Outsourcing/Offshoring

Outsourcing Act of transferring some recurring internal activities to outside providers, set in a contract Reasons / Benefits: Organizational: enhance effectiveness, improve flexibility, increase product/service value Improvement: improve performance, obtain expertise, improve control, acquire ideas, improve credibility Financial: free up resources, generate cash Revenue: gain market access, sped expansion, expand sales Cost: Reduce costs Employee: expand career path,

Levels of Outsourcing Individual, Functional, Process Individual moving specific positions out Functional moving functions out Processes particular tasks moved out

Strategic Outsourcing When outsourcing is aligned with firm’s long-term strategies, benefits may take years, and examines: Future vision Core competencies Structure Costs Performance Competitive advantages ALL outsourcing should be strategic

History Farmers have used migrant workers Construction Cos. Subcontract Govt. subcontracts military equipment Outsourcing transfers “internal” activities Now, functions ex: payroll, IS/IT, Acct, Facilities management, janitorial, Food Processes are not commonly outsourced

Outsourcing Trends Handy (London Bus Sch): “less than half workforce in industrialized world will be in full-time jobs in the 21 st century...” He describes ‘shamrock org’, where leaves of shamrock are: Professional core workers Nonessential work contracted out (cheaper) Flexible labor force (P-T, temp workers) Customer doing the work Instead of 1-2 firms people work for 5-10; women entered workforce; firms downsize

Outsourcing Trends Large firms not competitive advantage Small, agile niche firms change structure, cost overnight Global economy creates more competitive pressure Product, service cycle times dramatically reduced Significant operating, financial performance critical to success Technical specialists available; no need to hire them internally Cutting edge technology, knowledge now considered competitive weapons; expensive

Outsourcing Trends Outsourcing used when internal incompetence caused failure; now used to restructure successful orgs Larger orgs outsource entire processes Processes furthest from the core first, moving toward it Unlikely that operating processes, management positions will be outsourced Outsource global functions, processes to firms with global presence, expertise Smaller firms growing outsourcing individual tasks (rent a CFO, CIO)

Outsourcing Growth Double digit growth expected in decade In 2000, market was $282 billion (20% growth) Outsource providers increased 65% s, internal audit accepted by acct firms Now outsourcing services means seeking audit business

Seven Steps to Successful Outsourcing Greaver

One Assess risks Announce initiative Form project team Engage advisers Train the team Acquire other resources Address issues: Resource management Information management Project management Set objectives

Two Understand Organization’s vision Vision Core competencies Structure Transformation tools Value chain Strategies Determine: Decision rights Contract length Termination date Align Initiative

Three Measure activity costs Project future costs Measure performance: Existing and future Cost of poor performance Benchmark costs/ performance Determine: Specific risks Asset values "Make" total costs Pricing models Final targets

Four Set qualifications Set evaluation criteria Identify providers Screen providers Draft RFP Evaluate proposals: Qualifications Costs Perform due diligence Determine: "Buy" total costs Short-list providers Finalist provider Review with senior management

Five Plan negotiations. Address High-level issues Deal breakers Prepare term sheets Negotiate contract: Scope Performance standards Pricing schedules Terms and conditions Announce relationship

Six Adjust team roles Compare/merge transition plans Address transition issues: Communication Human resources Other production factors Meet with employees: Organization Provider Make offers/termination Provide counseling Physically move

Seven Adjust management styles Set up oversight council Communicate Define and design: Meeting agendas Meeting schedule Performance reports Perform oversight role Confront poor performance Solve problems Build the relationship