1 Outsourcing Focusing on Core Competencies

2 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?

3 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

4 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

5 Types of Outsourcing Business Process Outsourcing (BPO)  Strategic decision Customer/vendor (make or buy)  Tactical decision

6 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

7 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

8 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

9 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

10 Business Process Outsourcing  Cost savings Facilities costs  Ownership and/or financing of assets  Overcapacity, duplication, overlap  Insurance, taxes, security  Maintenance, repairs, upgrades  Obsolescence

11 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

12 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

13 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

14 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

15 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

16 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?

17 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

18 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.

19 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

20 Managing the BPO Process  Supplier reputation Quality Reliability  Supplier practices Operating procedures Internal controls Disaster recovery Backups for key systems, people, etc.  Contingency plans

21 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

22 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

23 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

24 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?

25 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?

26 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

27 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.

28 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

29 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

30 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

31 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

32 Customer/Vendor Outsourcing Considerations  Financial Relevant costs  Material  Labor (?)  Variable overhead (?)  Fixed overhead (?)  Purchase price from supplier Opportunity costs

33 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

34 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

35 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