Managing the Risks of Outsourcing to Ensure Strategic Success Rob Clemo

1. Managing the Risks of Outsourcing to Ensure Strategic SuccessRob Clemo StrategixManagement Consultancy CSCMP South African Round Table

2. Introduction • Major area of growth • Not been that successful • Dun & Bradsheet 20-25% fail in first 2 years 50% fail within 5 years • Reasons 70% 0f respondents noted Did not understand Cost too high Poor service • Dataquest Study 50% - Re-negotiated a contract 25% - Original Supplier lost the Contract

3. How do we overcome the problem? You’ve got to be careful if you don’t know where you’re going because you might not get there - Yogi Berra

4. Risks - Risks of valuable data falling into competitors hands (52%) • - Risk that the cost of outsourcing will exceed expectations (48%) • Erosion of in-house knowledge (45%) Life is so much less a competitive struggle for survival than a triumph of cooperation and creativity. - Fritjof Capra

5. Valuable Data Every kind of peaceful cooperation among men is primarily based on mutual trust and only secondarily on institutions such as courts of justice and police. • Albert Einstein • Relationships – somewhat adversarial • Sam Walton of Wal Mart and Proctor & Gamble

6. Cost of Outsourcing I was never very good at mathematics, but I do understand numbers, with a bunch of zero’s at the end. - Chi Chi Rodriguez • Operating Costs • Return on Assets • Capital re-investment

7. Outsourcer’s expectations • Operate at a lower cost • Achieve savings Efficient distribution system • May not reduce costs • May add value to the system Comparing costs Total costs Surprise! • Error free, prompt deliveries, unique business, consumer expectations and requirements Customer service has to be the most important consideration

8. In-House Knowledge If something has been done in a particular way for fifteen to twenty years, it’s a pretty good sign, in these changing times, that it is being done the wrong way. - Elliott M. Eastes

9. Managing Outsourcing • Not easy • Full time job • Expectations and friction points identified • Key assumptions change • Evolving environment changes

10. Managers role: Relationship manager Problem solver, innovator, facilitator and negotiator Exceptional skills and ability to get things done Good knowledge Problem solver Respect and influence – functional issue quickly – non-politically

11. Project Planning Before everything else, getting ready is the secret of success. - Henry Ford • Implementation/Start up Contract signed Policies and procedures developed Implementation team take over

12. Project Team Champion – Senior Executive Leader – in-house Manager Sales Customer Service Inventory Manager Information Systems Service Provider (Direct responsibility for account) Threats and sustainability

13. Supplier Selection Logistics providers fit into different niches, While most sell themselves as being capable of all things, they normally are better at a couple of them. • Richard D. Armstrong

14. Outsource process RFI RFP • Types of Risks Cost containment, productivity growth, service improvement Absorb change Corporate structure, business configuration Trust Integrating Capable suppliers Understanding the cost structure

15. Contracting/negotiations The minute you read something you can’t understand, you can be sure it was a lawyer. - Will Rogers • Understanding expectations • Inadequate information • Inaccurate or incomplete information Expectations are not the “rules”. They are the basis of the rules

16. Risks • Inaccurate information • Bankruptcy • Acquisitions • Management structure • Performance deteriorates • Customer complaints • Unclear or changed expectations • Conflicts • Provider loses control • Providers physical assets deteriorate • Provider requires a rate increase • Arrangement does not work

17. Structure of contract • Cooperation • Value and benefits • Collaboration vs. Arbitration • Common goals • Reasonable non adversarial language

18. Transition/Startup There’s nothing remarkable about it. All one has to do is to hit the right key at the right time and the instrument plays itself. - Johan Sebastian Bach • Develop an implementation plan • Timetable • List of tasks • Expectations • Policies and procedures • Information shared

19. Biggest risk Poor communications Second to poor planning • Communications Frequent and two way • Encourage the provider to keep client fully informed

20. Basic Rules Business not personal issues Approach problems openly Treat others as you want to be treated No emotions No impulsiveness No exaggeration Give the other party time to respond Prevent reoccurrence No “them and us” relationship

21. Supplier Performance You don’t manage people; you manage things. You lead people. - Admiral Grace Hooper Four axioms for all industries; • Performance levels must be measurable and achievable. • Measure only what is important. • Performance levels must be balanced. • You cannot manage what you cannot measure

22. Six Traps – Lorrie Scardino, Gartner • Short term focus – cut costs with no regard to long term implications. • Poor communications – failing to keep people informed leads to an exodus. • Inadequate service levels – failure to set service levels • No benchmarks – no mechanism to judge service delivery • Rejecting risk – both parties must consider risks and mitigate them • Insufficient resources – organisations split large deals and offer smaller contracts to more service providers

23. Conclusion • Valuable strategy • Careful planning • Implementation • Relationships • Management • Good partner

24. 10 Point Process • Develop a strategy • Establish a rigorous provider selection process • Clearly define expectations • Develop a good contract • Establish sound policies and procedures • Identify and avoid potential friction points • Communicate effectively • Measure performance, communicate results • Motivate and reward providers • Be a good partner

25. Outsourcing relationships are like marriages. They have a honeymoon period and unless you invest and manage them carefully, they can spiral towards divorce. The more the client and provider work together toward a solution, the more effective it will be. Thank you. Rob Clemo crclemo@mweb.co.za