OUTSOURCING

Reasons for Outsourcing SCost Savings SImprove Quality SReallocate Staff SAccess to Technical Skills SBusiness Agility S Improve Efficiency/Effectiveness SFocus on Core Competencies SEnsure Innovation SProvide source of advice SSupply 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 Þ Risk that vendor will fail Þ Loss of control Þ Potential culture clash Þ 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 1Internal Analysis & Evaluation 2Requirements Definition 3Vendor Selection 4Contract Negotiation 5Relationship Management 6People 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 3Terms 3Service Levels 3Confidentiality 3Warranty 3Performance Measures 3Disclaimers 3Contingency Plans 3Relationship Management Structure

Relationship Management MOST CRITICAL ELEMENT!

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

Relationship Management: Integrating Contractors Train on business and organization SBetter knowledge and solutions SWork within norms of organization Include in all meetings and events SEncourage cooperation and collaboration SFacilitate 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 3Strategic, broad based 3Experience managing different businesses 3Project management 3Contract negotiation 3Change management 3Experience managing expenses 3Ability to manage intellect 3Political and cultural awareness 3Ability 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 H Communication H Rewards H 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 HUnderstand benefits that can be achieved HOutsourcing Life Cycle +Managing process correctly very important +Relationship management key element HNeed 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:

Relationship structure 1.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 1What factors led your company to decide to outsource? 2What resources and processes do you have in place to manage the operation and relationship with an outsourcing vendor? 3What challenges do you experience in managing a combined workforce? 4Does your company have any regrets about a decision to outsource? 5Has your company ever terminated or switched an outsourcing vendor?