Session Code:JC Global Outsourcing of Knowledge-Based Services: Strategy and Relationships

1. 1 Session Code:JCGlobal Outsourcing of Knowledge-Based Services: Strategy and Relationships Subroto Roy University of New Haven and K. Sivakumar Lehigh University Wednesday,May 11, 2005. 8.00 AM to 9.00 AM

2. 2 Overview Supply Managers� �Relationship� � strengths From global outsourcing of product to global outsourcing of services Except core competence? Knowledge-based services Definitions and examples Tacit knowledge in knowledge-based services BPO vs. KPO Managing �internal� Relationships Managing �external�relationships Questions & Discussion

3. 3 Importance of Relationships in Business Always important in personal life Academics now realize that this is crucial in business life- my Ph.D. topic �Innovation Generation in Buyer-Seller Relationships�

4. 4

5. 5 Supply Managers� relationship strengths Supply Managers are next to HR managers in �Internal� relationships Understand requirements of users See my �P-Card� paper Represent users to external world Supply Managers are next to Sales and Distribution Managers in �External� relationships- represent suppliers and upstream supply chain Theoretically exciting firm �boundary spanners�- practically��

6. 6 Supply Managers� Practical �Perception� Internally- road blocker,paper pusher, tell me if I fire a buyer what is the impact, contribution unclear CPO reports to CMO/Chief of Ops or CFO Today CFO more powerful due SOX Externally- Answerable to supplier �Why don�t you just change the supplier if the price goes up- do reverse auctions� �how?

7. 7 From global outsourcing of product to global outsourcing of services 1980s and 1990s saw global outsourcing of manufacturing � particularly to China,Taiwan, SE Asia- San Antonio-Mexico 2000s saw global outsourcing of services take off with availability of fiber optic cable, cheap air travel, Internet and telecommunication. Anything that did not require face to face contact could be outsourced Except the firm�s core competence

8. 8 Except core competence� Core competence (Prahalad and Hamel 1990) is the skill set of the firm that binds its customers to it Core competence difficult to imitate Can be in Patent, recipe, distribution, procurement, etc. Is the syrup formula Coca Cola�s core competence or is it the distribution and marketing?

9. 9 Redefining core competence:Knowledge Based View of Firm In industrial era, the �Firm� was needed to optimize: machine,labor and capital [Traditional View of Firm] In today�s global service era �Firm� should be able to rapidly Access,integrate and deploy knowledge,skills and services globally [Knowledge Based view of firm] The notion of what is �core� has changed�

10. 10 Changing Core� Consider the pharmaceutical industry: Rapid M&A to acquire know-how like Pharmacia and Warner Lambert by Pfizer. Extensive alliances to access early development compounds from start-ups by Bristol Myers Squibb, Merck, Bayer, and everyone else Major outsourced clinical trials for drugs - get a group of patients with the specific disease to try out your drug. Even if you can help a few patients it�s great for humanity - and even greater for your NPD cycle time reduction.

11. 11 Knowledge-Based Services �Definition & Examples Knowledge based services are services that cannot be entirely specified in advance and cannot be �quality checked� at point of delivery. These services enter your company�s supply chain for serving or satisfying your customer. Contrast to a machine part that you can make an RFP with a drawing, detailed material specs, and well understood quality checks.

12. 12 Service Characteristics Perishable � cannot be stored, real time Supplied and consumed simultaneously More difficult to measure Quality at delivery point For provider more challenging to provide consistent quality with different individuals For outsourcer more challenging to integrate with their processes

13. 13 Examples of Outsourced Services Business Processes Payroll Tax IT HR Purchasing Sales Customer Service Knowledge Processes Market Research Equity and Financial Research Pharma-research including clinical trials Data mining Libraries and databases Legal Services

14. 14 Tacit and Explicit Knowledge Tacit knowledge is knowledge that is in the head of the worker and is difficult to articulate in a process manual. Since difficult to write down in �steps� or �rules� tacit knowledge is difficult to outsource and difficult to manage as a supply = BIG opportunity

15. 15 Matsushita Bread Maker Example of Tacit knowledge(From �Knowledge Creating Company�, Nonaka and Takeuchi,1995) Matsushita was trying to develop a Bread Maker The software engineer Ms. Tanaka was unable to understand why the bread came out hard Till she became an apprentice to the top Baker of Osaka Hotel�.

16. 16 Matsushita cont�. Ms. Tanaka found that the Head Baker of Osaka Hotel gave a peculiar twist to the dough�� Earlier written documents had not captured this motion but now once Tanaka captured the twisting of the dough in the software programming � she could get the bread maker to produce soft bread.

17. 17 Matsushita Lessons Need to get a top baker�s advise and input Able to integrate what the baker has to offer by way of tacit and explicit knowledge Matsushita does not need to �learn� baking It makes Bread Maker, and not Bread! Bread making is not a core competence of Matsushita.

18. 18 BPO and KPO Where does the service outsourcing initiative start in your company�.. At the CFO Why outsource globally.. Lower costs to improve results for Wall Street Outsource what� Anything that is �non-core� and that can be �digitized� and is �rule based.� I.e. you can measure outcomes? E.g., Call center

19. 19 Call Center Performance�. Highly developed industry, very developed provider reporting- great benchmarking and metrics Waiting time Call resolution rate Customer satisfaction Evolved from existing local outsourced model to global outsourced model. Generally poor integration to firm operations (Outsource: out of sight and out of mind)

20. 20 Supply Management New Career Focus Get involved in managing the supply of KB services both at the procurement stage and at the supply management stage Why? Because no one is doing it and outsourced services are critically important to manage Remember we are a service economy and if outsourced services will not go �out� of the company but will actually re-enter the company value chain - they have got to be managed.

21. 21 What value can you add to outsourcing of KB services Get involved in BPO and KPO activities Some BPO activities are poorly integrated back to the organization�s activities � because it does not bring �glory� to managers who led the outsourcing Get involved in BPO or rules based-supply management and then move to KPO

22. 22 Why KPO involvement for Supply Management? KPO activities are frequently those that are potentially highly �innovative� They involve assessment of internal requirements and supplier capabilities � activities for which supply management has years of experience KPO involves managing �tacit� knowledge in the global supply chain- the new frontier in the supply chain

23. 23 Why KPO by Supply Management It�s a natural for the Supply Profession Just like NPD is a natural for Marketing Profession It�s new, unstructured, and can have a great impact on firm innovation and intellectual property When properly integrated, KPO can leverage your firms competitive ability- Without losing US jobs

24. 24 Technology enhances Customer service at Home Depot�. �Rules� allow Technology/Outsourcing Self checkout at Home Depot Where have the cashiers gone? They are at the shelves helping customers and adding value- Outsourcing to technology or overseas is a bit like this � put people on high value jobs- like talking to customers than talking to machines.

25. 25 Knowledge that resides in relationships At the core of our thinking is the notion that relationships are the locale of knowledge. Managing relationships well can help supply managers manage knowledge Managing knowledge can lead to innovation Managing knowledge in relationships can help enhance supply manager�s organizational influence

26. 26 Tip 1: Relationships inside �with users In a recent CAPM advisors meeting I can teach them purchasing but how do I teach my people to be more caring, better listeners and more responsive? Don�t blame the user for poor RFP input, link the user and supplier, go for SOW (Statement of Work) before RFP,hold hands for user and supplier

27. 27 Tip 1: What �insiders� do� You have a great sense of what your colleagues in other departments would like to do � if they had the human /technical resources Here is your opportunity- Step in and offer to help articulate the requirement And then bring in supply management skills to organize the supply chain�.. Wait a minute- why should people listen to you supply managers?

28. 28 Here is why - We asked a Multi National Pharma CFO why can�t they simply ask their India office to organize supplies- the answer was shocking -The India office is a marketing office and not a supply office, Nike, UTC all have separate supply organizations in Singapore that are now trying to cope with Outsourcing of Services and logistics.

29. 29 Tip 2: Relationships outside Supply Managers have the existing skills Putting metrics like 6 sigma in place for supplier performance Managing supplier relationships so that they go the extra mile whenever needed Global KB services can become a crisis much faster than product supplies You need to make a much better �trust� determination before contracting Need to �trust and verify� continually as quality loss can be subtle

30. 30 Summary Tip 1: Relationships inside- more responsive,more friendly,more supportive - Help articulate BPO and KPO tasks Tip 2: Relationships outside- Build skill set to manage BPO/KPO suppliers and integrate with supply chain No other professional in the company is really managing all this

31. 31 Summary 2 Managements are just waking up to the need of managing the outsourcing and integrating it to the company value chain Supply managers are ideally placed to move into this �integrator� role�.

32. 32 Follow-up Discussion board and further information at www.stratoserve.com MBA Course on �Global Outsourcing of Knowledge Based Services� being offered by Dr. Roy at University of New Haven in Fall 2005.Thursday evenings �