Outsourcing Advice

June 1, 2005
Logistics and manufacturing professionals can use all the advice they can get to successfully manage their companies outsourcing efforts. Logistics and

Logistics and manufacturing professionals can use all the advice they can get to successfully manage their companies’ outsourcing efforts. Logistics and Manufacturing Outsourcing: Harness Your Core Competencies, (Tompkins Press, 2005, $24) offers ideas on how to create and maintain a successful outsourcing relationship that benefits the entire supply chain. Here’s a summary of some of the key concepts presented in the book.

The history and future of outsourcing. It’s not a new concept, just updated.

While outsourcing is a relatively new term, the idea has been around for a long time. It was a part of doing business in Renaissance Italy and 19th century England. After World War II, it fell out of favor as companies transformed themselves into vertical enterprises, trying to be all things to all people.

But in the last few decades and particularly in the last 10 years, trends such as downsizing, right-sizing, consolidating, and reengineering combined with the explosion of the Internet have shifted the focus of company leaders back to outsourcing. Software and technology offerings have expanded, new products and innovations have grown, and management’s thinking has shifted to an understanding that some assets are costly and can hurt earnings.

As a result, more and more companies are eyeing outsourcing as a viable method for improving speed to market and increasing market share. The percentage of budgets spent on outsourcing is rising, providers are becoming more capable, contractors are experiencing heightened competition, and the number of companies outsourcing manufacturing and logistics is on a sharp increase.

Companies only outsource to cut costs, right? Wrong. Other benefits can put your company way ahead of the game.

When done properly, outsourcing primary non-core operations functions yields a wealth of benefits—those with direct impact on a company and those that are not as obvious but affect the services that remain in-house. Direct benefits include:

• Focus on core competency

• Reduction in manufacturing and logistics costs through the consolidation of operations and reduction of inventory carrying and transportation costs

• Reduction in management and hourly head count

• Improved accuracy through better inventory visibility and production tracking

• Flexibility and wider range of service.

The indirect benefits of operations outsourcing are:

• Creating a catalyst for change by highlighting how outsourced operations are managed

• Initiating or fueling expansion by allowing a company to offer new services because outsourcing has improved performance

• Stimulating analysis due to the requirement to document business processes and their costs

• Converting sluggish functional areas into dynamic, successful ones

• Developing resources and contacts brought to the table by the service provider.

Before outsourcing, define your core competencies. And you may be surprised at the some of the results.

The process of defining “Core” requires awareness of the four types of business functions within a company—primary core, secondary core, primary non-core, and secondary non-core. Primary core functions are the things that differentiate your company in the marketplace, and more importantly, they are the reasons your customers come to you. Secondary core functions are those things that bring value to your customer and must be done well, but at the same time, they are not visible to your customer.

Primary non-core functions are those that can affect your relationship with your customer but are not what your business is about. Secondary non-core functions are those processes that are necessary for running the business but do not affect your company’s success.

To properly define “core,” develop a team made up of company leaders who understand the strategic nature of the vision. Breaking the company up into discrete processes is one of the first tasks this group must undertake. These discrete processes will become more defined further down the road and may be consolidated or divided even further, depending on the availability of external service providers. This task helps break down the decision into manageable chunks.

Once this process is complete, the discussion of defining “core” can begin. There are some definite questions that must be asked in order to understand and evaluate “core.” These questions are:

• Who are our customers?

• How do the functions we have defined touch the customer? Or do they touch the customer?

• What is it that our customers know us for most?

• What is it that our company does that provides the most value to the customer?

• What is it that we do that may be difficult for our competitors to imitate?

What happens when the selection process is over? The relationship from this point can make or break an initiative

Although you may have built a great relationship during the selection process, this is not the outsourcing relationship that will take you through your initiative. A failed relationship can lead to complicated and costly legal battles.

Therefore, as soon as is practical, you should create a new team—the implementation team— comprised of members of both companies to begin the process of creating your relationship. This includes setting initial expectations, identifying resources in advance, determining where you are now and your destination, defining the relationship desired, and planning for resistance.

Next, determine the relationship structure, select a fee structure, conduct relationship due diligence, and set realistic timeline expectations. Other suggested actions include:

• Do not over-promise on either side

• Share information

• Analyze available data, understand that it is likely to be historical, and deal with data gaps and integrity

• Tour sites to see them with your own eyes

• Do not make unfounded assumptions

• Line up all levels and functional groups from both organizations.

Bring in the lawyers early to help achieve outsourcing objectives

Your legal team needs time to understand the drivers behind your decision to outsource and what your goals are for the outsourcing initiative. It is best to involve the legal team before or during the RFI step to improve your selection process. Your counsel will then be familiar with all the players and can contribute to the selection process. This also better prepares the legal team when it is time to negotiate.

You and your legal team should also decide whether to wait until you have selected one final provider (sole source) before you start the negotiations or to begin the negotiation process with two finalists (negotiating in parallel).

It is best to lead the negotiations with a binding term sheet, which allows you to settle on the terms of the deal without bogging down the parties involved in “legalese.” The negotiated term sheet embodies the deal and will be the basis of the agreement. Properly constructed, it makes preparation, negotiation, and execution of the definitive agreement a simple process and allows you to continue to evaluate and improve the service provider’s proposed charges, technical solutions, and legal terms.

Communication is the key to building a lasting outsourcing relationship.

Outsourcing relationships are between both organizations and people. Therefore, several types of relationships can form during and after implementation. The two most common are vendor/client and partnership. Ideally, you want your post-implementation relationship to move beyond vendor/client and toward partnership.

In many respects, the relationship between a company and an outsourcing provider is like the process of getting married. There is a courtship period that starts out with dating (the requirements and RFP process), followed by the wedding and honeymoon (selection, start-up, and the first months after start-up), and then, finally, a happy marriage (maintaining and managing the outsourcing relationship).

The key is to maintain the atmosphere of teamwork and open communications that was established in the beginning. As you begin building a lasting relationship with your provider, an important thing to remember is that there is no “off-the-shelf” approach.

Establishing a relationship that is geared toward long-term success is as much an art as it is a science. The trick is communicating properly so that any disagreements become an impetus for moving the relationship and initiative forward. Therefore, you must adopt an acceptance mindset and agree to communicate openly and honestly with your outsourcing provider, so that your companies can build the lasting relationship necessary for outsourcing success.

Logistics and Manufacturing Outsourcing: Harness Your Core Competencies can be ordered online or by phone, 800-789-1257, ext. 55494.