Consider the Source

Sourcer, Heal Thyself

By Bill Huber, Director, CPO Services, TPI

As I speak with procurement colleagues, I consistently hear of corporate mandates to negotiate an across-the-board price reduction or change to payment terms with all suppliers.  While companies will see some short term benefits from this behavior, it of course is not sustainable.  By not differentiating based on supplier performance and innovation, the quality of the supplier base will ultimately be degraded. Also, because this approach tends to focus on price it can starve innovation that might more significantly reduce total cost

I was asked by Tim Cummins at IACCM to speak on a panel along with Dan Mahlebashian, Chief Contracting Officer at General Motors and Tim McCarthy, Worldwide Director of Pricing and Contracts at Rockwell Automation on the subject of Renegotiation – The Silent Killer of Expected Results.  The topic clearly resonated with the sourcing community and was subscribed to by an audience of over 400 representing a who’s who of leading corporations.

The prescription for procurement was clear: We must possess the courage to resist knee-jerk tactics and lead through strategy, prioritization and alignment, leavened with a touch of old fashioned ingenuity

If anyone is attending SIG’s Global Sourcing Summit this week in Baltimore, MD, I’ll see you there. I’ll be posting between presentations throughout the week.

Captives May Not Always Be What They Seem

By Brian Smith, Partner & Managing Director, FSO Services North America, TPI

Global organizations typically offshore a broad range of business processes. To optimize their resources, early adopters, particularly those in the financial services industry (Citibank and Standard Chartered Bank, as examples), established their own wholly owned and operated offshore business units, called “captive centers.” In light of recent events in India (Satyam, Mumbai attacks) and the changes in economic priorities in their home markets, global companies have begun to rethink their sourcing strategy and review the mix of outsourced and captive solutions, and the onshore/offshore mix. Like Nick Heath’s article, Banks: Offshoring, Not Outsourcing (BusinessWeek Online) explains, Satyam and regulatory scrutiny has made many institutions wary of the risks associated with trusting third parties with information.

While it may seem like a good idea to revert to relying on captives, there are various other structures that can mitigate risk without the capital expense. Since many captives often do not attain critical mass, they eventually lack the efficiency that parent entities want and become a liability instead of an asset. Captive units that do not reach critical scale are often 30 to 50 percent more expensive than the median third parties after a company either invests in revitalizing the captive and later sells the business to a third party after the captive atrophies beyond repair. A minority of captives or “best-in-class” captives, however, can attain cost performance gains better than those of the third-party service providers.

Alternatively, parent companies are increasingly evolving toward a balanced hybrid captive model, retaining strategic core employees while the commodity work is spun off to third parties. A hybrid captive model offers the following benefits:

• Leverages the captive’s premises improving its efficiency ratio
• Makes better use of fixed overhead
• Can be perceived as reducing risk
• Lowers the cost of third-party resources, since the service provider does not need to provide infrastructure, secured space, and other resources that the captive possesses.

The hybrid captive concept has emerged as a means of structuring a relationship that gives the buyer of services a significant degree of transparency and management oversight over operations carried out offshore by a service provider.

Increasingly, as firms move to second-generation offshoring, it is necessary to look beyond labor arbitrage as a means to increase capability and variable capacity that helps achieve previously unattainable value. Evaluating your organization’s strengths and analyzing which approaches can help optimize your offshoring strategy can unlock value not previously seen in previous or current labor arbitrage experiences.

The Silver Lining: Vertical Integration

By Peter Allen, Partner & Managing Director, TPI

It’s been a few weeks since I’ve posted an entry. I’ve been busy working with several large companies to think through the next source of value from their outsourcing and offshoring initiatives.

My line–of-sight can hardly be deemed a perfect indicator of broader trends, but I thought it worthwhile to share what I’m seeing.

Foremost, companies that have used offshoring as part of their cost-realignment programs over the past few years have driven the unit costs of “commodity” services to a fairly attractive price point. It’s worth noting, however, than one company’s commodity is another’s differentiation, or so they think.

I get great satisfaction from facilitating the debate on just what’s core to a business’s strategy in the context of today’s horrible market economics.  I can tell you that the sacred cows of the recent past are not so sacred today.

But, many companies have a rather healthy attitude toward what can be bought versus what needs to be made/owned internally.  So for them, where’s the next source of value-creation?

That’s the emerging silver lining from the economic morass.  Up until now, very few companies have addressed the hardest, most complicated questions regarding their total cost equations. They haven’t asked why their operating environments are so complex, so burdened with fixed costs, or their front-to-back business processes so inefficient.

Finally, we’re seeing companies take up the age-old issue of vertically-driven costs.  One of the greatest areas of opportunity relates to integration.  Many first-generation adopters of outsourcing learned that driving down unit costs might not result in a reduction in total costs if they did not understand and manage the front-to-back linkage of business operations, applications, and infrastructure.

In 2009, I’m finally seeing some meaningful emphasis on vertical integration and associated sourcing.  Maybe there’s a benefit from this economic mess?

 

Successful Contact Center Outsourcing

Today's guest blog entry is by Amy McCarty, Senior Advisor, TPI Contact Center Services

 

Outsourcing is an attractive proposition in today’s economic climate.  Using contact centers for outsourcing projects allows companies to shift their cost structures from fixed to variable and avoid large technical investments. Companies benefit by taking advantage of a large service provider’s buying power and broad industry expertise through its multi-client - multi-industry approach. 

While these benefits are hard to argue with, it’s important to do your homework first.  The time and energy investment upfront can make outsourcing a positive, successful, and financially beneficial experience.  The top five issues to consider are:

1. Creating solid, well structured contracts – In my experience, a poor or loosely defined contract structure can lead to confusion and poor execution. The lack of structure leads to varying interpretations of the contract’s original intent as personnel changes over time.

2. Managing an ongoing service provider relationship – Identify the right person to manage the relationship on a full time basis to ensure successful delivery by your service provider.  Lack of oversight in the relationship will cause long-term dissatisfaction with the service provider if communications are fragmented and internal client goals are not met.

3. Aligning vendors with corporate goals and values – Service providers should have the same goals as your organization. Differing goals can lead to varied expectations, misunderstandings, and general dissatisfaction with the process.

4. Defining your contact center’s strategic vision – Your strategic vision should be defined and communicated internally prior to executing a contract with a service provider.  Once defined, the vision can act as the guide for selecting a service provider and developing a beneficial contract.  Without a vision, a mismatch can only be discovered once the contract is executed and implementation is underway.

5. Identifying the right (qualified) service provider – Each service provider has an area of expertise. There are no one size fits all service providers. A client should spend time researching the right service provider before moving forward to prevent a bad outsourcing experience.

It has been my experience that far too often there are critical factors missing from a contract. Doing the due diligence from the start and making sure your address the five points outlined above can result in a positive outsourcing relationship and a return on investment. I’m interested in learning about your past/present contract experiences and how you may have tried to repair the relationship.

Building Fences & Digging Holes

By Duncan Aitchison, Partner & President, EMEA, TPI

Amidst the current economic turmoil, it is not surprising that the ogre of protectionism has once again reared its ugly head.

From Barack Obama’s “Buy American” stimulus package provision, to Gordon Brown’s “British jobs for British workers” comments, to the calls by President Sarkozy to repatriate the production of French cars from Eastern Europe, there is no shortage of evidence pointing to an increasing level of political debate over the merits of and methods for fencing in domestic economies. Even the Swiss have felt the need to call a referendum on whether to keep its labour markets open to all EU countries despite increasing internal unease over a possible tide of economic immigration from its neighbours.

   

Image from The American Online

For the outsourcing industry, which has spent much of this decade migrating its business models to ones that leverage global delivery platforms built upon off and near shoring approaches, such political rhetoric makes for uneasy listening. Globalisation has been one of the key factors driving continued growth in this sector. Forces – be they legislative or social (it will be increasingly brave for any high profile business to be seen as “exporting” jobs) - that conspire to constrain this current modus operandi will not be welcome developments.

For the moment, in public at least, most national leaders are still preaching the doctrine of internationalism. From the G9 to the EU, the talk is of coordinated responses and global answers to global problems. History has shown us, however that countries find it hard to stay faithful to liberal markets when the domestic electorate is calling for action in the face of a severe economic downturn.

The hope is that our natural reflexes to build fences to protect do not lead us to digging ourselves into an even bigger hole.  

Recession Service Management: Talking about money at the service delivery level

Guest blog by Cynthia Batty, Global Competency Lead, Service Management, TPI

In this economically challenging time, I’m finding that my clients’ service delivery managers are on the front lines having difficult discussions. Their companies are asking for base services from their service providers to be maintained, often with smaller overall services budgets than before the recession hit. These reduced budgets make conversations with service providers painful and become a challenge at the service delivery level when providers simply refuse to deliver the base contracted services.

This is where a strong governance process really helps the service delivery team. These people often will try to take the burden of negotiating these matters into their own hands – though they shouldn’t. While I think that issues should be solved at the correct level, matters of policy or basic service delivery simply can’t be negotiated outside of an executive process. My advice to teams with this kind of problem is to escalate and refuse to engage in the discussion with their service provider counterparts. It’s not a failure to ask for help. To maintain a good outsourcing relationship it is essential to have a governance escalation path that everyone understands, provides clear lines of decision-making and authority, and is immediately responsive to problems.

How do you deal with this in your world? Can your service delivery team get immediate escalation for these types of problems? Are you seeing this discussion in your relationship? I’d love to hear how you are solving the problem, and in a day or so I will talk some more about the challenges of the service delivery team, and how companies I work with are meeting the need to continuously growing their ability and knowledge about good outsourcing management practice.

Satyam Debacle: What can we learn from it?

Guest Blog Entry by Dinesh Goel, Partner, TPI, Inc

 I learned two lessons pretty early on: avoid making mistakes that have fatal consequences and learn from those mistakes to avoid falling victim to them in the future. In my previous blog entry “Corporate Governance Takes the Cake,” I mentioned that these mistakes can recur in any industry/country due to a wider collusion of stakeholders.

We can learn a thing or two from the Satyam situation (and the recent terrorist attacks in Mumbai) to avoid falling victim to them in the future. It is appropriate to point out that these are generalizations rather than “one size fits all” solutions and hence may not apply to all situations.

• Diversify your risk: It may be wise to consider splitting similar work or processes (if there’s sufficient scale to warrant) among multiple service providers  Avoid placing all eggs in one basket.

• Cost can’t be the only decision driver: Clients may have veered toward attractive gaps in Satyam’s price positioning versus their peer group.

• Resilient Capacity: Two other top decision drivers, aside from cost, should be capacity and capability. A resilient global delivery capacity is paramount for customers given the unavoidable risks of terrorist attacks, corporate scandals, constant geo-political threats and other man made or natural disasters that have the potential to disrupt business operations. Equally important is for customers to choose providers that have the technical and domain capability to leverage apart from just the cost and capacity (we, at TPI, call it the 3C Framework for Successful Sourcing Strategies).

• Real Business Continuity & Disaster Recovery Plans: These plans not only need to be written but periodically tested to ensure that they meet standard requirements and will help avoid disruptions in critical business functions. Independent review by a third party can also help to reassure management that their plans meet standards and will achieve its purpose of managing a disaster situation if invoked

• Controlled/Flexible Contracts: Customers must insist that contracts contain sufficient flexibility and control for issues that may arise. This cannot be over emphasized as it becomes more than just a contingency clause in contracts.

• Data privacy/security: Customers should employ independent teams (their own or a third party) to monitor the physical and logical safety of data that providers access under the scope of a contract. Annual reports on the security practices in place at offshore delivery centers can be of immense value to management to detect any lapses or potential issues sooner.

• Captive Centers: The Satyam situation has invoked reactions by those in favor of captive set ups, but I don’t believe that’s the right way of looking at it. That, in my view, is just an opportunistic argument supporting those who favor captives over third party relationships. While captives have their advantage in terms of offering better control to the parent, they are being scrutinized for their ability to compete with third party providers especially for services that are now offered by the market in a matured way.

These key lessons that emerge from the recent developments are not exhaustive by any means. If buyers become more vigilant in their contracting and post-contracting phases for outsourced arrangements keeping the above lessons in consideration, it will hopefully make their road ahead less bumpy.