Strategic Evaluation of Outsourcing

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4/12/2005 © 2005 Phoenix Strategies Syndicate, LLCWhite Paper on Strategic Evaluation

White Paper on Strategic Evaluation

The following material is a Powerpoint Presentation printed into PDF using “Speakers Notes”. All material is protected by copyright and is for published as a service to potential clients of Phoenix Strategies Syndicate. LLC

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Generic Strategic Planning Process

Evaluate External

Environment

Internal CapabilitiesAssessment

CreateStrategicDirection

Define & Select BaseStrategy and Contingency

Plans

ImplementPolicy orStrategicProgram

EvaluatePerformance

What is “Strategy”? Tactics is finding yourself in an alley andfighting your way out. Strategy is not ever putting yourself ina dead-end alley in the first place. The above represents a simplified version of the Strategic Planning Process. You might use this to decide whether it’s a better strategy to take your significant other out to dinner or to cook in or to order in. Can you cook? Is is raining outside? How did your plan go? Want to change it for next time?

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Elements of Strategic ManagementEnvironmental

Scanning

External

SocietalEnvironment

TaskEnvironment

Internal

Structure

Culture

Resources

StrategyFormulation

Mission

Objectives

Strategies

Policies

StrategyImplementation

Programs

Budgets

Procedures

Evaluationand Control

Performance

Reason forexistence

Whatresults toaccomplishby when

Plan toachieve themission &objectives Broad

guidelinesfor decisionmaking Activities

needed toaccomplisha plan Cost of the

programs

Sequence of stepsneeded todo the job Actual results

Feedback / Learning / Refinement

There are two types of people in the world. Lumpers and Splitters. If you disagree you’re a splitter. I’m a lumper, meaning I try to keep designations simple and streamlined and not “split” into too many categories or distinctions. When it comes to strategy my first lump is do you have one or not? Second is are your tactics consistent and congruent with your strategy? A project or program to me “is” a Strategic Implementation. The above view on Strategy is helpful because it relates “normal” business steps and language to the process of Strategy Formulation and Evaluation. An Outsourcing initiative is a Strategic Implementation. One which has serious long-term impacts and second order consequences for your company. Phoenix Strategies provides expert Strategic Evaluation and formulation of Strategic Implementations.

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Why Strategic?• Rare

– Unusual and with little or no precedent to follow

• Consequential– Commits substantial resources and demands

commitment from people at all levels – and usually changes way work is done

• Directive– Sets precedent for lesser decisions and future actions

throughout an organization

Something can be Strategic for one or more of the above reasons. Outsourcing, especially initially, usually hits all three categories. This makes a careful evaluation of your approach critical. Just how does one go about reviewing Strategy? The art involves understanding External Factors, Internal Factors, your unique Core Competencies, and the Sustainability of any value proposition you may now own or seek to create. We now turn to a review of External Factors.

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Societal Scanning Variables

Social institutionsLegal systemRegs on tech transTrading blocks

Human rightsTerrorist activityNatural resourcesEcon development

Lifestyle changes

Attitudes to foreign Co.

TeleComm Infrastructure

Bank health

Consumer activismForeign invest lawsUniv supportUnemployment

Career expectationsHire/fire lawsGovt. supportDisposable income

Family formationEnvironmentalProductivity imprEnergy avail/cost

Regional shiftsForeign trade regsRate new devel(re)devaluationLife expectancyStability of govt.New productsWage/price cntrlBirth ratesSpecial incentivePatent protectionCurrency exchngPop growth ratesTax lawsFocus of techInterest ratesLanguage(s)Anti-trustIndustry spendGDP trendsSocioculturalPolitical-legalTechnologicalEconomic

As Strategy is holistic you can start anywhere to get Feedback and Perspective. The above chart is a very helpful reminder and framework for Evaluating a portion of the External Environment. Depending upon your needs, strategy, and core competencies any number of the above variables can come into play. The Art is in selecting the most critical variables and understanding their application to your project.

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Task Environment Variables

ShareholdersAbility to forwardIntegrate

Ability to backwardIntegrate

Diversity of rivals

Cost disadv.independent of size

UnionsAvailability of substitutes

Impact on finished product

Exit barriersAccess to dist. Channels

Trade associations

Percentage of total sell

Percentage of total buy

Consumer’s readiness

Amount of fixed cost

Capital Requirements

CreditorsSwitching costs

Switching costs

Elasticity of demands

Number of competitors

Product differentiation

Governments# of competitors

Alternative suppliers

Switching costs

Growth rate of Industry

Economies of scale

Relative power of

Stakeholders

Bargaining power of suppliers

Bargaining power of buyers

Threat of substitutes

Rivalry of existing firms

Threat of New

Entrants

Another important component of the External Environment is your “Task” Environment. This is more complex than just competition. Focusing too narrowly on competition is always a mistake. Especially in Outsourcing where Global politics and infrastructure and law can have a huge influence on your outcome. Something very important to understand; in some places in the world, when you Outsource you are putting your future competition into business and equipping them. The Nautica® brand is a great example of this point. Nautica® is owned by a very savvy Taiwanese business man who originally supplied apparel to American Brand Houses & Retail. Pick them well and keep your potential enemies close to you. There are ways to think through the situation to minimize future potential damage and erosions to your market. We deeply evaluate these issue when we look at Core Competencies and the Sustainability of Resource Advantages.

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Internal Strategic FactorsBasically analysis of Corporate Resources

• Value– Do resources provide competitive advantage?

• Rareness– Do other competitors posses it?

• Imitate-ability– Is it costly for others to imitate?

• Organization– Is the business unit organized to exploit the

resource(s)?

Transitioning from the External Environment to your Internal Capabilities; the four above points are laser focused ways to comprehend the Outsourcing value proposition. Looking at your organization through these lenses leads directly to a very important set of decisions about what uniquely makes up your Core Competencies. We address Core Competencies as part of the basic Strategic Evaluation. Information on Core Competencies may be found in the “Outsourcing” White Paper.

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Sustainability of Resource Advantages

• Durability: rate at which resources depreciate or become obsolete

• Imitate-ability: rate at which resources or competencies can be duplicated by others– Transparency is speed at which other can understand

systems making up core competency– Transferability is ability of competitors to replicate key

resources and capabilities– Replicability is ability of competition to use duplicated

resources to imitate success process/product

Okay, you have “some” Resource Advantage but are you able to protect it, renew it, leap frog it? In other words, all resources, including Intellectual Property, Trade Secrets, Business Methods, Service Offerings, Tacit knowledge of your people, and actual products & processes depreciate in value over time and ultimately become obsolete. Think buggy whips. There is still a market out there but do you want it? Depends doesn’t it? But probably not. One of the biggest considerations in Outsourcing is that the closer the business process is to your core competencies the more you will have to teach your outsourcing partner. By definition if you are teaching, improving, or even just exposing them to your “Advantage” then you are accelerating the rate of decay or Imitate-ability. There are ways to protect against this we will help you do just that!

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Elements of Strategic Decisions

• Scope/Where (geography, product/service, markets, value chain, etc) are we to operate?

• Matching/Fit between organizations activities and its environment.

• Matching of activities to resources.• Implications of organizational change.• Resource (re)allocation and optimization.• Decision maker values, expectations, goals.• Direction Organization is to move in long-run.

Earlier we discussed why something was Strategic and this chart goes deeper into understanding some of the elements that go into making a Strategic Decision. The last two points might be the most important. Understanding the potentially conflicting values, expectations, and goals of the Decision Makers is critical to success. Seeing and then directing all the long-term implications is also critical because many of these things take a long time to implement. For example, say that you R&D, Make, Market, & Sell today; but your business model is about to shift to “Some R&D”, Outsourced Make with “some r&d”, Market, & Sell. How do you integrate product feedback in a US marketplace to a Thailand ‘make’? How do you integrate US R&D with r&d in Thailand? Did you pick the right partner? Can they accommodate your pipeline technologies or will you have to expand supplier or switch suppliers? How many relationships can you maintain? How do you plan, long-term, to overcome language barriers? And the list goes on because once you tumble the first domino they do not stop tumbling. By Front End Loading your effort you can avoid very costly future switching costs including loss of i h l d i i d

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Strategic Alliance Success Factors• Have clear strategic purpose integrated with each partners

strategy and ensuring mutual value.• Identify partner that fits w/compatible goals and

complementary capabilities• Identify likely partnering risks and deal with upfront.• Allocate tasks & responsibilities• Minimize conflict with clear objectives and avoidance of

direct marketplace competition• Operate with long-term time horizons.• Develop multiple joint projects so that any failures are

counterbalanced by success• Agree upon a governance & monitoring process• Agree on an exit strategy for when objectives are achieved

or alliance is judged a failure.

Wait a minute! You just switched from Outsourcing to Strategic Alliance!?!? Yes. Outsourcing is a poorly defined and over-used concept. In the Outsourcing White Paper we will attempt to address the problem with “lumping” all the potential business models under the banner of Outsourcing. For right now flow with the provocation that if you are making a Strategic Decision (operating with long-term objectives and time horizon) then it will be more helpful to start out thinkingyou are going to create a Strategic Alliance than it is to thinkyour going to “buy” something or “contract” it out.

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Basic Outsourcing PolicyPurchase from the outside only those activities that

are not key to a business units’ distinctive competencies

The ‘closer’ an activity is to core competency and/or value-add the longer-term the arrangement needs to be and the more strategic the decision, hence an Alliance model vs. “buy”

Decisions need to take advantage of environmental opportunities and corporate strengths /competencies and lead away from threats / weaknesses.

We will chart these dimensions in the Outsourcing White Paper. There are sharp differences between a “Buy”, “Contract Manufacturing”, “Toll Manufacturing”, “Build to Print”, “Strategic Alliance”, a “Joint Venture”, and a “Merger / Acquisition”. The gray areas here do matter and successful Outsourcing is a functional blend of Sourcing, Operations, M&A, & Technology combined – you cannot give it any one of these functions. Much better that you create a ‘new’ function responsible for the integration of viewpoints and implementation of the business model.

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Next Steps

• For more information please contact us [email protected]

• The next White Paper “Outsourcing” describes what Outsourcing is and is not and discussing the evaluation of Core Competencies. To order please visit our site or contact us. www.phxstrat.com

Strategic Evaluation of Outsourcing

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