Strategic Outsourcing

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Strategic Outsourcing

• Based on
• Maurice F. Greaver II, Strategic Outsourcing- A
  Structured Approach to Outsourcing Decisions
  Initiatives.
• Prepared by Ninna Ricci L. Creencia

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Part 1 Overview of Strategic Outsourcing

• Overview
• Methodology

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What is Outsourcing?

• Outsourcing is the act of transferring some of
  an organizations recurring internal activities
  and decision rights to outside providers, as set
  forth in a contract.

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Reasons and Benefits

• Organizationally - focus, flexible,
  transformation, customer service
• Improvement - performance, manage control, risk
  manage, new ideas, image
• Financially - reduce investment, generate cash
• Revenue - gain market access, expand
• Cost - reduce cost, from fixed to variable cost
• Employee incentive, motivate.

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Levels of Outsourcing

• Individual moving specific positions out of the
  organization.
• Functional having specialized knowledge and
  responsibilities.
• Process how products or services actually flow
  through the organization.

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Michael Porters value chainPage 6
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Types of Outsourcing

• Tactical
• Strategic-future vision consideration-current
  and future core competencies-structure-costs-pe
  rformance-competitive advantages.

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History, Trend, and Growth

• To describe the growing trend of large companies
  transferring their information systems to
  providers (WWII).
• Trend in larger organizations is to outsource
  entire processes.
• Expected to grow at double-digit rates over the
  coming decade.

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7 Steps to Successful Outsourcing

• Planning initiatives
• Exploring strategic implications
• Analyzing costs/performance
• Selecting providers
• Negotiating terms
• Transitioning resources
• Managing relationships

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Planning Initiatives

• Assess risks
• Announce initiatives
• Form project team
• Engage advisers
• Train the team
• Acquire other resources
• Address issues resource management, information
  management, project management
• Set objectives.

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Exploring Strategic Implications

• Understand organizations vision, core
  competencies, structure, transformation tools,
  value chain, strategies
• Determine decision rights, contract length,
  termination date
• Align initiatives.

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Analyzing Costs and Performance

• 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.

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Selecting Providers

• Set qualifications
• Set evaluation criteria
• Identify providers
• Screen providers
• Draft RFP
• Evaluate proposals qualifications, costs
• Performa due diligence
• Determine buy total costs, short-list
  providers, finalist providers, review with senior
  management.

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Negotiating Terms

• Plan negotiations
• Address high-level issues, deal breakers
• Prepare term sheets
• Negotiate contract scope, performance standards,
  pricing schedules, terms and conditions
• Announce relationship.

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Transitioning Resources

• 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.

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Managing Relationships

• Adjust management styles
• Set up oversight council
• Communicate
• Define and design meeting agendas, meeting
  schedule, performance reports
• Perform oversight roles
• Confront poor performance
• Solve problems
• Build the relationships.

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Part 2 Planning Initiatives

• Project Management and Champions
• Outsider Advisers
• Setting Objectives.

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Types of Risks

• Inherent risks
• General risks
• Specific risks

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Risks Related to

• Risks relating to Project Design
• Risks relating to Managing the Project
• Risks relating to the Transition to the
  Providers Services
• Risks relating to Managing the Providers
  Services.

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Why Outside Advisers are Needed?

• Because they
• help manage risks
• level the playing field with provider expertise
• assist the project manager in focusing on
  outsourcing issues
• act as a paradigm buster (challenge established
  thinking)
• offer independent observations on the outsourcing
  environment.

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Organizational Objectives

• There are a number of questions that the project
  team should explore with senior management
  through discussions, surveys, and other means of
  information gathering in order to frame the
  project and its objectives.

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Part 3 Exploring Strategic Implications

• Organizational Structure
• Determining Core Competencies
• Restructuring
• Aligning Outsourcing With Strategy

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Organization

• Outsourcing challenges many of the ways in which
  organizations have traditionally been structured.
  For example, large size, vertical integration,
  and functional organizational structures have
  long been accepted as foundations for business
  success and for good reasons
• However, the reasons have disappeared
• One of senior managements most important jobs is
  to articulate its vision of the organization at a
  point in the future.

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What Core Competencies Are

• Core competencies are the innovative combinations
  of knowledge, special skills, proprietary
  technologies, information, and unique operating
  methods that provide the product or the service
  that customers value and want to buy
• Core competencies are what sets the
  organizations products and services apart from
  the competitors similar offerings.

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Ways to Acquire and Develop CC

• Hiring talented people
• Renting talented people (consultants,
  academicians, etc.)
• Executing development contracts (to share the
  cost of developing)
• Joint venturing (to share existing core
  competencies)
• Licensing (the use of core competencies)
• Acquiring or taking equity positions in
  organizations (who have the core competencies).

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Examples of Core Competencies
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Alternative Approaches to Operational Change
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Provider Relationship

• Strategic partner will approach the relationship
  as if it were a part owner of your business will
  participate in strategic planning meetings and
  share in the strategic decisions.
• Supplier provider wants to deliver the requested
  services with a performance that at least meets
  the specifications will use an operational
  ,tactical, or transactional approach, paying
  close attention to activity performance will
  prefer a pricing model.

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Part 4 Analyzing Costs and Performance

• Existing and Projected Costs
• Performance Standards
• Other Financial Issues

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Existing and Projected Costs (overview)

• In order to evaluate the decision to outsource,
  it is necessary to understand the costs of the
  activities of the target function. Requires
  research and analysis.

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Identifying Activities

• Inputs Activities
  Outputs
• The project team should interview
  knowledgeable people within the function and
  concentrate on production factors
• People
• Facilities (space and related services)
• Equipment
• Software
• Third-party contracts.

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Performance Standards (overview)

• Should measure existing and projected performance
• Organizations should have performance measures
  for their significant activities that support
  their strategies
• Knowing the performance measures for the
  activities being considered for outsourcing helps
  the project team make judgments.

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Measuring Current Performance Level

• Productivity Measuring inputs / outputs
• Quality Measuring waste, errors, and rework
• Timeliness Measuring the meeting of deadlines
• Cycle time Measuring elapsed time from start to
  stop in minutes, hours, days, etc
• Utilization Measuring time invested in a
  specific activity / total time available
• Creativity Measuring artistic achievement (such
  as design) or new ideas, discoveries, products,
  etc
• Outputs Measuring the results of activities
• Financial Measuring certain financial objectives
  (such as budgets, net income, earning per share,
  and economic valued added)

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Asset Identification and Capital Budgeting

• The project team identifies which assets, such as
  facilities, equipment and technologies, are
  related to each activity. If an activity is then
  outsource, consideration can be given to the
  disposition of each asset.

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Part 5 Selecting Providers

• Service Providers
• Developing the Request for Proposal
• Comparing and Evaluating Proposals
• Provider Selection

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Identify Potential Providers

• Strongest research skills are most useful
• Project team identifies greatest number of
  providers who might have the right qualifications
  and might be interested in providing the services
• Networking
• Get five to seven proposals from the most
  qualified, interested, and cost-competitive
  providers, and to evaluate those proposals
  efficiently.

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What to see in a Proposal

• A clearly written RFP
• Sufficient information (to shorten their time
  investment)
• Reasonable time to respond to the RFP
• Access to the organizations decisions makers.

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Restate All Proposals

• If the Request For Proposals has been prepared
  (WELL), all else should be easy
• Other things should be considered in the
  RFPQualifications EvaluationPerformance
  CommitmentsPrice Comparison and EvaluationMake
  or Buy Financial DecisionDecision Time.

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Relationship Manager

• Relationship manager the person who will deal
  directly with the providers account manager
• Relationship manager the former head of the
  unit being outsourced avoids confrontation,
  termination, severance, and so on . . .
• Relationship manager help technical specialists.

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Part 6 Negotiating Terms

• Negotiations
• Contracts

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Negotiate and Contracts

• The final agreement for the RFP is negotiated
• Negotiating process is like a funnel, from top to
  bottom issues, analysis and discussions, issues
  are addressed and agreed upon
• Outsourcing contracts scope of services,
  performance standards (service-level agreement),
  pricing schedules, terms and conditions.

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Part 7 Transitioning Resources

• The Transition Process

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Transition Process

• The Relationship Team takes over
• Transition Roles communication issues, human
  resources issues, transition issues
• Communication Issues general meeting, individual
  meeting for those receiving offers, individual
  meeting for those interview.

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Part 8 Managing Relationships

• Performance Monitoring
• Solving Problems

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Performance Monitor

• The relationship manager manages one or more
  contracts and providers
• To build the relationship effectively, the
  relationship manager and the organization should
  be active in monitoring and evaluating
  performance and in addressing issues.

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Resolving Disputes

• Outsourcing problems is segmented into one of
  four areas
• People
• Process
• Technology
• All other

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Third-Party Intervention

• Mediation
• Arbitration Non-binding and Binding
• Judicial By a judge or by a jury

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Termination

• At contract expiration
• For cause
• For convenience

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Reasons Not To Outsource

• If there are reasons to Outsource, there are
  reasons NOT to Outsource
• Uncertainty
• Loss of Control
• Conflict
• Employee Unhappiness
• Financial
• Excuses

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The End