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Inside Outsourcing
The insider‘s guide to managing strategic sourcing
AUTHOR:  Cha": !s L...
THE BIG IDEA

 

Inside Outsourcing by Charles l_ Gray and James Esslnger

- How can organizations use outsourcing to its ...
First,  what exactly is “Outsourcing”? 

Inside Outsourcing by Charles L.  Gray and James Essingor

It’s much more than ju...
First,  what exactly is “Outsourcing”? 

 

Inside Outsourcing by Charles L.  Gray and James Esslnger

- An organization s...
First,  what exactly is “Outsourcing”? 

Inside Outsourcing by Charles L.  Gray and James Esslnger

- In 1999, the fastest...
First,  what exactly is “Outsourcing”? 

Inside Outsourcing by Charles l_ Gray and James Esslnger

 

V" These are: 

- Co...
First,  what exactly is “Outsourcing”? 

 

Inside Outsourcing by Charles L.  Gray and James Esslnger

V Outsourcing servi...
Why outsource? 

 

Inside Outsourcing by Charles l_ Gray and James Esslnger

- Top ten reasons why companies outsource: 
...
Will’ *f‘l! li~fl¥l! ii'§ 

lnsldie Outsourcing by Charlies L.  Gray and James Essingirr

 Improved service

 Extra managem...
Why outsource? 

 

Inside Outsourcing by Charles l_ Gray and James Essingor

~/  Focuses on costs of services when altern...
Make the case

- Next,  define your business case. 
It can be anywhere from a single page to 100 pages. 

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The cont...
Make the case

 

Inside Outsourcing by Charles l_ Gray and James Esslnger

- Gather team members to research and make a
b...
Make the case

 

Inside Outsourcing by Charles l_ Gray and James Esslnger
V Managing managers and key stakeholders
V Comm...
Make the case

 

Inside Outsourcing by Charles l_ Gray and James Esslnger

V Contract negotiations take longer than you e...
Train the contract management team

Inside Outsourcing by Charles L.  Gray and James Essinger

 

- Presentations to the b...
Employ the ‘‘locked room” method

Inside Outsourcing by Charles L.  Gray and James Esslnger

- Don't let anyone out until ...
Employ the ‘‘locked room” method

- Define the type of relationship you want with your

Inside Outsourcing by Charles L.  ...
Employ the ‘‘locked room” method

 

Inside Outsourcing by Charles L.  Gray and James Essinger

- A supplier should make l...
Legal issues of outsourcing:  Contracts and M. O.U. ’s

Inside Outsourcing by Charles L.  Gray and James Esslnger

- Split...
Legal issues of outsourcing:  Contracts and M. O.U. ’s

lnsldo Outsourcing by Charla L.  Gray and James Esslngor

 

V It ...
Legal issues of outsourcing:  Contracts and M. O.U. ’s

lnsldc Outsourcing by Charles L.  Gray and James Essingor

 

- Ac...
Legal issues of outsourcing:  Contracts and M. O.U. ’s

Inside Outsourcing by Charles L.  Gray and James Esslnger

- For t...
Human Resources

 

Inside Outsourcing by Charles L.  Gray and Jarrres Esslnger

° Outsourcing is a people-intensive under...
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lnsldie Outsourcing by Charlies L.  Gray and James Ess...
Human Resources

 

Inside Outsourcing by Charles l_ Gray and James Esslnger

° Some typical staff questions you will need...
Implementation

 

Inside Outsourcing by Charles L.  Gray and James Essinger

- The following items must be in place to en...
The Shreeveport Survey

 

Inside Outsourcing by Charles l_ Gray and James Esslnger

° Shreeveport Management Consultancy
...
The Shreeveport Survey

 

Inside Outsourcing by Charles L.  Gray and James Essinger

V Access to expertise
V Improved ser...
Outsourcing in general: 

 

lnsldo Outsourcing by Charles l_ Gray and James Esslngor

° An organization aiming to
- Recei...
Outsourcing in general: 

 

lnsldo Outsourcing by Charles l_ Gray and James Esslngor

V Contract management must be devis...
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lnsldie Outsourcing by Charlies L.  Gray and James Essingirr

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The Future of Outsourcing

lnsldo Outsourcing by Charlos l_ Gray and James Esslngor

- The practice of outsourcing contrib...
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Inside Outsourcing B I Z

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Inside Outsourcing B I Z

  1. 1. BusinessSummaries. com
  2. 2. ,. ""I', .‘. ‘. I I N: ‘‘ Inside Outsourcing The insider‘s guide to managing strategic sourcing AUTHOR: Cha": !s L. Gray anc Jam»: -3 Essingcr PUBLISHER: N. «:: hoI. :as Bream’ Put: ~'. sl~I~g DATE OF PUBLICATION: ZCICD NUMBER OF PAGES: 245 pages ‘El! M‘iIiQ»$3!IIIlI01IiI! -QAAQIOIII
  3. 3. THE BIG IDEA Inside Outsourcing by Charles l_ Gray and James Esslnger - How can organizations use outsourcing to its full potential, as a strategic business tool? V Maximize your company’s efficiency, profitability, and cost- effective operations while allowing flexibility and building a greater customer franchise. V 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. V 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. v. w: businc*sssunvnarIcs. ctxn
  4. 4. First, what exactly is “Outsourcing”? Inside Outsourcing by Charles L. Gray and James Essingor It’s much more than just a fashionable term for getting a new caterer or cleaning service for the office. Outsourcing V A management strategy by which an organization engages in contractual agreements to assign major non-core functions to specialized and efficient service providers. / It is the strategic use of outside resources to perform activities traditionally handled by internal staff and resources. 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. 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. v. w: businc*sssunvnarics. ccxn
  5. 5. First, what exactly is “Outsourcing”? Inside Outsourcing by Charles L. Gray and James Esslnger - An organization should outsource its non-core functions so it can focus on its core competencies. V Good outsourcing ensures maximum value of delivery to the customer. V Good outsourcing frees managers to focus on core activities. - Before getting into any outsourcing deal, it is first necessary to ask: V What are our core competencies? V What is the nature of our customer franchise? V Can we fix ourselves intemally before we consider outsourcing? What can an outside vendor do that we cannot? What kind of relationship with a vendor is most appropriate? What kind of contract will we need with vendors? How will we deal with people issues? Especially those made redundant by outsourcing? '. v. w: businc*sssunvnarics. ctxn
  6. 6. First, what exactly is “Outsourcing”? Inside Outsourcing by Charles L. Gray and James Esslnger - In 1999, the fastest growing areas for outsourcing worldwide were V human resources management media management infonnation technology customer service marketing. KKKK. - The UK, France, Germany, and Italy were the top countries where the practice of outsourcing grew most rapidly. - In industries such as media and publishing V outsourcing has been a traditional practice where publishing houses outsource design and layout, printing, subscriptions and distribution services. ' Commercial relationships between purchasers and suppliers — all fall under the general term of Outsourcing. v. vin: busincsssunvnarics. ctxn
  7. 7. First, what exactly is “Outsourcing”? Inside Outsourcing by Charles l_ Gray and James Esslnger V" These are: - Co-sourcing - Subcontracting - Partnering - joint ventures - third-party contracts - facilities management - managed services - management buyouts - strategic insourcing - Shreeveport V 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. ° Types of outsourcing V Contracting out activities - Short-term urgent solutions, delegating activities to another organization , ,,, ,., ._. j,u, ,,m, ,,, ,,, ,,, ,,, ;c5_c, ,., ,
  8. 8. First, what exactly is “Outsourcing”? Inside Outsourcing by Charles L. Gray and James Esslnger V Outsourcing services - Engaging specialized external service providers enabling the company to focus on what it does best while service provider contributes on a deeper strategic level V Insourcing - An alternative that improves operations of one area so work from other areas can be undertaken V Co-sourcing - The host organization supplies staff or managers; both supplier and host have responsibility over resources to meet the objectives V Benefit-based relationships - A long-term relationship based on both parties making an up-front investment and sharing benefits and risks. vmn: busincsssunvnarics. ctxn
  9. 9. Why outsource? Inside Outsourcing by Charles l_ Gray and James Esslnger - Top ten reasons why companies outsource: V Reduce and control operating costs Improve company focus Gain access to world-class capabilities Free up internal resources for other purposes Obtain resources not available internally Accelerate reengineering benefits Deal with a function that is difficult to manage/ out of control Make capital funds available Share risks V Obtain a cash infusion ' K - Top ten benefits derived from outsourcing: V Reduction in cost of obtaining service V Reduction in headcount of the organization V Flexibility in tenns of service delivery V Access to expertise vmn: busincsssunvnarics. ctxn
  10. 10. Will’ *f‘l! li~fl¥l! ii'§ lnsldie Outsourcing by Charlies L. Gray and James Essingirr Improved service Extra management time Focus on core services Improved quality V Less need for capital investment V Cash inflow Other benefits that result from outsourcing and often are unexpected: Outsourcing is a catalyst for change It highlights areas for improvement. V Supports other business initiatives. V Initiates cultural change by educating people about creative service delivery options / j , . . . . ‘$3.. ‘ Stimulates critical business analysis because of ‘ {E documentation of processes and costs - __, ‘ i-. 'wv. . bus i ncs-. xu rr ’T‘l: ll’iC . t cm
  11. 11. Why outsource? Inside Outsourcing by Charles l_ Gray and James Essingor ~/ Focuses on costs of services when alternative sourcing becomes a reality V Provides a strong case for outsourcing in other areas of the business when it is working out well V lnvigorates business by converting sluggish areas into dynamic successful ones and stimulating internal pride ° Before deciding which approach to outsourcing you want to follow, answer the following questions: ~/ Have we defined our objectives clearly? ~/ Have all our options been identified? / What are the risks in proceeding with each option? / What are the risks if we do not proceed with each option? v. w: businc*sssunvnarics. crxn
  12. 12. Make the case - Next, define your business case. It can be anywhere from a single page to 100 pages. J J J The content is what matters. Inside Outsourcing by Charles L. Gray and James Essingor The business case must identify the problem and list actions or solutions and the cost of each option. It must contain the following key sections: Executive summary Strategic context Current provisionsl existing conditions Options Benefits Costs Sensitivity analysis Risks The plan Recommendations vmn: busincsssunvnarics. crxn
  13. 13. Make the case Inside Outsourcing by Charles l_ Gray and James Esslnger - Gather team members to research and make a baseline analysis to decide whether the outsourcing process is the right way fonivard. V They should come from different areas of expertise: — Legal - human resources - Finance - Communications - market research - Procurement - Specific function/ area to be outsourced. - Prepare the outsourcing plan. It should address 12 key stages: V Clarifying objectives/ requirements V Planning the process V Determining suppliers and their levels of interest vmn: busincsssunvnarics. crxn
  14. 14. Make the case Inside Outsourcing by Charles l_ Gray and James Esslnger V Managing managers and key stakeholders V Communicating with staff involved inside and out V Shortlist suppliers and provide them with your requirements V Evaluate their responses and continue dialogue V Get senior managers signed up to the plan V Negotiate contract and service level agreements V Transition V Manage the contract in the manner agreed with the supplier at negotiation stage - Key outsourcing wisdom: V The amount of communication in an outsourcing process should never be underestimated. It is a people-intensive process. v. w: businc*sssunvnarics. ccxn
  15. 15. Make the case Inside Outsourcing by Charles l_ Gray and James Esslnger V Contract negotiations take longer than you estimate. Keep lawyers out of the negotiations for as long as you can. V Develop an evaluation method and criteria before making contact with suppliers V When board members “own" the deal or are fully involved in every step, they are more likely to endorse it and see it through. - Getting senior management to sign up V Furnish an initial shortlist of suppliers V Get an agreement to the scope of the exercise and later to the statement of requirement V Meet potential suppliers and visit reference sites V" Select a preferred supplier V Agree to the contract. v. w: businc*sssunvnarics. crxn
  16. 16. Train the contract management team Inside Outsourcing by Charles L. Gray and James Essinger - Presentations to the board are time-consuming. - Establishing a group to focus on planning and handling the whole outsourcing contract and interactions with the supplier will be required. minubusim-sssumnarics. cixn
  17. 17. Employ the ‘‘locked room” method Inside Outsourcing by Charles L. Gray and James Esslnger - Don't let anyone out until an agreement has been reached where both parties are happy with the deal. ° Agree on key milestones or deadlines for both parties to meet. V The contract must spell out options available especially in outsourcing IT, where technology is rapidly changing, a contract must allow for flexibility. - Key things to remember when producing an output-based specification: V List the outcomes you want and what must happen. V Don't make the outcomes greater than what the service provider can deliver. V Make sure you get to the heart of the matter. minubusim-sssumnarics. cixn
  18. 18. Employ the ‘‘locked room” method - Define the type of relationship you want with your Inside Outsourcing by Charles L. Gray and James Esslnger service provider: J J J J J J Agree on who does what Have termination provisions for both the end of the service contract and during the contract Service levels Penalties or credits for non-performance Specify how the contract may change and who will do what in such cases Pricing mechanisms and "caps" on changes. - When issuing a formal RFP or Request for Proposals make sure it includes: J J J The specification you have been writing Background. especially if there is a new trend in the service Instructions for bidders vmn: busincsssunvnarics. cixn
  19. 19. Employ the ‘‘locked room” method Inside Outsourcing by Charles L. Gray and James Essinger - A supplier should make life easier for you. V 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. vmn: busincsssunvnarics. cixn
  20. 20. Legal issues of outsourcing: Contracts and M. O.U. ’s Inside Outsourcing by Charles L. Gray and James Esslnger - Split the legal issues into two categories: J the contract and related documents to get the relationship started other miscellaneous legal issues that may arise over the course of the relationship. - A Memorandum of Understanding J A short agreement that is a statement of intent between parties and is not legally binding but offers a moral obligation once signed. It is written in plain, non-legal language the general objectives of both parties. it is a cheaper and quicker way to establish early on if both parties can strike a deal or not. - The contract must be precise and written in ordinary language to explain the terms and scope of work. vmn: busincsssunvnarics. cixn
  21. 21. Legal issues of outsourcing: Contracts and M. O.U. ’s lnsldo Outsourcing by Charla L. Gray and James Esslngor V It must clearly define roles. objectives, responsibilities, and expectations. V Any failure to deliver on either side should have clear procedures spelled out to remedy it. V The contract should be able to let the customer achieve value for money while allowing the supplier to make a reasonable profit. V Lay down specific targets and measures. as well as payment terms and conditions. ° The contract is an important risk management tool. V It is the safety net for problems when they arise and will settle any disputes that occur due to human folly. ° The contract must be able to stand the test of time. V Should the project last for a number of years and key individuals leave their positions, the terms of the contract should still apply. v. vin: busincsssunvnarlcs. ccxn
  22. 22. Legal issues of outsourcing: Contracts and M. O.U. ’s lnsldc Outsourcing by Charles L. Gray and James Essingor - Accommodate unforeseeable changes by treating the contract as a living document that can be open to re- negotiation. V Both parties’ interests may change overtime. - Termination of the contract should be the last resort after a series of specific measures or penalties. V The contract should provide a comprehensive description of events that allows one side to terminate it unilaterally. V It should describe a process that will trigger and complete termination, and cover the exit process, handover of assets. and transfer of staff. ' Confidentiality should be covered in the contract, since both parties will be providing information to each other of a commercially sensitive nature. v. vin: busincsssunvnarics. ccxn
  23. 23. Legal issues of outsourcing: Contracts and M. O.U. ’s Inside Outsourcing by Charles L. Gray and James Esslnger - For the supplier the most important part of the outsourcing arrangement is being paid. J Delays can seriously affect its financial position and cash flow. Clear provisions should be laid out on invoicing and payment terms and procedures. 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. - Write your contract from the standpoint of already having had a disagreement. J J J Do not rely on gentlemen‘s agreements or a person's word. Poorly defined contracts later lead to ill will. Draft a well-defined contract to avoid any disputes and expensive court battles later on. vmn: busincsssunvnarics. crxn
  24. 24. Human Resources Inside Outsourcing by Charles L. Gray and Jarrres Esslnger ° Outsourcing is a people-intensive undertaking V It is vital to address human resource issues from the outset. V 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. ' Outsourcing tends to make purchasers employees redundant. V Do not involve staff in the choice of service provider. ° A detailed transition plan outlining all aspects of human resources is a fundamental requirement of a well- managed outsourcing arrangement. - Staff will ask you two questions: V What will happen to our jobs? V What will happen to our pensions? vmnx-. businc*sssunvnarics. crxn
  25. 25. i. . . . r _ _ . i~ll. Irir: lii i-, t§. i;1-. .i! li’; ei, i;. lnsldie Outsourcing by Charlies L. Gray and James Essingirr ' Staff resist outsourcing because ~' They feel loss of control over their jobs and lives. V They fear change, increased workload without any increased compensation. They feel threatened. v‘ They feel a clash of cultures. and the whole outsourcing initiative may not have been thoroughly explained to them. To overcome resistance and build trust, have internal briefings, bulletins, intranet websites. and a hotline helpdesk to address staff concerns. v’ Involve employees and managers in the outsourcing process. vi Explain the benefits of the deal and focus on the positive. ,/ : ‘K - it? i i-. 'iin'. . bus i ncs-. xu rr ’T‘l: ll’lC . t cm
  26. 26. Human Resources Inside Outsourcing by Charles l_ Gray and James Esslnger ° Some typical staff questions you will need to answer are the following: V Why are we seeking a supplier/ service provider? V How will the arrangement work? V What will happen next? . / Individually speaking, will I have to relocate? How will I be involved in the process? Are the unions involved in consultation about the outsourcing? How will I be paid and when? What will happen to my pension? Will I be acquiring new skills? Will we continue to work on existing projects or will we be transferred? How do we handle the press? When will I receive more information? ' K vmnx-. businc*sssunvnarics. crxn
  27. 27. Implementation Inside Outsourcing by Charles L. Gray and James Essinger - The following items must be in place to ensure the outsourcing effort is optimized: J J J Clear and agreed objectives Performance measures Agreed sanctions for non-performance Agreed frequency of reviews Agreed dates for submissions for reviews Escalation process Feedback and lessons learned sessions vmnx-. businc*sssunvnarics. crxn
  28. 28. The Shreeveport Survey Inside Outsourcing by Charles l_ Gray and James Esslnger ° Shreeveport Management Consultancy V Recently surveyed the UK's 500 biggest organizations. V The summary of its findings is a result of in-depth phone interviews with senior executives of these organizations. - The main benefits of outsourcing were: V a reduction in cost of obtaining the service. V a reduction in headcount of the organization. V increased flexibility of the business enterprise. - The most frequently mentioned factors motivating the decision to outsource are as follows: V Service cost reduction V Headcount reduction V Opportunity to focus more on core business ‘/ C°mPemlVe 5tr3te9V minxzbusincsssunvn-. irlcs. crxn
  29. 29. The Shreeveport Survey Inside Outsourcing by Charles L. Gray and James Essinger V Access to expertise V Improved service delivery V Improved quality of products or services mm-. busii'csssumnarics. crxn
  30. 30. Outsourcing in general: lnsldo Outsourcing by Charles l_ Gray and James Esslngor ° An organization aiming to - Receive the maximum benefits from outsourcing - Must adopt a systematic approach to it. - Must above all set targets for the benefits to be achieved - Then measure them continuously. V 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. V" A communications strategy to keep all stakeholders informed must be developed and implemented. V The baseline cost of the service must be accurately determined. - Objectives to be achieved from outsourcing need to be set down for clarity. vmnx-. businc*sssunvnarics. ccxn
  31. 31. Outsourcing in general: lnsldo Outsourcing by Charles l_ Gray and James Esslngor V Contract management must be devised with frequent meetings, and interactions. - Common experiences in outsourcing: V Not anticipating time required for outsourcing V Not preparing the service for outsourcing V Confining the initiative and excluding it from other business decisions V Failing to agree to firm objectives to be achieved V Preparing inadequate or incomplete specifications V Not costing the service properly V Not communicating appropriately with all stakeholders V Not instituting a means of managing the arrangement v. vin: busincsssunvnarics. ccxn
  32. 32. Iiifm: iii. i:': e*liui iii ; -,: i:—iii: .ii': ,.i. :e lnsldie Outsourcing by Charlies L. Gray and James Essingirr The Findings: 72% of the 500 surveyed organizations had positive things to say about the practice of outsourcing. V Shreeveport concluded most expectations were met and sometimes even exceeded. v“ Majority would gladly enter into another outsourcing arrangement again] , / z‘ “T. ‘ ’ - {'3 j i-. 'iin'. . bus i ncs-. xu rr ’T‘I: ll’lC . t cm
  33. 33. The Future of Outsourcing lnsldo Outsourcing by Charlos l_ Gray and James Esslngor - The practice of outsourcing contributes to the evolution of our working environment. V It will help businesses concentrate their efforts on core activities. - 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. mm-. busii'csssumnarics. ctxn
  34. 34. iifli It “i ? l1l? i|i‘. |EE~? t?E? i'. lili. lili. l.riF-l :5?‘ lnsldie Outsourcing by Charlies L. Gray and James Essingirr BusinessSummaries. com is a business book Summaries service. Every week. it sends out to subscribers a 9- to 12—page summary of a best—selling business book chosen from among the hundreds of books printed out in the United States every week. For more information, please go to miptlmmmimzsumcpm. , / zx ‘TC. ‘ ’ - {'3 j i-. 'iin'. . bus i ncs-. xu rr ’T‘l: ll’iC . t cm

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