Outsourcing is

• The purchasing of products and services currently performed by yourself
• The delegation of the management of your processes or services to a third party
• The integration of third party expertise and processes into the company

Why Outsource?

• We pay too much to do it ourselves
• Not core to the company
• Don’t have the management expertise
• Require major investment: off balance sheet
• Need to jump the learning curve
• Area requires major re-engineering
• Business going through major change, need to make more areas variable cost

The Commercial Process of Outsourcing

• Request for Interest
• Invitation to Tender
• Negotiation
• Contracts
• Service Level Agreement

The Results of Outsourcing

• They over-promised or under-delivered
• They don’t understand
• They interfere
• They can’t do the job as well as we did
• They don’t listen
• They are incompetent
• They are too expensive

The Cause of the Breakdown

• Poor definition of requirements
• The Negotiation Process
• No SLAs
• Lack of teamwork
• Poor management

Major Issue

The outsourcing operation remains essential to the added value processes of the company in its quest to supply its customers

How to avoid the pitfalls

• Spend time integrating the outsourced service
• The more central the activity is to the heart of the company, the more time that is required to really ensure the outsourced operation is integrated

Major questions to be answered

• Why am I outsourcing?
• Who should my outsourcing partner be?

– What are their strengths and weaknesses?

– What are their visions and strategies?

– Will the cultures fit?

• What does our SWOT analysis look like now and afterwards?
• What am I depending on them for?
• What are my Requirements?
• Have I articulated the SLAs correctly?
• What are the strategic changes that we are looking for?
• How will we judge success and failure?
• How will we reward/ remunerate them?
• How will we link the organisations?
• How do we reduce the internal frictions and the feeling they are just a supplier?
• Complete the service level agreement before the contract

Outsourcing Case Study

A Major FMCG Company facing two markets outsourcing a contract for Warehousing and Distribution

Partner: A leading Contract Logistics Company

What drove the outsourcing?

• A market requirement for temperature controlled warehousing and distribution
• A wish not to directly invest large sums
• A concern that factory skills led wage inflation was producing uncompetitive distribution costs

How was the contract awarded?

• By tender to three main contractors
• The tender was reasonably detailed but did not refer to the possible different strategies for the two halves of the business
• Post tender negotiations

Problems during planning phase of Outsourcing

• The two consumer markets had very different margins
• Reorganisation in the manufacturer caused inward focus
• ‘Leave distribution to the experts’
• The contractors promised too much, too quickly
• Wage rates were set too high
• There was no administrative system process map

Problems at Start-up

• Administration was incorrect
• Computer hardware was not sized properly
• The quiet sales period promised was quashed without the contractors knowledge
• The pick layout was very wrong
• Stocks were 25% above plan
• The operation degenerated into ‘it’s your fault’

Why the problems?

• Despite the grand plan there was no follow through
• No process mapping
• No sign-off of changes
• No acceptable delay allowed
• No help with the hooks into the manufacturers IT systems. In-house solution was better
• No volume testing of data systems
• The irregular executive meetings did not allow problems to surface, no joint solutions
• No honest appraisal of reasons or strategy
• No analysis of individual and joint strengths and weaknesses
• No joint approach for dealing with the doubters
• No acknowledgement that Customer service might suffer in the short term

First two years of operation

• Problems spilled over and destroyed the relationship
• Severe short term market dislocation
• Contractor too scared to offer changes
• Costs barely changed

How the operation was changed

• Operation was placed in its strategic context and regular strategic meetings were held
• Operation was placed in its operational context – Sales and Marketing were encouraged to take part in regular operational review meetings
• Challenging KPI’s set and monitored; Mostly Customer focussed; Some internal productivity led; Some financial
• Challenging bonus scheme to reward real results
• Real dialogue encouraged at Board level
• Contractor asked to contribute in areas of real strength

– Transport planning and purchasing

– Terms and conditions re-engineering

Results of Outsourcing

• Costs fell by 40% in constant money
• Right first time deliveries achieved: 96%
• Stock levels fell by 35%

Summary

The closer the activity is to your core activities the more important it is to:

• Answer the question ‘why outsource?’ honestly
• Spend sufficient time to integrate the outsourced activity and the supplier
• Ensure you keep control of the strategy
• Set appropriate KPI’s and reward mechanisms to encourage the behaviour and results you want
• Make the partnership work