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Outsourcing

Focusing on Core Competencies

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Strategic Rationale

Focus on core competencies

Activities that are not core competencies are often not cost effective to perform

Why do something yourself if someone else can do it better and cheaper?

If starting over, would you do the activity yourself?

Would someone else pay you to do the activity for them?

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Strategic Rationale

Outsourcing frees resources to be used in more profitable ways

Resources are allocated to the areas where the company has a competitive advantage

Reduces complexity

Number of activities performed is reduced

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Strategic Rationale

Eliminates the need for expensive capital investment

Facilities are owned by the supplier

Increased flexibility

Can focus on the internal activities

External activities are shifted to the supplier

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Types of Outsourcing

Business Process Outsourcing (BPO)

Strategic decision

Customer/vendor (make or buy)

Tactical decision

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Business Process Outsourcing

Characteristics

Internal resources and responsibility for services are transferred to a third party and managed through contracts instead of ownership

Shift from owning capital and human assets to managing strategic alliances

Replaces the ownership model with a rental model

Long-term shift in how operations are conducted

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Business Process Outsourcing

How do we make money?

Most support functions are cost SBUs

Do not contribute revenue

Focus should be on revenue generating activities while reducing the cost of the support functions

Support functions are usually the targets for outsourcing

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Business Process Outsourcing

Accounting

Advertising

Customer service

Document management

Finance

Facilities management

Human resources

Information technology

Internal audit

Legal

Logistics

Manufacturing

Marketing

Product service

Research and development

Etc.

Opportunities for BPO

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Business Process Outsourcing

Potential advantages of BPO Allows organization to focus on core competencies

Revenue generation

Improved operational efficiency

Increased flexibility

Change becomes easier and less expensive as the organization becomes more lean

Creates a focused culture within the organization

Company specializes in what it does best

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Business Process Outsourcing

Cost savings

Facilities costs

Ownership and/or financing of assets

Overcapacity, duplication, overlap

Insurance, taxes, security

Maintenance, repairs, upgrades

Obsolescence

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Business Process Outsourcing

Employment costs

Salaries, benefits, retirement plans, etc.

Recruitment, training

Can “rent” the expertise, services, etc. only when you need them, and in the amounts you need

Technology costs

Costs of upgrading hardware and software, scalability, installation, training, etc. are the supplier’s responsibility

Often less expensive than converting legacy systems to a common platform

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Business Process Outsourcing

Use of an expert supplier

Your cost SBU is their profit SBU

Gain the benefits of the supplier’s expertise

New applications

Advanced, cutting edge processes

Economies of scale

Better, more focused and timely service since the supplier has a single focus

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Business Process Outsourcing

Increased reliability and consistency

Use of common platforms, processes

Timeliness

May take advantage of different time zones

Accountability

Disaster recovery

Insurance

Recourse

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Business Process Outsourcing

Expanded opportunities for individuals transferred to the supplier

Can increase job skills across industries

Can focus on areas of interest or expertise

Increased job satisfaction

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Managing the BPO Process

What areas to outsource?

Ask “How do we make money?”

Free yourself from nonproductive activities

Peripheral areas are candidates for outsourcing

What are the costs of not outsourcing?

Lost opportunities to use resources more efficiently

Including management time and expertise

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Managing the BPO Process

Where is change difficult to keep up with?

Technology

Laws and regulations

Where are we not competent or efficient?

Areas where the need does not justify the investment in capacity

Would someone pay us to do the activity for them?

If not, why are we doing the activity ourselves?

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Managing the BPO Process

Identifying the supplier

Search for the “best in class” supplier Supplier must have the activity as a strategic part of their

business

Core competency

Not just an “add-on” to increase market share, revenue

One supplier may not have all of the expertise needed

May need multiple suppliers depending on the functions being outsourced

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Managing the BPO Process

Supplier should treat the relationship as a partnership, not a sale

Must be willing to work with you to understand your situation, problems, expectations, etc.

Must provide the service level required

Should not offer a “one size fits all” solution

Supplier’s organizational culture should match yours

Supplier must be open to periodic on-site reviews, contract changes, etc.

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Managing the BPO Process

Supplier resources Quality of personnel

Will your personnel be transferred?

Quality of technology

Cutting edge

Scalable

Knowledge, access to several systems, processes, ASPs, etc.

Want unbiased recommendation of the best application for your work, not a sale of a “universal” application

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Managing the BPO Process

Supplier reputation Quality

Reliability

Supplier practices Operating procedures

Internal controls

Disaster recovery

Backups for key systems, people, etc.

Contingency plans

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Managing the BPO Process

Structuring the contract

Should focus on exactly what outcomes are wanted Not what is easy to contract – inputs

Should not focus on the process to accomplish the outcomes

Should not tell the supplier how to do the work

They are the experts

Should be flexible while being rigorous in defining performance

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Managing the BPO Process

Should address

Responsibilities assumed by each party

Performance criteria

What, how and when the outcomes will be delivered

Cost

Performance evaluation metrics and targets

Necessary changes in volume

Increase or decrease

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Managing the BPO Process

Confidentiality issues

Who owns the data, databases, work in process, work product, etc.?

Protection of proprietary designs, processes, etc.

Whether the supplier has the right to use the information in ways unrelated to your company

Sharing of information with other companies including your competitors

Return or destruction of records

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Managing the BPO Process

Personnel matters Supplier personnel

Can you select them or have the right to reject them?

Your employees

Will the supplier use them? How many? Which ones?

Will the supplier provide the same pay, benefits, etc.?

Can you prevent the supplier from recruiting them?

Do you have the right to rehire them?

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Managing the BPO Process

Reviews

Do you have the right to audit supplier practices?

Do you have the right to inspect supplier’s facilities?

Do you have the right to review supplier records related to costs and billings for your contract?

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Managing the BPO Process

Extenuating circumstances

Remedies for unacceptable outcomes

Dispute resolution

Insurance requirements, indemnity, limits of liability

“Exit strategy” if the arrangement does not work

Rights to cancel the contract

Transition plans

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Managing the BPO Process

Follow-up

The work is still important, even critical, to your company even if it is being outsourced

Your oversight should be as close as possible to what it would be if you were doing the work in-house

Monitor the work on an on-going basis

Review performance against established targets

Review costs, including supplier’s internal cost, benefits, etc.

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Business Process Outsourcing

Disadvantages of BPO

Partnership with supplier may cause major changes to the client organization

Potential for overdependence on the supplier

Bad publicity

Can strip your company of key employees and skills

Morale problems with remaining employees

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Customer/Vendor Outsourcing

Smaller in scale than BPO

Characteristics

Use of outside supplier to provide products or services currently made or performed in-house

Supplements in-house workforce or capacity

Frequently a short-term relationship

May be “one-shot” or rotating relationship

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Customer/Vendor Outsourcing

Advantages

Supplier may be more competent

Cost efficiencies in R&D, manufacturing, distribution, etc.

Better quality

Reliability of delivery

Size of project may not justify the required investment in personnel or capacity

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Customer/Vendor Outsourcing

Frees resources to be used on more profitable activities

Can help overcome in-house disruptions

Short-term nature of the relationship allows for flexibility

Bring the operation in-house

Switch to alternate supplier

Elimination of the need for the product or service

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Customer/Vendor Outsourcing

Considerations

Financial Relevant costs

Material

Labor (?)

Variable overhead (?)

Fixed overhead (?)

Purchase price from supplier

Opportunity costs

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Customer/Vendor Outsourcing

Non-financial Supplier characteristics

Quality

Reliability

Potential interruptions

Ability to meet delivery schedules

Scalability

Willingness to terminate, extend or alter contract if necessary

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Customer/Vendor Outsourcing

Impact on employees

Layoffs or transfers to other assignments

Morale issues with employees not involved in the outsourced activity

Impact on company reputation

Sending jobs elsewhere

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Customer/Vendor Outsourcing

Disadvantages

Loss of control over the outsourced activity

Greater reliance on supplier

Confidentiality of products, information, software, etc.

Loss of capacity, skills, that may be needed later