Outsourcing: Issues & Technicalities

Outsourcing: Issues & Technicalities

Dr. Elijah EzenduFIMC, FCCM, FIIAN, FBDI, FAAFM, FSSM, MIMIS, MIAP, MITD, ACIArb, ACIPM,

PhD, DocM, MBA, CWM, CBDA, CMA, MPM, PME, CSOL, CCIP, CMC, CMgr

Learning Objectives

At the end of this programme, participants should be able to do the following:

Identify outsourcing as an alliance strategyImplement outsourcing process in a firmDevelop outsourcing strategyConduct effective management of a firm’s

outsourced services

What is Outsourcing?

“Outsourcing is a type of business alliance in which an organisation set up contract with a service provider, with the aim of driving a feasible framework for the service provider to take charge of a set of processes or function within it, in order to enhance corporate performance.”

Source: Elijah Ezendu, Outsourcing

Alliance

Alliance is definite agreement between firms such that each shall commit resources to achieve common set of objectives.

“Alliances are institutional arrangements which combine resources and governance forms of several partnering organisations, making them mutually interdependent.”

Source: Inkpen

i. Define business vision and strategy in order to understand how alliance fits stated objectives.

ii. Evaluate and select potential partners based on synergy and ability to work together.

iii. Develop working relationship and mutual recognition of opportunities with prospective partner.

iv. Negotiate and implement formal agreement that includes systems to monitor performance.

Alliance Methodology

i. Shortened product life-cycle.ii. Globalization of competitioniii. Entry restrictioniv. Focus on increasing cost efficiencyv. Neoinstitutionalism for imitationvi. Development of Regional Economic Blocvii. Scarce Resourcesviii.Cultureix. Increased specialization of skills and

capabilities especially in high technology businesses.

x. Boundaries of Industries are becoming hazyxi. Focus on core-competenciesxii. Best-in-class industry practices

Reasons Why More Organizations form Alliance

Rationale for Alliance

Determinants of Success in Alliance

Alliance

Source: Elijah Ezendu, Alliance Development

Short

Long

None High

Dur

atio

n of

Com

mitm

ent

Extent of Joint Decision-Making

One-off armslength purchase

CompetitiveSuppliers

Joint R & D

PreferredSuppliers

Co-Marketing

Joint Production

Equity JointVentures

Mergers&

Acquisition

Full Integration

Alliance

Market Exchange MinorityInvestment

Types of Inter-Firm Relationships

Outsourcing

Outsourcing: A Central Alliance

Joint R & D

PreferredSuppliers

Co-Marketing

Joint Production

Equity JointVentures

MinorityInvestment

Outsourcing

Dur

atio

n of

Com

mitm

ent

Extent of Joint Decision-Making

Long

Short

None High

Source: Elijah Ezendu, Alliance Development

Practices Related to Outsourcing

• Insourcing: The reassignment of an outsourced function to a department, unit or section of a firm, for 100% in-house management by employees.

• Heresourcing: Assigning a function or process to a service provider within the same country.

• Captive Offshoring: Assigning a function or process to overseas service provider that’s either an affiliate or partly owned by service user.

• Offshore Outsourcing: Assigning a function or process to overseas service provider.

Why Organisations Prefer Captive Offshoring to Generic Offshore Outsourcing

i. To gain from service developmentii. To be involved in building capability of service

provideriii. To explore and exploit competitive national

advantageiv. To gain from the arithmetic of asset ownershipv. To ward off managerial uncertainties in

commitment of service provider

Key Drivers of Outsourcing

• Vertical Disintegration• Search for Higher Cost Efficiency• Unbundling of corporate functions• Focus on Core Competencies• Scarcity of Required Skills and Capabilities• Best-in-class industry practices

Two Types of Outsourcing

Adapted from Mari Sako, Business Service Offshoring

Outsourcing Capability Maturity ModelKey Features

Strategy Management Governance Management Relationship Management Value Management Organisational Change Management People Management Knowledge Management Technology Management Threat Management Sourcing Opportunity Analysis Sourcing Approach Sourcing Planning Service Provider Evaluation Sourcing Agreements Service Transfer

Source: Dian Schaffhauser, Outsourcing Best Practices

Ranking FirmsLevel 1: A firm performs sourcing without

input of best practices.

Level 2: A firm is not only doing sourcing, but consistently manages it and follows a set of procedures.

Level 3: A firm has established clear standards, objectives and strategy for outsourcing.

Level 4: A firm leverages on outsourcing for adding value.

Level 5: A firm consistently operate at level 4 for about two years.

Outsourcing Process

Outsourcing Strategy Development


The Outsourcing Strategy must have a high level of interoperability with the Corporate Strategy and Competitive Strategy of the Business Portfolio.

Interoperability of Outsourcing Strategy

Using McKinsey 7S Framework for Testing Outsourcing Strategy

Style

Staff

Shared Values/Subordinate Goals

StructureSystems

Strategy

Skills

Action Points for Testing Outsourcing Strategy

• Examine each of the 7S.• Identify the key success factors of each ‘S’.• Ascertain the gap between the elements and

the strategic fit.• Solution should be either to amend the

elements accordingly or to alter the outsourcing strategy.

Aligning Outsourcing Strategy to Business Model

It’s imperative to align Outsourcing Strategy to a firm’s Business Model due to its role. Business Model is the logic behind value generation. The Business Model binds Business Strategy and Business Process together and functions as link between them. The focus of strategy is determination of position and codification of aims and objectives, while business process captures and implements the strategy.

Identification of Outsourcing Opportunity

Outsourcing opportunity should be identified based on the direction and structure of outsourcing strategy. Consideration should differentiate rightsourcing targets from core competence and residual processes. Thereafter, key components of rightsourcing targets shall be isolated for comprehensive evaluation.

Evaluation

• Evaluation of Barriers• Evaluation of Risks• Evaluation of Business Transformation

Indicators

Barriers to Outsourcing

i. Employee Issuesii. Customer Connectivityiii. Importance of processiv. Fear of Insecurityv. Fear of Losing Controlvi. Loss of Flexibility

Risks in Outsourcing• Privacy Risk• Compliance Risk• Disaster Recovery Risk• Customer Satisfaction Risk• Political Risk• Ethical Risk• Security Risk• Human Factor Risk• Legal Risk• Delivery Risk

Business Transformation Indicators• Higher Cost Efficiency• Availability of More Funds for Business• Opportunity to Increase Capabilities• Superior Business Focus• Prospect for Competitive Repositioning • Greater Shift to Customer-Facing Activities• Reduction of Internal Rivalry for Fund• Better Management of Problematic Function• Reallocation of Internal Resources to Higher Value

Purposes

Criteria for Selection of Service Provider

• Fee• Independence• Expertise of Firm• Expertise of Key People• Finance• Experience• Flexibility• Culture• Integrity• Staff Requirement• Operational Facility

Importance of Due Diligence

In a large scale outsourcing programme, comprehensive due diligence of the prospective service provider must be done to ensure clear-cut identity and clarify suitability.

Negotiation

The outsourcing team must aim at reaching an acceptable point between the firm’s position and that of the prospective service provider. Team members must be well trained in advanced negotiation skills which are required for the tasks.

Service Level Agreements

“Service level agreements validate expectations of the respective parties and set parameters for measuring project success. This important tool helps determine value and define success and discourages potential disagreements.”

Source: Syntel

Schedule of SLA

Service Level Agreements commonly set out provisions for the following:

• Service definition• Timing standards• Minimum and maximum quality needs• Compliance with set standards• Payment (incentives and rebates)• Consequences for performance drops• Current and Future needs• Monitoring methods• Security of premises and information• Alternative dispute resolution• Variation of arrangements

Source: Noric Dilanchian, Hints for Service Level Agreements

Resolving Values of All Stakeholders


Ascertaining Value Networks

FirmService

Provider1

Service Provider

3

Service Provider

2

Merits of Face-to-Face Meetings in Nurturing Outsourcing Relationships

• Physical Proximity• Multiple Modalities• Vocal Inflection and Timing• Real-Time Question and Answer

Staffing Models in Outsourcing

Product Vendors: These are service providers who focus on selling deliverables. They are assigned to staff functions and report to an executive, who ensures fulfillment of SLAs.

Temporary Employees: These are flexible workers used for lower level and short-term jobs.

Project Employees: These are workers obtained for a specific project, and their contracts terminate at the expiration of the project.

Long-Term Contract Employees: These are employed by a service provider and assigned to a firm. They are the closest to full staff of a firm.

Problems with Staff Extension

• Control of strategic evolution• Improper supervision due to shortage of skill

in cases of scarce competencies• Abandonment of competency development in

the area being outsourced• Service provider may end up as problematic

decision –maker for the firm• Tendency to continue reducing staff strength

because of cost savings

Using Technology For Driving Outsourcing

The complexity of multiple outsourcing relationships can be solved by infusion of technology enablement. Suitable software for Business Process Management that highlights SQL, ERP and other intelligence systems can provide the requisite leverage to track, identify, monitor, and analyse service provider’s performance. Example of such software is Ajira.

Dr. Elijah Ezendu is Award-Winning Business Expert & Certified Management Consultant with expertise in HR, OD, Competitive Intelligence, Strategy, Restructuring, Business Development, Sales & Marketing, Interim Management, CSR, Leadership, Project & Programme Management, Cost Management, Outsourcing, Franchising, Intellectual Capital, eBusiness, Social Media, Software Architecture, Cloud Computing, eLearning & International Business. He holds proprietary rights of various systems. He is currently CEO, Rubiini (UAE); Hon. President, Worldwide Independent Inventors Association; Special Advisor, RTEAN; Director, MMNA Investments Limited. He had functioned as Chair, International Board of GCC Business Council (UAE); Senior Partner, Shevach Consulting; Chairman (Certification & Training), Coordinator (Board of Fellows), Lead Assessor & Governing Council Member, Institute of Management Consultants, Nigeria; Lead Resource, Centre for Competitive Intelligence Development; Turnaround Project Director, Consolidated Business Holdings Limited; Lead Consultant/ Partner, JK Michaels; Technical Director, Gestalt; Chief Operating Officer, Rohan Group; Executive Director (Various Roles), Fortuna, Gambia & Malta; Director, The Greens; Chief Advisor/Partner, D & E; Vice Chairman, Refined Shipping; Director of Programmes & Governing Council Member, Institute of Business Development, Nigeria; Member of TDD Committee, International Association of Software Architects, USA; Member of Strategic Planning and Implementation Committee, Chartered Institute of Personnel Management of Nigeria; Adjunct Faculty, Regent Business School, South Africa; Adjunct Faculty, Ladoke Akintola University of Technology, Nigeria; Editor-in-Chief & Chairman of Editorial Board, Cost Management Journal; National Executive Council Member, Institute of Internal Auditors of Nigeria; Member, Board of Directors (Several Organizations). He holds Doctoral Degree in Management, Master of Business Administration and Fellowship of Several Professional Institutes in North America, UK & Nigeria. He is an author & widely featured speaker in workshops, conferences & retreats. He was involved in developing Specialist Master’s Degree Course Content for Ladoke Akintola University of Technology (Nigeria) and Jones International University (USA). He holds Interim Management Assignments on Boards of Companies as Non-Executive Director.

Thank You