Successful Outsourcing BC Supply Chain Council December 16 th, Robert Cooke Intex Consulting Partners

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1 Successful Outsourcing BC Supply Chain Council December 16 th, 2004 Robert Cooke Intex Consulting Partners

2 Agenda Background on Outsourcing: - What is it? - What is being outsourced - Overview of Process Best Practices and Learnings - References: Direct experience with clients Conferences, books, articles, interviews

3 What is Intex? BC based boutique consulting firm Specialists in Shared Services and Outsourcing Key services: - Services sourcing reviews and feasibility assessments - Contract Governance & Vendor Relations workshops - Relationship diagnosis and alignment - Organizational change and transition support Resource pool of senior specialists Client sectors include public, private and crown across Canada

4 About Outsourcing Outsourcing has become an essential tool in managing today s and tomorrow s organizations (Michael Corbett, Chair, Outsourcing World Summit) Outsourcing is the fastest growing industry in the world (Peter Drucker) Outsourcing is one of the greatest organizational and industry structure shifts of the century (James Brian Quinn, The Amos Tuck School, Dartmouth College)

5 About Outsourcing Outsourcing is about establishing a long term relationship that results in true collaborative advantage It has been defined as A strategic, long term relationship with an outside specialist for managing work traditionally performed within the organization It is considered to be analogous to a marriage and its success rate has not been stellar (over 50% of relationships still fail) There is a growing backlash against outsourcing in the U.S. as it is confused with off shoring but it will continue to grow at dramatic rates Despite the challenges, successful outsourcing deals can produce substantial savings, increases in service levels, and consistent, leadingedge solutions

6 Outsourcing as Percentage of Corporate Budgets Source: Michael Corbett & Associates 2004

7 Percentage of Executives NOT Outsourcing Source: Michael Corbett & Associates 2004

8 What s Being Outsourced Physical Services Printing and publishing Specialist Services Public relations and legal Transactional Services Order processing Mailroom and shipping Warehouse and distribution Component manufacturing Facilities maintenance Food and catering OTHERS? Payroll and tax Recruiting and training Advertising and promotion Information technology Supply Chain Customer relationship management (call centres) Employee benefits administration Travel and expense management Accounts payable/receivable Invoicing and receivables Data entry and transcription Industry specific processes (e.g. insurance claim processing, visa card processing) Source: Outsourcing Institute 2004

9 Trends In Supply Chain Outsourcing 50% of firms in Europe and U.S. are considering outsourcing part of their procurement operations by end of 2006 (22% currently outsource) * Procurement Service Providers being used today/considered for the future * - Strategic Sourcing (18%/42%) - Inventory Management (22/%/44%) - Requisition to Pay (26%/60%) - Hosting e-procurement application (39%/75%) - Hosting e-sourcing applications (45%/75%) Growth in 4 th Party Logistics providers (4PL) who manage services of 3PL providers such as transportation and warehousing * from Accenture study of 219 procurement directors in 2004

10 Current Practices Discussion What is the current state of outsourcing of supply chain in your organization? - What have you outsourced? - What are you considering outsourcing? - Why?

11 Successful Outsourcing: Best Practices and Learnings

12 BP# 1: Have a Clearly Defined Outsourcing Management Process Relationship Management

13 Phase I: Pre-Planning

14 BP# 2: Establish Clear Goals Innovation Speed to Market Access to Skills Variable Costs Flexibility Improved Focus Reduced Costs Outsourcing is not the goal, business improvement is If outsourcing is based on cost savings alone it will ultimately appear as a hollow solution

15 Outsourcing Begins With Three Simple Questions 1. If starting from scratch today, would you really do it yourself? 2. Are you so good at it, that others would hire you to do it for them? 3. Will tomorrow s leaders come from this part of the business? If core competency, the answer will be yes to all three.

16 BP# 3: Formalize the Pre-Planning Phase Establish a project team: project manager, business expert, financial and HR support etc. Complete scope and baseline assessment. Clearly understand what is included in the function - Is the Function well-defined - Has the function been successfully out-sourced by other organizations - Are there significant potential benefits from out-sourcing this function - Is the organization ready for this type of change If processes are a mess you may want to consider fixing them up before proceeding Complete Initial business case - If just considering the outsourcing option this will require comparison of current costs to vendor market best fully loaded costs. - If considering other options such as shared services, business process improvement the process is much more complex as processes and sub-processes and their associated costs will need to be defined

17 Phase II: Contracting

18 BP# 4: Comprehensive Due Diligence Soundness - Financial strength, funding and stability - Clearly defined and visible cost structures - Management team strengths & capability - Technology capability - Staff capability - Customer satisfaction rating - Growth potential Practices - Quality and continuous improvement processes - Problem solving capability and reputation - Project management and transition experience Reality - Site Visit - Culture and values fit and compatibility - Demonstrates clear understanding of your needs and expectations - Service philosophy - Work environment: employee capability, performance and climate - Contract priority for them

19 BP# 5: Win/Win Negotiations and Contracting Keep in mind that you want a long term relationship where you become partners in long term success - Build a strong working relationship while negotiating the optimal deal - Establish a common ground for working together (but recognize you have very different goals) - Keep the negotiation process friendly: unresolved conflict will live on - Clearly define service level expectations Move to process focusing on: - Key objectives (not tasks or rigid performance indicators) - Open sharing of costs and financials - Honesty re expectations and concerns Develop a document that is: - Flexible and can adapt to changes in technology, economy, business needs - Structured as user friendly, not to be filed away Define a process for managing changes Use professional negotiators

20 Phase III: Transition Planning

21 BP# 6: Recognize the Real Work Begins After the Contract is Signed Once the contract is signed the real work begins: (for many this is seen as the end of the project this is wrong!) The real work after the contract is signed is to: - Finalize the transition plan - Handle the transition (movement of people) - Implement new operating model and processes - Deliver intended results - Manage contract governance - Sustain a long term working relationship with the vendor Establish a dedicated internal transition team as well as a joint team to develop and implement the plan Ensure change management is an integral part of the transition Recognize in the planning that transition goes on for a number of months after Day 1

22 BP# 7: Develop a Risk Management Plan Risk management asks the questions, What could go wrong and what would we do mitigation or contingency - if it did go wrong? Each risk is assessed with respect to the likelihood of its occurrence and the consequence of its impact should it occur Mitigation/contingency plans are developed for highly rated risks which include clearly defined actions and accountabilities A process for ongoing identification and assessment of risks needs to be defined Risks are typically assessed in the following categories: - Customer Care & Performance - Financial - Human Resources/Labour - Market - Political

23 BP# 8: Take Change Management Seriously The change and cultural shock created by outsourcing can severely impact business performance. There will always be resistance to change because of: - parochial self interest - misunderstanding and lack of trust - differing assessments of the process and outcomes of change - low tolerance for change Change Management is about: - Understanding the type and scope of change - Understand how people and groups manage and overcome personal and organizational resistance to change (traditional change management tasks) - Developing and assessing organizational change options - Planning for change implementation In the end, success is all about the people!

24 Phase IV: Contract Governance & Vendor Relations Pre-Planning Contracting Transition Planning Contract Governance & Vendor Relations Start-Up & Activation Relationship Alignment Contract Governance Results Assessment Page 0

25 Contract Governance & Relationship Management CONTRACT GOVERNANCE To Monitor, Direct and Control Vendor Performance RELATIONSHIP MANAGEMENT To Establish a Long Term Sustainable Relationship CONTRACT MANAGEMENT The process of ensuring effective contract governance and relationship management

26 BP# 9: Formalize Contract Governance Well selected and trained stay back team - Clarity of roles and accountability for managing vendor performance - Knowledge of the contract - Knowledge of contract law - Skills in managing non-performance and vendor relationships Cleary defined governance processes - Performance reporting against standards - Time sensitive reporting of performance problems - Problem escalation and conflict resolution process

27 BP# 10: Focus on Vendor Relations When things go wrong, focus on understanding joint contributions Wise decisions need joint input Surprises should be rare: work as a team to maintain internal and external alignment Cultural differences need to be explored, understood and managed Key Relationship Success Issues - degree of trust - ease of working together - capacity for joint problem solving - capacity to resolve conflicts - openness and quality of communication - capacity for taking a what is best for the relationship perspective

28 Vendor Relations Progression Step 1: Start Up Friends and colleagues working together to achieve mutual goals Minimal change in roles and expectations Where is your relationship? Step 2: Honeymoon All working together during months of transition Stay back team staff very much involved in their old work and day to day management Not much confrontation on performance issues Some signs of growing stress start to emerge Step 3: The New Reality Recognition that goals are not all congruent Increased conflict over responsibilities Performance feedback increases tension Increased demands by vendor to reduce costs reduces performance and customer satisfaction Step 4: Sustaining the New Relationship Increased recognition by both parties of each other s unique needs Building protocols, increasing communication and trust

29 Relationship Management Challenges Management of negative perceptions lingering from negotiations Resolution of ambiguities in agreement Efficient and effective joint decision making Proactive identification of conflict or tension Maintaining and enhancing trust Management of commitments Learning from both recurrent conflict and broken commitments Maintenance of internal alignment (both sides) Minimization of surprises about internal (organizational) changes Anticipation of significant external changes that will impact the relationship

30 Actions to Enhance the Relationship Relationship alignment workshops Audit the health of the relationship on a regular basis Formal monthly, quarterly and annual meetings to discuss the relationship Develop relationship vision, goals and metrics Develop working together, communication and decision making protocols Establish conflict management methods and processes

31 Summary of Best Practices and Learnings BP# 1: Have a clearly defined outsourcing management process BP# 2: Establish clear goals BP# 3: Formalize the pre-planning phase BP# 4: Comprehensive due diligence BP# 5: Win/win negotiations and contracting BP# 6: Recognize the real work begins after the contract is signed BP# 7: Develop a risk management plan BP# 8: Take change management seriously: it s all about the people BP# 9: Formalize contract governance BP#10: Focus on vendor relationship BP#11: Others? What have you learned along the way?

32 Questions?

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