OUTSOURCING

Reasons for Outsourcing

Cost Savings Improve Quality Reallocate Staff Access to Technical

Skills Business Agility Improve

Efficiency/Effectiveness

Focus on Core Competencies

Ensure Innovation Provide source of advice Supply Chain Integration

OUTSOURCING TRENDS

With the ever increasing trend at outsourcing, the value addition that takes place outsides the company is also increasing in most industries. It is estimated estimated that over 75% of value addition is being made by partners outside the company.

Outsourcing: Considerations

• Reasons for Hesitancy Risk that vendor will fail Loss of control Potential culture clash Long term job security for employees

Outsourcing: Considerations

• Reasons for Failure! Poor Vendor Performance

! Objectives/Requirements Not Well Defined

! Tactical vs. Strategic Management

! Poor Relationship Management

Outsourcing Life Cycle

1 Internal Analysis & Evaluation

2 Requirements Definition

3 Vendor Selection

4 Contract Negotiation

5 Relationship Management

6 People Management

Vendor Selection

• Expert knowledge

• Experience in your industry

• Recommendations from previous clients

• Organizational Fit

• Financial terms

• Attitude towards forging a relationship

Contract Negotiation:Elements of the Contract

Terms

Service Levels

Confidentiality

Warranty

Performance Measures

Disclaimers

Contingency Plans

Relationship Management Structure

Relationship Management

MOST CRITICAL ELEMENT!

Relationship Management

Top Management Support Performance Criteria Integrate Contractors Communication Knowledge Transfer Relationship Review

Relationship Management:Integrating Contractors

• Train on business and organization Better knowledge and solutions Work within norms of organization

• Include in all meetings and events Encourage cooperation and collaboration Facilitate knowledge transfer

Relationship Management:Communication

Perform joint planning Staffing issues Problem resolution Keep all parties informed Address contract changes

Relationship Management:Knowledge Transfer

• Planned training sessions

• Database of project

Relationship Management:Relationship Review

People Management Issues

• Outsourcing Coordination Manager

• Human Resource Issues

Outsourcing Coordination Manager:Why?

• Ensure effort is successful and cost effective

• Optimize value-add outcomes

• Enable organization to learn and assimilate from best-in-the-world

• Shorten project cycle times

• Protect company’s interests

Outsourcing Coordination Manager:Skills Required

Strategic, broad based Experience managing

different businesses Project management Contract negotiation Change management

Experience managing expenses

Ability to manage intellect Political and cultural

awareness Ability to “think outside the

box”

Outsourcing Coordination Manager:Process

Evaluate

MonitorNegotiate

Manage

Human Resource Issues

• Salary Differences

• Insider vs. Outsider

• Fear of Contractor Performance

• Teamwork

Human Resource Issues

• Salary Differences+ Communicate contractor actual pay rate+ Create internal career development structure+ Arrange for employees to learn new

technologies from contractors

Human Resource Issues

• Insider vs. Outsider+ Make contractors part of social fabric of

organization

Human Resource Issues

• Fear of Contractor Performance+ Require minimum level of experience+ Interview contractors

Human Resource Issues

• Teamwork+ Provide training for everyone+ Implement equal incentive plan= Collaborative environment

Human Resources Issues

• Recommendations Understand different motivations Create incentives for teamwork Create an inclusive culture Communicate Shape jobs according to strengths and

motivations Provide project training

Optimize Human Resources

Communication

Rewards

Incentives

Outsourcing:Future Trends

• Increased levels of outsourcing– Rapidly changing business environment– Need to focus on core competencies

• Growth in Outsourcing industry $$– From $82 billion to $184 by 2001

Outsourcing:Key Take-Aways

Understand benefits that can be achievedOutsourcing Life Cycle

+ Managing process correctly very important+ Relationship management key element

Need to plan for human resources implications+ Relationship management coordination

resource

Reasons for outsourcing

• Examples of outsourcing– A credit card company outsource it data capture and customers

expenditure reporting IT function– A hotel outsource its laundry services– The university outsource its catering service

• Reasons– ‘Contain’ cost because of the lack of ‘competence’ &

sharing the vendor’ economies of scale

– Avoid specific investments

– Improve service

– Refocus resource strategically

The context for outsourcing

• Intensified competition leading to – Need for building distinctive competence

– Organizational downsizing

– Need for flexibility

– The need for diverse inputs in businesses in the ‘new economy’ e.g. delivery health care service on the net

• But are these ‘alliances/partnering’ or ‘outsourcing’?

What to outsource?

Internal or External provider

Internal or External provider

Internal provider

Internal provider

External provider

External provider

Migrate or integrate

Migrate or integrate

Critical

Useful

Commodity Differentiate

The transition to outsourcing

• Contractual issues – how to draft the contracts

– who should be involved, transition process

• People issues– What will happen to existing staff,

– how the ‘insiders’ relate to the ‘outsider’

• Organizational adjustment

From outsourcing to partnering

• From outsourcing contracts on a one-off basis to relationship management

• From exchange of interest to mutual learning

• From hard to hard AND soft benefits

• From close ended to open ended relationships

• From legalist rights to honor & obligations

• From having control to sharing control

• From ‘contractual deliveries’ to organizational adjustments

• From dealing at the strategic level to partnering at all levels

Its all about managing a network of relationships

Dimensions of a successful outsourcing relationship

• Relationship structure – where the parties define the goals of the relationship – What

they hope to accomplish, and most importantly, how they will measure success

• The management structure – defines how both organizations will work together to ensure

success and, when necessary, take corrective actions on less-than-desired outcomes

• Ref: www.firmbuilder.com

Relationship structure1. Define relationship strategically – creating a basis for LT

cooperation

2. Capturing the intent, not just the terms of the relationship

3. Manage expectation carefully – chances of repeated business?

4. Defined scorecard

5. Differentiate between the client and the Customers

6. Match pricing & contractual terms to the goals and culture of the partners

7. Create incentives for improvements

8. Define management structure in advance

Management structure

1. Keep strategic responsibilities close to the top, but create multilevel organizational links

2. Conduct regular goal oriented meetings

3. Encourage lateral, multi-channel communications

4. Define escalation process

5. Use scorecard to keep track of performance

6. Reward providers employees

7. Implement a change process

8. Treat the relationship as a valuable organizational asset

Managing Outsourcing:Case Study Questions

1 What factors led your company to decide to outsource?

2 What resources and processes do you have in place to manage the operation and relationship with an outsourcing vendor?

3 What challenges do you experience in managing a combined workforce?

4 Does your company have any regrets about a decision to outsource?

5 Has your company ever terminated or switched an outsourcing vendor?