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Smart2013 presentation vested outsourcing audio


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Presentation made at the SMART 2013 Supply Chain Conference on the Subject of Vested Outsourcing - how to deliver improved performance, lower costs and enhanced innovation.

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Smart2013 presentation vested outsourcing audio

  1. 1. Third Party Insourcing/Outsourcing Delivering Better Service, Lower Costs and Increasing Innovation Through „Vested Outsourcing‟ Andrew Downard Karl Manrodt, Ph.D. Managing Director Professor AD Supply Chain Group P/L Georgia Southern University
  2. 2. Andrew Downard & Karl Manrodt Introduction Based on Research by And has led to a series of books:
  3. 3. Andrew Downard & Karl Manrodt The Problem…..
  4. 4. Andrew Downard & Karl Manrodt How‟s That Outsourcing Going For You? • Late in 2012 the Zurich Insurance Group re- issued a survey on Supply Chain Risks – Outsourcing failure is now a significant cause of supply chain disruption. – Outsourcing failures had increased from 17% to 35% – Moving the issue into third place on the list of causes • Research in Europe* indicated: – 75% of respondents expressed dissatisfaction with outsourced services, 25% intended or did insource. *Freytag, P. V., Clarke, A. H. & Evald, M. R., 2012. Reconsidering outsourcing solutions. European Management Journal, Volume 30, pp. 99 - 110.
  5. 5. Andrew Downard & Karl Manrodt As outsourcing exploded in the 1990s and 2000s and sourcing became more complex as services grew, companies began to realize they were faced with the “Watermelon Effect” A good supplier might be doing what they were asked and achieving “Green” metrics, but the overall business results are still “Red” Conventional Approaches Encourage the: “Watermelon Scorecard” Are You Suffering from a “Watermelon Scorecard”
  6. 6. Andrew Downard & Karl Manrodt The 10 Ailments of Outsourcing No Ailment Description 1. Penny Wise and Pound Foolish: Occurs when a company outsources based purely on costs. 2. The Outsourcing Paradox: Happens when a buyer hires an “expert” service provider then proceeds to tell them precisely how to do the work 3. Activity Trap: The more transactions performed the more money the service provider makes, = no incentive for improvement 4. The Junkyard Dog Factor: Retained ‘internal’ experts ‘micro-manage’ the contract 5. The Honeymoon Effect: The provider initially goes overboard to perform but drops back over time as other clients come on board. 6. Sandbagging: To prevent the Honeymoon Effect, some companies adopt measures to encourage service providers to perform, can lead to minimalist results. 7. The Zero-Sum Game: This is one of the most common ailments. Companies believe, mistakenly, that if something is good for the service provider, then it is automatically bad for them. 8. Driving Blind Disease: Occurs when there is no formal governance process to monitor the performance of the relationship. 9. Measurement Minutiae: Too much of a good thing can be bad for you. This applies to Fast Food and to measuring service providers. 10 The Power of Not Doing: The saddest of all the ailments, having performance measures but not using them.
  7. 7. Andrew Downard & Karl Manrodt Is There A Better Way To Outsource? “The significant problems we face cannot be solved at the same level of thinking we were at when we created them.” - Albert Einstein
  8. 8. Andrew Downard & Karl Manrodt The Solution…..
  9. 9. Andrew Downard & Karl Manrodt Based On Research With…… Why What How Tells the real stories of…
  10. 10. Andrew Downard & Karl Manrodt • Shifts from a conventional “buy/sell” business model focusing on transactions to an “outcome” based business model focusing on results • Moves beyond saying “strategic supplier” to developing a carefully crafted collaborative agreements • Creates Value through win-win solutions economics (grow the pie, not fight over the pie) Vested Outsourcing is a Hybrid Model
  11. 11. Andrew Downard & Karl Manrodt The 5 Rules of Vested Outsourcing
  12. 12. Andrew Downard & Karl Manrodt 1. Outcome Based vs. Transaction Based Model • Most outsourcing relationships follow a transaction-based business model • This can be cost plus or a fixed price per transaction where the service provider gets paid a transaction fee for each activity that is performed • Vested Outsourcing moves to an outcome-based business model where the service provider is paid for achieving results, not just for performing tasks or activities
  13. 13. Andrew Downard & Karl Manrodt Rules 2 Focus on the WHAT, not the HOW Joy’s Law No matter who you are, most of the bright people don’t work for you
  14. 14. Andrew Downard & Karl Manrodt You got to be very careful if you don't know where you're going, because you might not get there. - Yogi Berra Rule 3 Clearly Defined/Measurable Desired Outcomes
  15. 15. Andrew Downard & Karl Manrodt • Definition of Perverse Incentives − A classic example occurred in Hanoi when a French program paid people a bounty for each rat pelt handed in. The program was intended to exterminate rats. Instead it led to the farming of rats.1 Be On Guard For Perverse Incentives… 1 Michael G. Vann, "Of Rats, Rice, and Race: The Great Hanoi Rat Massacre, an Episode in French Colonial History," French Colonial History Society, May, 2003 [Def] “A perverse incentive is a term for an incentive that has the opposite effect of that intended. Perverse incentives by definition produce unintended consequences.” The Language of Psychology
  16. 16. Andrew Downard & Karl Manrodt Rule 4 Pricing Model with Incentives Optimize for Trade-ups! Solow’s Law: Business Growth is Driven by Innovation 87% of Economic growth is driven by “technical change” which is driven by improvements in business process or technical improvements in products. Labor & physical capital 13% (e.g buildings, machinery) The vast majority of today‟s outsourcing contracts are for labor and physical capital rather than for innovation and problem solving!
  17. 17. Andrew Downard & Karl Manrodt Rule 5 Insight vs. Oversight Governance Structure BECOMES • Getting the supplier to meet my needs • It’s in the contract, now it’s the supplier’s problem • Blame and punish the supplier • Unpleasant surprises • Finding a way to meet both our needs • Work together to achieve performance and compensation goals • Communicate the issues, jointly find solutions • Integrated planning and communications ME WE Manage the Business…Not Just the Supplier!
  18. 18. Andrew Downard & Karl Manrodt The Recipe: 10 Elements of a Sound Agreement
  19. 19. Andrew Downard & Karl Manrodt • P&G (Real Estate/Facilities Mgmt) • Microsoft (BPO) • McDonald‟s (Supply Chain) • U.S. Dept. of Energy (Environmental Services) • State of Minnesota Dept. of Transportation (Construction) • Integrated Management Services (Staffing) • Diversey (IT) • Water for People (non-profit NGO support in developing countries) Success Stories – It Really Does Work!
  20. 20. Andrew Downard & Karl Manrodt Procurement / Finance I WIN with lowest possible costs I WIN with higher service levels Business Units / Customer I WIN with higher margins/profitsSupplier 20% reduction in cost of contract, with 35% projections $30m in transformation value realized 7 year contract; added 5 years after first 2 years Book of business expanded from $185 to $330m Higher profitability; share of transformation value in profits Global Process Standardization - 140 to 40 Systems 23% reduction man-hours in “tactical” work - allows for more strategic focus 20% increase in first pass accounts receivable Only 0.43% misses across all Accenture SLAs Internal satisfaction for finance customer increased 90% SOX Compliance from 15 to all 95 subsidiaries Results From Microsoft – Accenture OneFinance In First 2 Years Does it Really Work? WIIFWe
  21. 21. Andrew Downard & Karl Manrodt What They Are Saying… Tim Cummins, CEO, International Association for Contract & Commercial Management "Vested Outsourcing offers a robust approach for developing high-performing strategic relationships.” Dawn Tiura Evans – President and CEO, Sourcing Interests Group “Kate has hit the nail on the head. The “rules” while often spoken about have never been so clearly defined as they are here. The journey to a truly collaborative agreement is practically guaranteed if you follow the step-by-step process outlined in this great book.” Peter Sheahan, Founder and CEO, ChangeLabs and Author of the Best Selling Book “Flip” “Vested Outsourcing truly flips conventional outsourcing on its head. Kate has captured what it takes to drive REAL value through your external partnerships. A must read for anyone who wants to do outsourcing.” Frank Casale – CEO, Outsourcing Institute “Vested Outsourcing is a game-changing approach that will quickly become the new gold standard for advanced outsourcing relationships. It is a critical enabler for Outsourcing 2.0” Tim McBride – Chief Procurement Officer, Microsoft “As the Chief Procurement Officer at Microsoft it is my job to help us adopt next generation outsourcing models and Vested Outsourcing is definitely one of the tools we have in our toolkit that we are exploring”. Todd Shire, Global Logistics Sourcing Strategy Manager, Intel "I predict the buzzword for the next decade will be "incentives". Only when our incentives are aligned will we succeed with collaboration. Vested Outsourcing nails how to get collaboration right.“ Brad Mitchell, President of Distribution and Logistics, UPS Listed Vested Outsourcing as one of the top five supply chain trends for 2010, stating, “Companies will take a vested interest in Vested Outsourcing” Wall Street Journal – Six Ways Small Businesses Can Save Money Vested Outsourcing is identified as one of “six ways small businesses can save money.”
  22. 22. Andrew Downard & Karl Manrodt • Visit the University of Tennessee’s dedicated Vested Outsourcing website at • Andrew Downard • Vested Center of Excellence Tel 0419581705 • Karl B. Manrodt, Ph.D. • Georgia Southern University For More Information
  23. 23. Andrew Downard & Karl Manrodt Services to Support a Vested JourneyProducts/Services Courseware • Vested Outsourcing Orientation (four free online modules) Support • Speeches • Half Day and Full Day Workshops Courseware • 3 Day Open Enrollment Support • Deal Review • Compatibility and Trust Assessment • Onsite Facilitated Workshops • Business Case Justification (Pony) Courseware • Online course for Getting to a Vested Agreement • Collaborative Contracting Open Enrollment Support • Onsite Facilitated workshops • Coaching support • Consulting projects Courseware • Certified Deal Architect • Re-certification of Deal Architects Support • Facilitated Governance Management • Deal Certification Resources • Website • Blogs • Books • Articles • Social Media (linkedin group) • Case Studies and White Papers • Limited set of tools free with course • Advanced set of free tools w/online course • Proprietary set of tools w/coaching • Funded Research MasteryImplementationUnderstandingAwareness Orange Text – University of Tennessee course offering Grey Text –provided by UT Faculty and Vested Outsourcing Center of Excellence partners independently
  24. 24. Questions