Consider the Source

Theory of Competitive Advantage

By: Dinesh Goel, Partner, TPI

The Competitive Advantage theory suggests that everyone is better off if decisions are made based on the competitive advantage at all levels – national, corporate, local, and individual. Simply stated, it is nothing more than asking for optimal utilization of resources and the globalization of manufacturing and services across the world as if we lived in a borderless (read: flat) world. Unfortunately, we don’t live in a borderless world since there are politicians and thick boundaries that define the territory of nations and politicians; hence the issues surrounding the loss of jobs due to offshoring and use of protectionist measures.

In a perfect world, letting someone do the work who has an advantage over you (due to natural or human resources, unique capabilities, competencies or cost) is not a zero sum game as it offers better pay off for everyone involved, thereby creating a win-win situation. However, this does assume that resources and capital can flow freely across the world. If market forces were allowed to operate freely, that would automatically be the case.

In the real world, that is not necessarily the case as there are several frictions which prevent not only the free flow of resources but also the ability to capitalize on gains resulting from the use of competitive advantage. Let me dwell on this a bit more.

The theory is based on a fundamental assumption that adequate employment opportunities are available to those who are engaging themselves to leverage competitive advantage of others to the degree that they can optimize their own potential – for instance, move up the value chain if they were constrained so far due to capacity instead of capability. Similarly, it assumes that resources will move to where they find their best employment opportunities irrespective of socio-cultural differences (water will find its level if there’s no man-made obstruction). That’s not necessarily the case in the real world, but it’s not altogether untrue either.

What we observe is that, at a macro level, those forces will be at play – people will redeploy themselves to the best possible opportunities available and relocate if necessary. However, at an individual level, there may be adjustment pains due to lack of societal support, capability gaps and personal financial situations. While that is true at the micro level, the trend does not negate the fact that it is beneficial to everyone at a macro level. Man-made obstacles can slow it down but not reverse the trend that offers a beneficial outcome to everyone involved. Hence, I conclude that offshoring services to the nations and locations which offer a competitive advantage is an irreversible trend. That said, you will be better off embracing it than standing in its way.

Top 5 Actions to Heighten the Strategic Impact of Your Procurement Organization

By Bill Huber, Director, CPO Services, TPI

During tough economic times, procurement is often called upon to “win” price and payment term concessions from suppliers and service providers in order to boost the bottom line. While there is no question that part of procurement’s role is to ensure that a company is paying the best price, the “blunt instrument” approach tends to simply focus on supplier profit margins without doing anything to improve quality or drive innovation that ultimately, permanently removes real costs from the supply chain. 

                                                                                              

Here are five actions that you can take to raise the strategic impact of your procurement organization.

1. Define the target role for your procurement organization. Review your department objectives and formalize the role and results that you would like procurement to achieve for your company during tough economic times. Set strategic objectives in terms of innovation, quality, cost savings and customer service that the procurement organization will embrace as a response to recessionary times, and measure your progress toward those goals.

2. Segment your supply base. A formal tiering of your supply base, with best-practice supplier management processes for the top tier, can have a dramatic effect on the value that you derive from your most important suppliers. Set frequencies for reporting, monitoring, collaboration and financial reviews with each, and require that your most strategic suppliers bring a certain number of innovation suggestions to the table each period. Set a formal process whereby these suggestions will be vetted, with the best ideas submitted for review by an executive-level procurement governance team.

3. Realign your resources. Identify underutilized or misaligned resources, and shift roles to focus talent on your greatest areas of opportunity. Often individuals who have been focused on a particular commodity because of their expertise could bring a fresh perspective to other categories. People who make the greatest impact in their current areas can have an even greater effect on an entirely different category.   

4. Review processes and technology to identify roadblocks and underutilized capabilities. Processes can be slower and more cumbersome than they need to be. Stay on the lookout for procurement processes that were designed to address a past problem that is no longer relevant today. Also, organizations often have only partially deployed procurement technology solutions for lack of resources to support a more ambitious rollout. A second look can reveal underutilized technology that could be leveraged with a different support model to drive faster cost savings or improve visibility or user satisfaction.

5. Evaluate governance structures, and change if necessary. Good procurement governance should enable transparency and balanced decision making. In order for it to be effective, procurement governance must be designed to ensure that important decisions are made at the right level to balance risks with rewards, and to ensure a timely flow of information to the right levels of the organization.  

Implementation of these five actions could ultimately improve the effectiveness of your procurement organization by 3 to 5 percent or more, increasing your impact on the bottom line and transforming the role that procurement plays within your company.

TPI’s CPO Services experts can collaborate with you to assess your current procurement processes, then help you identify and implement strategies to improve quality, drive innovation and permanently remove real costs from the supply chain.

Contact us today to begin the dialogue.

UK Public Sector Operational Efficiency Programme - An Opportunity or a Threat for Service Providers?

By: Daniel Jones, Partner, EMEA

After a year of investigation the Operational Efficiency Programme report appeared. The first paragraph states:

"In the current economic circumstances businesses are facing up to real challenges of cutting costs in order to stay in business and emerge stronger from the downturn. The public sector needs to do likewise, looking for savings in addition to the routine savings departments are expected to make each year, so that the Government can continue to invest in excellent public services while maintaining sustainable public finances." (Operational Efficiency Programme Final Report April 2009 - © Crown copyright 2009)

Those delivering public services, whether they are in-house operations or outsourcing suppliers, will no doubt be wondering if this is an opportunity or a threat.  In the areas of back office and information and communication technologies (ICT), the report points to an estimated annual savings of around £4bn and £3.2bn respectively.  It also recommends that these amounts be taken into account when determining future funding settlements.

External service suppliers can expect to come under pressure to reduce costs in some way.  This may not be a straightforward task for the customer to achieve, since the supply side is experiencing hard times. Suppliers, particularly those who might be struggling to deal with the downturn, are unlikely to accept lower revenues and margins without a compelling set of reasons.  Our experience shows that a robust approach is vital to ensure the right outcome is achieved.

For in-house operations, one possible future is to be merged into some form of shared service operation, either with other public sector bodies or with a commercial partner. If this is not the path chosen, then transformation will be the order of the day. Whatever the approach adopted, change needs to happen.

Will the programme drive new outsourcing contracts?  Interestingly, there is only passing mention of a potential increase in outsourcing as a means of achieving the estimated 20% savings. In the ICT area, the mechanisms for cost reduction, defined in the report, are to:

• Improve the collection, reporting, benchmarking and review of data on IT spend across the public sector;
• Strengthen the governance of IT- enabled change projects;
• Strengthen Gateway assurance processes for all IT- enabled change projects;
• Implement portfolio management processes to prioritise projects and resources and to reduce overlap and duplication in IT- enabled change projects;
• Promote greater standardisation and simplification of IT systems, desktops, infrastructure and applications across the public sector; and
• Develop the internal IT capability within the public sector and continue to professionalise the IT function.

The key to success is to remember that the end goal is to achieve the savings.  The best public sector organisations will find ways to minimise the pain by engaging with their staff and with suppliers to find innovative solutions. Shared services, outsourcing and standardisation are all possible routes to the end result; they aren’t mutually exclusive and should be evaluated as part of a smart sourcing strategy that delivers improved front line services and lower costs at the earliest possible date.

So are the conclusions from the report an opportunity or a threat? Well, change has to happen, and for those who see change as opportunity, it is now knocking loudly.

The full report is available at: www.hm-treasury.gov.uk/vfm_operational_efficiency.htm

New Mecca of Outsourcing – Middle Eastern Region

By Dinesh Goel, Partner, TPI

As the outsourcing industry globalizes, new regions and countries are joining the bandwagon both as markets of demand for outsourced services as well as to supply talent for servicing the demand.

With the onset of 2009, TPI has targeted a few countries/regions as new geographies for offering sourcing advisory services. The selection criteria, apart from other factors, obviously included the current volume of outsourcing activity and the medium term potential of these markets. The mid-east region is one example.

In discussions with prospects, service providers and market influencers, we find that this is an interesting and encouraging market for multiple reasons.

• Firstly, we find that in places such as Dubai, businesses are going through a severe downturn due to current economic pressures – a phenomenon that is fueling interest and potential demand for outsourced, or even off shored, services.
• Secondly, in general the consulting industry is well established for important initiatives which are complex, transformational, unprecedented or potentially risky. That seems to be the trend with both the public and private sectors.
• Thirdly, there is considerable demand for implementing contemporary IT solutions and infrastructure with large spends as organizations want to become more competitive and prepare for growth in countries such as Saudi Arabia.

An important indicator of the growing interest in outsourcing: Arab Outsourcing Conference is being held for the first time ever this year in Dubai. The organizers are bullish about senior level participation in this conference.

However, outsourcing of services – other than AMC or break fix support contracts – is not an established and mature model for the most part across the region. Hence all interested market participants should expect, as in any other such market, to spend cycles educating the buyers of these services on the benefits and risks involved.

I am very interested in learning from your experiences and thoughts on this region.

 

Pricing Pressures: Living and Dying by the Sword

By Peter Allen, Partner & Managing Director, TPI

Many outsourcing industry service providers are talking about the demands they are receiving from their clients for pricing concessions. We know of several cases in which clients are calling for a 5-15 percent reduction in the rates they pay for offshore labor and market analysts are following with reductions in the earnings estimates for several of the industry leaders.

I can’t resist pointing out that this is the downward edge of the labor arbitrage sword.

In these situations, I offer a different recipe to the parties.  Rather than focus on squeezing the price of the commodity – and an hour’s worth of work or a day’s wage – why not look to maximize the value created through the relationship?

I tell the service providers:  if you’re a leader in our industry, then turn the knowledge that you have gained from the work you’ve performed for your client into a different proposition.  Take more risk, in return for the ability to sustain your margins. 

I tell the clients: pushing the providers on their unit prices only creates issues at other places in the value chain.  There are only so many levers available to the providers in a wage-arbitrage relationship.  They will need to take actions in response to your pricing mandates that transfer more risk to you, the client.

At the risk of over-generalizing, these market conditions demand that companies increase the variability of their cost base and focus on total costs rather than unit costs. That means that your outsourcing service providers should be narrowed to a cadre that are able to scale down and up with your business, and do so without exacerbating your risk profile.

Ironically, I think this is best achieved by giving those providers more work – by leveraging the knowledge they’ve gained around your systems and applications to take on more scope, perhaps to include operational responsibilities.

Beware the pressure on unit costs when the bigger prize is improved total costs.

SIG Conference: Day 2 – Examining Offshore Measures & Encouraging Tech Advancement

By Bill Huber, Director, CPO Services, TPI 

Captive vs. Outsource:

DuPont’s Frank Conway co-presented with our own Brian Smith  on the considerations between captive and outsourced solutions, which they compared to “seeing in a sandstorm.”  

As Frank pointed out, the decision is often a journey that reflects executives’ mindsets.  Having a captive can have a strong psychological benefit, but when times get tough, executives can often swing from not wanting to outsource to trying to outsource too much.   

• Frank also pointed out that whether outsourcing or managing a captive, you never give up your ultimate accountability.  The buck stops with you.  Whether it is outsourced, internal, onshore or offshore, the CEO expects it to work.
• Brian Smith noted that the most efficient captives and service providers achieve a fairly similar cost level, with the best captives operating at a 2%-4% lower cost than the best service providers.  However, median service provider costs amount to 79% of median captive costs.  Two reasons for this are that captives tend to have a significantly higher percentage of support staff, and a lower span of control (Apparently there are a number of captives that are currently “for sale”).

 

Newt Gingrich:

Former Speaker of the House Newt Gingrich provided the keynote at today’s lunch, covering an encyclopedic range of issues.  Equally critical of both U.S. political parties, he emphasized more changes in technology in the next 25 years than in the previous 125. He pointed out that no bureaucracy could possibly grasp, plan for, or react to this level of change and that only the private sector, reacting to the market, often through trial and error will be able to take our economy through this change. 

His key challenge to the sourcing audiences: 

Define what conditions would be required for the U.S. to be the preferred sourcing destination for more business activities, and become a force to advocate for those changes.  He mentioned taxes, regulation, education, and energy among those key issues.

Newt also pointed out that those countries that become protectionist, ultimately lag in technology, become more expensive and ultimately become backwaters on the global stage.  

The audience appeared to like Gingrich’s messages. Stay tuned for some more from day 2…

  

SIG Conference: Day 2 – eSourcing Insights and BPO Innovations

By Bill Huber, Director, CPO Services, TPI

eSourcing:

SAP and WE Energies provided some excellent, practical insights on how eSourcing auctions have been successfully conducted, and how they were able to diffuse the frequent arguments that reverse auctions destroy value.  As we have noted in the past, reverse auctions and other sourcing technologies are simply tools, and it is always the human element that determines whether tools will help to create or destroy value.  Gail DeVeau’s work at WE Energies is an example of how the tools can work in capable hands. 

The BPO Market:

Phil Fersht from AMR Research provided a broad overview of the direction of BPO. He shared many excellent nuggets with the group.  There were several highlights that stood out:

• There is a new breed of executive emerging that is looking at globalization and outsourcing.  In the 90’s the CIO had to move forward with enterprise resource planning (ERP) or be left behind.  Now, senior finance executives are feeling the need to move forward with globalization or be left behind.
• Healthcare analytics and sourcing from federal funding will be a growth area for sourcing professionals.  The stimulus plan confirms this.
• Many things that AMR Research has been telling clients not to do in outsourcing for years is now happening. Now companies are simply saying, “Take 30-40 % off bottom line. We are willing to take a leap of faith. We just want it done.”  The reality is that it takes 3-4 years to do effectively. 
• In outsourcing, client satisfaction trumps other service level agreements (SLAs).  If clients are satisfied and they feel that they are working with the provider, they will tend to be pleased even if there are problems in other SLAs.
• Procurement outsourcing will increase, partially because of the skill set issues facing procurement organizations, and knowledge process outsourcing (KPO) options available that are executable with relatively small headcounts. 
• Customers are asking procurement software vendors to provide more process support to      drive greater collaboration between procurement software providers and outsourcers.  Currently only about 15% of procurement BPO implementations involve technology transformation, far below other areas of BPO.
• KPO resources are often used to bring high value service to clients with the objective of ultimately growing the business into more scalable BPO. 

More insights from day 2 to follow…

 

Sourcer, Heal Thyself

By Bill Huber, Director, CPO Services, TPI

As I speak with procurement colleagues, I consistently hear of corporate mandates to negotiate an across-the-board price reduction or change to payment terms with all suppliers.  While companies will see some short term benefits from this behavior, it of course is not sustainable.  By not differentiating based on supplier performance and innovation, the quality of the supplier base will ultimately be degraded. Also, because this approach tends to focus on price it can starve innovation that might more significantly reduce total cost

I was asked by Tim Cummins at IACCM to speak on a panel along with Dan Mahlebashian, Chief Contracting Officer at General Motors and Tim McCarthy, Worldwide Director of Pricing and Contracts at Rockwell Automation on the subject of Renegotiation – The Silent Killer of Expected Results.  The topic clearly resonated with the sourcing community and was subscribed to by an audience of over 400 representing a who’s who of leading corporations.

The prescription for procurement was clear: We must possess the courage to resist knee-jerk tactics and lead through strategy, prioritization and alignment, leavened with a touch of old fashioned ingenuity

If anyone is attending SIG’s Global Sourcing Summit this week in Baltimore, MD, I’ll see you there. I’ll be posting between presentations throughout the week.

Picking the Sourcing Flavors

Today's blog comes from Peter Allen, Partner and Managing Director, TPI.

Across professions and industries, those of us who provide services to paying customers strive to obtain a position of recognition best evidenced by the difference made to those who hire us for our expertise.  It’s human nature. 

Unless we’re truly in the business of providing non-differentiated (aka commodity) services to our customers, we want to be recognized and compensated for being better at what we do than others in our field of work.  We also want to recover our investments and the risks we take in building an offering to serve a market need.

In the field of outsourced services, many outsourcing buyers and their service providers are asking whether there’s an opportunity to achieve partnership-oriented relationships.  Conversely, has the industry moved to a position analogous to that of gasoline stations where providers on virtually every corner compete on the basis of unit prices?

Paradoxical Market Metrics

Today's blog on TPI's 2008 second quarter Index comes from Peter Allen, Partner and Managing Director, TPI.

Having just posted the scorecard for the global outsourcing industry’s contract awards for the first half of 2008, I must say that there are more than a few conflicting messages being bantered about.

We’ve been producing the TPI Index for almost six years now, and our track record of reporting on the market size and trajectory has a consistently small margin of error. No one is perfect in this art, but our business intelligence analysts are usually right on target. We invest considerably in tracking the market to help guide our clients with facts about peers and providers in particular domains.

The report for the first half of 2008 was striking.