most expectations were met and sometimes even exceeded. </li></ul></ul><ul><ul><li>Majority would gladly enter into another outsourcing arrangement again.’ </li></ul></ul>
  32. 33. The Future of Outsourcing <ul><li>The practice of outsourcing contributes to the evolution of our working environment. </li></ul><ul><ul><li>It will help businesses concentrate their efforts on core activities. </li></ul></ul><ul><li>The Shreeveport survey shows that the future of outsourcing is secure, and over the next five years, companies are likely to outsource more, especially in the IT sector. </li></ul>
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