What Rotman knows about Outsourcing

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What Rotman knows aboutOutsourcing?

• Walid Hejazi
• Rotman School of Management
• October 26, 2006

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Rotmans Knowledge Base
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Rotmans Knowledge Base

• Home for leading researchers on
• outsourcing
• Extensive interactions with other leading
• researchers, many of whom are in this
• room

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Rotmans Knowledge Base

• Home for leading researchers on
• outsourcing
• Extensive interactions with other leading
• researchers, many of whom are in this
• room

Several Executive programs (especially
Essentials of Outsourcing Program) put Rotman
in contact with executives from the worlds
largest corporations
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Rotmans Knowledge Base

• Home for leading researchers on
• outsourcing
• Extensive interactions with other leading
• researchers, many of whom are in this
• room

Several Executive programs (especially
Essentials of Outsourcing Program) put Rotman
in contact with executives from the worlds
largest corporations
Today represents Rotmans links to the government
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Rotmans Knowledge Base

• Home for leading researchers on
• outsourcing
• Extensive interactions with other leading
• researchers, many of whom are in this
• room

Several Executive programs (especially
Essentials of Outsourcing Program) put Rotman
in contact with executives from the worlds
largest corporations
Today represents Rotmans links to the government
This overlay between Academia, the Private Sector
and Government has placed Rotman in a unique
position
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Core Rotman Educational and Research Initiatives

• Centre for Outsourcing, Research and Education
  (CORE)
• Undertakes many activities around educating /
  informing the business community and government
  on Outsourcing
• Their educational program was outsourced to
  Rotman
• The relationship has allowed Rotman faculty to
  gain access to company level data several
  ongoing projects
• We have learned many lessons from our
  interactions with the business community
  (educational program / research initiative)

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What do Business People Know? And How Rotman
helps?

• Our experience is that managers know a
  significant amount about outsourcing, but have
  not developed a systematic way to think through
  the outsourcing deal
• This is the case with respect to
• Identifying what to outsource (what is core to
  the organization)
• What are the benefits to outsourcing?
• What are the dangers the stem from outsourcing?
• How to design and implement the outsourcing
  contract?
• How to manage the transition to the outsourcing
  arrangement?
• How to assess the impact on stakeholders?
• How to think about renegotiation at time of
  renewal?
• Answers will often depend on whether the
  outsourcing arrangement is Local or Offshore
• We (Rotman) are integrative thinkers the answer
  to each aspect cannot be made in isolation of the
  overall transaction

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Essentials of Outsourcing Executive Program

• The Essentials of Outsourcing Executive Program
  focuses on these issues
• Provides business executives a conceptual
  framework to think through outsourcing decisions
  more effectively, and hence make better decisions

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Outsourcing

• This involves moving a firms function or
  activity to an outside provider
• This can be done
• Within the firm but outside the unit (Shared
  services, which can also occur across
  organizations)
• Cautions Measured outputs increase, and thus may
  attribute to outsourcing an increase in
  productivity (shared services)
• May be a loss in internal learning
• Locally (Canadian mentality but is it? )
• Near Shoring (Canada to US)
• Offshoring

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Five Steps to an Outsourcing Deal
1. Identify what is core to your company 2. Think
of all associated costs 3. The contract must be
clear on scope and service levels 4. Think about
renewal before you sign the deal 5. Out-of-firm
is not out of mind
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Step 1 Identify what is core to your company

• What distinguishes your company from the
  competition?
• These activities define your companys core
  competency and should not be outsourced
• It would prove to be a fatal strategic error if
  another firm was able to deliver your core
  competency at a lower cost than you could
• this would likely put you out of business.
• However, all other non-core activities have the
  potential to be outsourcedand serious
  consideration should be given to whether an
  outside provider can deliver these activities at
  a lower overall cost
• There is no point in maintaining the functions
  within the company if an outside supplier can
  provide them at lower cost.

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Step 2Think of all associated costs

• Too often, the direct cost of production
  associated with outsourcing may be significantly
  lower than producing these activities in-house,
  but overall costsincluding expenses related to
  quality control, intellectual property
  protection, supply-chain management and
  co-ordinationmay be significantly higher.
• These and other expenditures are the overheads of
  operating at arms length and within a formal
  contractual framework rather than via informal,
  intra-firm networks under management control.
• The hidden costs of outsourcing can become
  particularly important when it involves an
  offshore solution.

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Step 3Contract must be clear on scope and
service levels

• Scope clauses define which party is responsible
  for specific tasks in the outsourcing
  relationshipbeing clear on who is responsible
  for what is crucial to success.
• The specification of service levels within an
  outsourcing agreement is also extremely
  important. However, do not micro-managetry to
  define the outcomes critical to your companys
  profitability and target those in the service
  level agreements.
• Let the service provider decide the best way to
  achieve these outcomes. After all, this is why
  you hired that company in the first place.
• It is important to remember, the provider must
  only satisfy the contract the company has signed.
  

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Step 4 Think about renewal before you sign the
deal

• One of the biggest challenges faced by business
  is renewal of the outsourcing agreement.
• It is often the case that the company has
  transferred many or all required assets to the
  outsourcing provider and hence makes transferring
  production to another provider more difficult. If
  this is a long-term contract, the knowledge of
  how to efficiently provide the service inside the
  company is lost.
• That is, the company often feels like it is being
  held hostage by the outsourcing provider.
• Furthermore, companies often wait until it is far
  too late to consider getting another provider
  and, as a result, renew contracts by default.

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Step 5 Out-of-firm is not out of mind

• Just because you have outsourced some activity,
  you should not assume it is out of your life
  doing so is a recipe for failure.
• A successful outsourcing relationship requires
  ongoing communication and management between you
  and your outsourcing partner.
• Both sides must have managers that own the
  relationship and work at building the partnership
  over time.
• In the best case scenario, individuals involved
  in designing the original outsourcing deal are
  also involved in managing it.

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Benefits of Outsourcing

• Often, the benefits of outsourcing are assumed to
  be
• Labour and other costs
• Scale economies
• Get rid of a headache
• This of course is a large part of the benefits
  that flow from outsourcing (some numbers)
• But there are large strategic benefits that flow
  from outsourcing that are often overlooked
• By outsourcing those functions for which the firm
  does not have a comparative advantage, that is,
  someone else can do that function better, the
  firm is then better able to focus its managerial
  resources on the higher value added functions
  for which it has a comparative advantage

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Survey Evidence on OutsourcingFinancial
Services Sector

• The Economist Intelligence Unit and
  PriceWaterhouseCoopers conducted an online survey
  of senior executives in Financial Services Sector
  (June, July 2005)
• Respondents from North America, Europe and Asia
  (Global in nature)

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67
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Plans to move high-value Activities abroad
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China and India remain important, but other
important markets include ..
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(No Transcript)
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Open Questions

• Best Practices what works and what does not
• Governance of outsourcing agreements
• Governance of transitioning employees
• Structuring the Outsourcing deal
• Performance Metrics and Service Levels
• How to manage renewal and innovation
• Industry Canada encouraged to collect more data
  on domestic outsourcing
• How prevalent is it, by industry, and trends?
• What have been the impacts of domestic and global
  outsourcing?
• Trefler on international outsourcing (trade in
  services)

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What does Rotman Know About Outsourcing?
Nothing
Everything
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What does Rotman Know About Outsourcing?
Academic
Nothing
Everything
Practical (real world)
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What Does Rotman Know About Outsourcing?
Academic
Everything
Nothing
Practical (real world)
27
What Does Rotman Know About Outsourcing?
Academic
Everything
Nothing
Practical (real world)
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What Does Rotman Know About Outsourcing?
Academic
Everything
Nothing
Practical (real world)
Rotman knows a lot about outsourcing but there is
a lot that is unknown But it is a team effort