In the field of mathematics, we have two types of statements. One is called an axiom and the other is called a theorem. An axiom is a statement that does not need to be proven and is accepted as the “truth” and a theorem is one that needs rigorous proof. If we draw a parallel in today’s global and connected economy, the axiom of the new economy could simply be stated as “Excel in your core areas of strength and partner for the rest”. This is a far different type of environment than one that existed even a decade back. Today we hear about companies outsourcing or partnering in areas of Information services; back office functions like payroll; accounts payable and receivable; human factors management; engineering and design services; procurement; logistics; etc; etc. The list grows larger and more innovative everyday.
It is not unfathomable to envision a day in which some of our activities have been pre or post processed in some remote part of the world, by a resource that knows us purely by a number and has no personal touch into our daily routine. We are already faced with some of that in claims processing as well as the hallowed land of medicine in which MRI reports and pathology laboratory reports are being read in India and diagnosis being sent across the web world for delivery in North America.
If we accept the axiom that vertical integration for all functions and services is not a sustainable value proposition in today’s extended economy, then it begs the question on methods that can be used to determine the core areas of focus for a company as well as metrics that need to be used to govern the behaviors and actions of partners.
There is never a cookie cutter solution or a one size fits all environments for all industries or functions. Having worked in consumer products; retail; high technology as well as the automotive industry, I am still trying to find the panacea that everyone can be happy with. Unfortunately, it does not exist. However, we can still find some core patterns and frameworks that can be applied to a somewhat nebulous process. However, we have found that frameworks applied in isolation cannot be successful or implementable.
To make a framework useful, I have always found that a balanced scorecard approach to verifying and validating certain decisions as well as the as well as answering the multi million dollar question “ To partner or not to partner?”. The remainder of this article focuses on putting forth a point of view on these topics that have worked well in the industry. It is by no means the only approach or the panacea but is one approach to answering a question that is complex, multi dimensional and extremely relevant in todays globally connected economy.
One framework that I have applied at companies who have a clear definition and understanding of their core value proposition. The various processes and work streams that are needed to conduct commerce within a corporation can be bucketed based on the closeness to the core. The higher the alignment or contribution to the core proposition, the greater the chances that they will be mapped in the lower right and upper right hand box. The others will be listed on the left hand side of the matrix. Complexity in this example would be a metric that trades of the risk of implementation to the economic and or quality reward that a company would benefit from in the event that a partnering decision is made. It is highly unlikely that a company would partner for the activities along the right hand side of the quadrant.
If the processes are “commodity like” i.e. easily available globally, then the cost of ownership becomes quite the deciding factor. However, if the process is aligned to the core but has a low level of complexity i.e. risk is low and reward is high, then one has to define the expected quality of the work and metrics that are needed to measure the effectiveness of a global partner.
An example application of the framework for a generic high end branded fast moving manufacturing company that has to deal with the consistent pressure on gross margins as well as ever increasing demands for innovation from the channel and the end consumer. The aim is to figure out areas that are potentially available for global partnering as well as continued shift of costs from “commodity like” activity to the higher end value generating activities that will alleviate the pressures on margin.
It is clear from the example that the continued aim for companies who are looking to stay competitive as well as thrive in the economy of constant margin pressures as well as continued shift in the power between the manufacturers and retailers in the quest to “own the end consumer”. Both parties would like to be in a situation where their own physical or cyber assets are the destination for the feet or the eyeball.
The continued sources of competition arises from the sheer fact that both enterprises would like to believe that the end consumers choice of destination is driven primarily by the power of either the retail or cyber brand and not by the product assortment that is provided.
Similarly, the manufacturing entities would like to believe that the power of the brand is what entices the ever expanding share of wallet of the consumer. As is the case of most channel and product debates that will rage on forever, the truth lies somewhere in the middle.
While the debate continues, both ends of the value chain in every industry as well as all value added partners in the middle, have to continue to manage the global dynamics around the fundamental law of business mathematics i.e. Profit – Cost = Margin. In many instances, forces in the global markets as opposed to the channel partners or the product manufacturers are setting the margin figure. The recent phenomenon of fixed margins has now forced the channel to adjust its business models to manage the profit and cost equation more aggressively. This has given rise to renewed emphasis and elevation of disciplines such as supply chain management as well as customer relationship management.
However, as many global companies are finding out the fact that it is not often to just focus on material and logistics cost or the cost of service for the end product but every cost item that is used to deliver the product and service. These other cost elements that are primarily considered as part of general and administrative (the G&A of SG&A) are now an emerging area of focus under the new field called Business Process Optimization or sometimes called Business Process Outsourcing.
Over the years our professional experiences allow us to create our own portfolio of business do’s and don’ts or watch out’s. Sometimes these are colored by our own propensity to take risks as well as in many instance the management philosophy of the corporation. If we took some time to put our own portfolio on a piece of paper, it will probably look similar to the one that I list below as criterion that can be used to evaluate various functions in the company’s internal value chain.
One sample scorecard that I often use to illustrate to senior management the various options that are available is as follows:
Factor is the criterion that is used to evaluate the function or in the case of outsourcing, the outsourcer; Weight is the relative measure between the factors; Importance is a differentiator amongst factors of the same weight (in many cases, we can combine the weight and importance columns).
While most of the factors are self explanatory, I would like to point out the importance of the openness factor also measured as the company culture to having remote services or partner provided services provided in the overall evaluation criterion of the decision to in source or outsource. Too often the price equation becomes the overriding criterion that is used to arrive at a decision. However, this provides short term gains and many times the pain of the process is not worth the effort. Similarly, the effect of automation and technology advances in driving down the overall cost without having to outsource should also be factored in as well as the internal ability to create global delivery models that can provide some levels of cost savings without having to bring in external providers. These are delicate tradeoffs that require careful analysis and internal retrospection of the company’s senior management in order to decide what functions truly makes up the core of the corporation. Remember the scorecard is used to further refine what functions remain under the category that we have called “distraction”.
Top five journey pointers
So, if you have managed to steer the companies management team to the point at which the journey to partner with a service provider is imminent, you may want to consider some of these areas to pay special attention to since they have worked for me and many other practitioners that I have shared thoughts with.
Change Management is as a key ingredient for the eventual success. In many efforts, we shortchange the change management effort around communication, training and alignment of the many facets of the company around the effort. I cannot emphasize enough the razor sharp focus around all aspects of change management that is required to be successful. One veteran practitioner once told me that it was paramount that one receives at a minimum “grudging support” for any outsourcing effort from all the functional and divisional heads in the corporation in order to succeed.
Don’t cut too deep: As with any transformation effort, the type of business model or delivery model that is used to staff the future world is key to the success. In my experience, cutting to the bone and hollowing out the organization will not deliver the type of long term sustainable results that are needed to achieve continued innovation in every function.
If in doubt, retain in house
An “ERP” solution is not always optimal : In the age of the ERP software suites where we have been conditioned to think that best of breed increases the total cost of ownership, many providers would like us to apply the same logic to outsourcing. I have found that economies of scale do exist in many instances but has to be traded off against the risk of being too dependent on one provider.
I have preached and will continue to preach the concept of dual provider sourcing for a company preferably not within a business function or process but across functions and processes. The total cost of ownership equation when dampened by the risk mitigation factor can be quite revealing.
Aim, aim, test, test, then test again before you fire: Sounds quite obvious, does it not? You will be amazed at the number of companies who do not have a well defined pilot and test plan prior to turning on the process to the outsourcers. This is often a cause of mismanaged deals and expectations that result in the much publicized breakages that we read about in the popular press. Just like a large software implementation, the end result is only as good as the test scripts that are used to test the package. Expect that bugs will always exist but the onus is on both parties to test the obvious scenarios that will result in high severity impacts to the business.
While concluding this article, I would like to remind the readers that there is no single approach or solution that works for all situations that we may encounter. Every situation is probably quite unique in the fact that there are slight nuances that makes the framework and the examples null and void. I would encourage all of us to have a framework as well as a balanced scorecard while evaluating these strategic shifts in a company’s future. One thing is for certain, the lack of a systematic approach to these problems will result in total failures – and that is an axiom.
Dr. Sumantra Sengupta has recently launched a strategic advisory firm focused on enhancing shareholder value for mid and large cap enterprises. Previously, he was a Partner at a Global Management consulting firm and then Head of Business and Information Services at a global Consumer Goods company. He can be reached at “firstname.lastname@example.org “.