Strategic Outsourcing

Based on: Maurice F. Greaver II, Strategic Outsourcing- A Structured Approach to Outsourcing Decisions & Initiatives. Prepared by: Ninna Ricci L. Creencia

Part 1: Overview of Strategic Outsourcing

Overview Methodology

What is Outsourcing?

Outsourcing is the act of transferring some of an organizations recurring internal activities and decision rights to outside providers, as set forth in a contract.

Reasons and Benefits

Organizationally - focus, flexible, transformation, customer service Improvement - performance, manage & control, risk manage, new ideas, image Financially - reduce investment, generate cash Revenue - gain market access, expand Cost - reduce cost, from fixed to variable cost Employee incentive, motivate.

Levels of Outsourcing

Individual moving specific positions out of the organization. Functional having specialized knowledge and responsibilities. Process how products or services actually flow through the organization.

Michael Porters value chain

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Processes and Functions Processes Inbound logistics Operations Procurement Technology development Human resources management Infrastructure Functions Purchasing Receiving Accounts Payable Inventory Control X X X X X X X X X X X X X X X X Inventory Distribution X X X X

Types of Outsourcing

Tactical Strategic -future vision consideration -current and future core competencies -structure -costs -performance -competitive advantages.

History, Trend, and Growth

To describe the growing trend of large companies transferring their information systems to providers (WWII). Trend in larger organizations is to outsource entire processes. Expected to grow at double-digit rates over the coming decade.

7 Steps to Successful Outsourcing

1. 2. 3. 4. 5.

6.
7.

Planning initiatives Exploring strategic implications Analyzing costs/performance Selecting providers Negotiating terms Transitioning resources Managing relationships

Planning Initiatives

Assess risks Announce initiatives Form project team Engage advisers Train the team Acquire other resources Address issues: resource management, information management, project management Set objectives.

Exploring Strategic Implications

Understand organizations: vision, core competencies, structure, transformation tools, value chain, strategies Determine: decision rights, contract length, termination date Align initiatives.

Analyzing Costs and Performance

Measure activity costs Project future costs Measure performance: existing and future, cost of poor performance Benchmark costs/performance Determine: specific risks, asset values, make total costs, pricing models, final targets.

Selecting Providers

Set qualifications Set evaluation criteria Identify providers Screen providers Draft RFP Evaluate proposals: qualifications, costs Performa due diligence Determine: buy total costs, short-list providers, finalist providers, review with senior management.

Negotiating Terms

Plan negotiations Address: high-level issues, deal breakers Prepare term sheets Negotiate contract: scope, performance standards, pricing schedules, terms and conditions Announce relationship.

Transitioning Resources

Adjust team roles Compare/merge transition plans Address transition issues: communication, human resources, other production factors Meet with employees: organization, provider Make offers/termination Provide counseling Physically move.

Managing Relationships

Adjust management styles Set up oversight council Communicate Define and design: meeting agendas, meeting schedule, performance reports Perform oversight roles Confront poor performance Solve problems Build the relationships.

Part 2: Planning Initiatives

Project Management and Champions Outsider Advisers Setting Objectives.

Types of Risks

Inherent risks General risks Specific risks

Risks Related to

Risks relating to Project Design Risks relating to Managing the Project Risks relating to the Transition to the Providers Services Risks relating to Managing the Providers Services.

Why Outside Advisers are Needed?

Because they :

help manage risks level the playing field with provider expertise assist the project manager in focusing on outsourcing issues act as a paradigm buster (challenge established thinking) offer independent observations on the outsourcing environment.

Organizational Objectives

There are a number of questions that the project team should explore with senior management through discussions, surveys, and other means of information gathering in order to frame the project and its objectives.

Part 3: Exploring Strategic Implications

Organizational Structure Determining Core Competencies Restructuring Aligning Outsourcing With Strategy

Organization

Outsourcing challenges many of the ways in which organizations have traditionally been structured. For example, large size, vertical integration, and functional organizational structures have long been accepted as foundations for business success and for good reasons However, the reasons have disappeared One of senior managements most important jobs is to articulate its vision of the organization at a point in the future.

What Core Competencies Are

Core competencies are the innovative combinations of knowledge, special skills, proprietary technologies, information, and unique operating methods that provide the product or the service that customers value and want to buy Core competencies are what sets the organizations products and services apart from the competitors similar offerings.

Ways to Acquire and Develop CC

Hiring talented people Renting talented people (consultants, academicians, etc.) Executing development contracts (to share the cost of developing) Joint venturing (to share existing core competencies) Licensing (the use of core competencies) Acquiring or taking equity positions in organizations (who have the core competencies).

Examples of Core Competencies

Company Black and Decker Casio Domino's Pizza Honda Motorola Nike Sevice Master Sony 3M Toys R Us Wal-Mart Core Competency Example Small electric motor technology Displays systems technology Cycle time and logistics mangement Combustion engine and drive train technology Portability tehcnology Athletic Shoe research and design Motivational and training systems Miniaturization technology Adhesives/coating technology Information and distribution systems Information asharing systems with providers and logistic skills

Alternative Approaches to Operational Change

Provider Relationship

Strategic partner: will approach the relationship as if it were a part owner of your business; will participate in strategic planning meetings and share in the strategic decisions. Supplier provider: wants to deliver the requested services with a performance that at least meets the specifications; will use an operational ,tactical, or transactional approach, paying close attention to activity performance; will prefer a pricing model.

Part 4: Analyzing Costs and Performance

Existing and Projected Costs Performance Standards Other Financial Issues

Existing and Projected Costs (overview)

In order to evaluate the decision to outsource, it is necessary to understand the costs of the activities of the target function. Requires research and analysis.

Identifying Activities
Inputs Activities Outputs

The project team should interview knowledgeable people within the function and concentrate on production factors: People Facilities (space and related services) Equipment Software Third-party contracts.

Performance Standards (overview)

Should measure existing and projected performance Organizations should have performance measures for their significant activities that support their strategies Knowing the performance measures for the activities being considered for outsourcing helps the project team make judgments.

Measuring Current Performance Level

Productivity: Measuring inputs / outputs Quality: Measuring waste, errors, and rework Timeliness: Measuring the meeting of deadlines Cycle time: Measuring elapsed time from start to stop in minutes, hours, days, etc Utilization: Measuring time invested in a specific activity / total time available Creativity: Measuring artistic achievement (such as design) or new ideas, discoveries, products, etc Outputs: Measuring the results of activities Financial: Measuring certain financial objectives (such as budgets, net income, earning per share, and economic valued added)

Asset Identification and Capital Budgeting

The project team identifies which assets, such as facilities, equipment and technologies, are related to each activity. If an activity is then outsource, consideration can be given to the disposition of each asset.

Part 5: Selecting Providers

Service Providers Developing the Request for Proposal Comparing and Evaluating Proposals Provider Selection

Identify Potential Providers

Strongest research skills are most useful Project team identifies greatest number of providers who might have the right qualifications and might be interested in providing the services Networking Get five to seven proposals from the most qualified, interested, and costcompetitive providers, and to evaluate those proposals efficiently.

What to see in a Proposal

A clearly written RFP Sufficient information (to shorten their time investment) Reasonable time to respond to the RFP Access to the organizations decisions makers.

Restate All Proposals

If the Request For Proposals has been prepared (WELL), all else should be easy Other things should be considered in the RFP: Qualifications Evaluation Performance Commitments Price Comparison and Evaluation Make or Buy Financial Decision Decision Time.

Relationship Manager

Relationship manager the person who will deal directly with the providers account manager Relationship manager the former head of the unit being outsourced: avoids confrontation, termination, severance, and so on . . . Relationship manager help technical specialists.

Part 6: Negotiating Terms

Negotiations Contracts

Negotiate and Contracts

The final agreement for the RFP is negotiated Negotiating process is like a funnel, from top to bottom issues, analysis and discussions, issues are addressed and agreed upon Outsourcing contracts: scope of services, performance standards (service-level agreement), pricing schedules, terms and conditions.

Part 7: Transitioning Resources

The Transition Process

Transition Process

The Relationship Team takes over Transition Roles: communication issues, human resources issues, transition issues Communication Issues: general meeting, individual meeting for those receiving offers, individual meeting for those interview.

Part 8: Managing Relationships

Performance Monitoring Solving Problems

Performance Monitor

The relationship manager manages one or more contracts and providers To build the relationship effectively, the relationship manager and the organization should be active in monitoring and evaluating performance and in addressing issues.

Resolving Disputes

Outsourcing problems is segmented into one of four areas:

1. 2. 3. 4.

People Process Technology All other

Third-Party Intervention

Mediation Arbitration: Non-binding and Binding Judicial: By a judge or by a jury

Termination

At contract expiration For cause For convenience

Reasons Not To Outsource

If there are reasons to Outsource, there are reasons NOT to Outsource: Uncertainty Loss of Control Conflict Employee Unhappiness Financial Excuses

The End