Third Party Insourcing/Outsourcing. Delivering Better Service, Lower Costs and Increasing Innovation Through Vested Outsourcing

Transcription

1 Third Party Insourcing/Outsourcing Delivering Better Service, Lower Costs and Increasing Innovation Through Vested Outsourcing Andrew Downard Managing Director AD Supply Chain Group P/L Karl Manrodt, Ph.D. Professor Georgia Southern University

2 Introduction Based on Research by And has led to a series of books:

3 The Problem..

4 How s That Outsourcing Going For You? Late in 2012 the Zurich Insurance Group reissued a survey on Supply Chain Risks Outsourcing failure is now a significant cause of supply chain disruption. Outsourcing failures had increased from 17% to 35% Moving the issue into third place on the list of causes Research in Europe* indicated: 75% of respondents expressed dissatisfaction with outsourced services, 25% intended or did insource. *Freytag, P. V., Clarke, A. H. & Evald, M. R., Reconsidering outsourcing solutions. European Management Journal, Volume 30, pp

5 Conventional Approaches Encourage the: Watermelon Scorecard As outsourcing exploded in the 1990s and 2000s and sourcing became more complex as services grew, companies began to realize they were faced with the Watermelon Effect A good supplier might be doing what they were asked and achieving Green metrics, but the overall business results are still Red Are You Suffering from a Watermelon Scorecard

6 The 10 Ailments of Outsourcing N o Ailment Description 1. Penny Wise and Pound Foolish: Occurs when a company outsources based purely on costs. 2. The Outsourcing Paradox: Happens when a buyer hires an expert service provider then proceeds to tell them precisely how to do the work 3. Activity Trap: The more transactions performed the more money the service provider makes, = no incentive for improvement 4. The Junkyard Dog Factor: Retained internal experts micro-manage the contract 5. The Honeymoon Effect: The provider initially goes overboard to perform but drops back over time as other clients come on board. 6. Sandbagging: To prevent the Honeymoon Effect, some companies adopt measures to encourage service providers to perform, can lead to minimalist results. 7. The Zero-Sum Game: This is one of the most common ailments. Companies believe, mistakenly, that if something is good for the service provider, then it is automatically bad for them. 8. Driving Blind Disease: Occurs when there is no formal governance process to monitor the performance of the relationship. 9. Measurement Minutiae: Too much of a good thing can be bad for you. This applies to Fast Food and to measuring service providers. 10 The Power Andrew of Not Downard Doing: & Karl The Manrodt saddest of all the ailments, having performance measures but not using them.

7 Is There A Better Way To Outsource? The significant problems we face cannot be solved at the same level of thinking we were at when we created them. - Albert Einstein

8 The Solution..

9 Based On Research With Why What How Tells the real stories of

10 Vested Outsourcing is a Hybrid Model Shifts from a conventional buy/sell business model focusing on transactions to an outcome based business model focusing on results Moves beyond saying strategic supplier to developing a carefully crafted collaborative agreements Creates Value through win-win solutions economics (grow the pie, not fight over the pie)

11 The 5 Rules of Vested Outsourcing

12 1. Outcome Based vs. Transaction Based Model Most outsourcing relationships follow a transaction-based business model This can be cost plus or a fixed price per transaction where the service provider gets paid a transaction fee for each activity that is performed Vested Outsourcing moves to an outcome-based business model where the service provider is paid for achieving results, not just for performing tasks or activities

13 Rules 2 Focus on the WHAT, not the HOW Joy s Law No matter who you are, most of the bright people don t work for you

14 Rule 3 Clearly Defined/Measurable Desired Outcomes You got to be very careful if you don't know where you're going, because you might not get there. - Yogi Berra

15 Definition of Perverse Incentives Be On Guard For Perverse Incentives [Def] A perverse incentive is a term for an incentive that has the opposite effect of that intended. Perverse incentives by definition produce unintended consequences. The Language of Psychology A classic example occurred in Hanoi when a French program paid people a bounty for each rat pelt handed in. The program was intended to exterminate rats. Instead it led to the farming of rats. 1 1 Michael G. Vann, "Of Rats, Rice, and Race: The Great Hanoi Rat Massacre, an Episode in French Colonial History," French Colonial History Society, May, 2003

16 Rule 4 Pricing Model with Incentives Optimize for Trade-ups! Solow s Law: Business Growth is Driven by Innovation 87% of Economic growth is driven by technical change which is driven by improvements in business process or technical improvements in products. Labor & physical capital 13% (e.g buildings, machinery) The vast majority of today s outsourcing contracts are for labor and physical capital rather than for innovation and problem solving!

17 Rule 5 Insight vs. Oversight Governance Structure ME Getting the supplier to meet my needs It s in the contract, now it s the supplier s problem Blame and punish the supplier Unpleasant surprises BECOMES WE Finding a way to meet both our needs Work together to achieve performance and compensation goals Communicate the issues, jointly find solutions Integrated planning and communications Manage the Business Not Just the Supplier!

18 The Recipe: 10 Elements of a Sound Agreement

19 Success Stories It Really Does Work! P&G (Real Estate/Facilities Mgmt) Microsoft (BPO) McDonald s (Supply Chain) U.S. Dept. of Energy (Environmental Services) State of Minnesota Dept. of Transportation (Construction) Integrated Management Services (Staffing) Diversey (IT) Water for People (non-profit NGO support in developing countries)

20 Results From Microsoft Accenture OneFinance In First 2 Years Global Process Standardization to 40 Systems 23% reduction man-hours in tactical work - allows for more strategic focus 20% increase in first pass accounts receivable Only 0.43% misses across all Accenture SLAs Internal satisfaction for finance customer increased 90% SOX Compliance from 15 to all 95 subsidiaries I WIN with lowest possible costs Procurement / Finance Does it Really Work? WIIFWe 20% reduction in cost of contract, with 35% projections $30m in transformation value realized 7 year contract; added 5 years after first 2 years Book of business expanded from $185 to $330m Higher profitability; share of transformation value in profits I WIN with higher service levels Business Units / Customer Supplier I WIN with higher margins/profits

21 What They Are Saying Tim Cummins, CEO, International Association for Contract & Commercial Management "Vested Outsourcing offers a robust approach for developing high-performing strategic relationships. Dawn Tiura Evans President and CEO, Sourcing Interests Group Kate has hit the nail on the head. The rules while often spoken about have never been so clearly defined as they are here. The journey to a truly collaborative agreement is practically guaranteed if you follow the step-by-step process outlined in this great book. Peter Sheahan, Founder and CEO, ChangeLabs and Author of the Best Selling Book Flip Vested Outsourcing truly flips conventional outsourcing on its head. Kate has captured what it takes to drive REAL value through your external partnerships. A must read for anyone who wants to do outsourcing. Frank Casale CEO, Outsourcing Institute Vested Outsourcing is a game-changing approach that will quickly become the new gold standard for advanced outsourcing relationships. It is a critical enabler for Outsourcing 2.0 Tim McBride Chief Procurement Officer, Microsoft As the Chief Procurement Officer at Microsoft it is my job to help us adopt next generation outsourcing models and Vested Outsourcing is definitely one of the tools we have in our toolkit that we are exploring. Todd Shire, Global Logistics Sourcing Strategy Manager, Intel "I predict the buzzword for the next decade will be "incentives". Only when our incentives are aligned will we succeed with collaboration. Vested Outsourcing nails how to get collaboration right. Brad Mitchell, President of Distribution and Logistics, UPS Listed Vested Outsourcing as one of the top five supply chain trends for 2010, stating, Companies will take a vested interest in Vested Outsourcing Wall Street Journal Six Ways Small Businesses Can Save Money Vested Outsourcing is identified as one of six ways small businesses can save money.

22 For More Information Visit the University of Tennessee s dedicated Vested Outsourcing website at Andrew Downard Vested Center of Excellence andrew.downard@adsupplychain.com.au Tel Karl B. Manrodt, Ph.D. Georgia Southern University Karl@vestedway.com

23 Resources Products/Services Services to Support a Vested Journey Awareness Understanding Implementation Mastery Courseware Vested Outsourcing Orientation (four free online modules) Support Speeches Half Day and Full Day Workshops Courseware 3 Day Open Enrollment Support Deal Review Compatibility and Trust Assessment Onsite Facilitated Workshops Business Case Justification (Pony) Courseware Online course for Getting to a Vested Agreement Collaborative Contracting Open Enrollment Support Onsite Facilitated workshops Coaching support Consulting projects Courseware Certified Deal Architect Re-certification of Deal Architects Support Facilitated Governance Management Deal Certification Website Blogs Books Articles Social Media (linkedin group) Case Studies and White Papers Limited set of tools free with course Advanced set of free tools w/online course Proprietary set of tools w/coaching Funded Research Orange Text University of Tennessee course offering Grey Text provided by UT Faculty and Vested Outsourcing Center of Excellence partners independently