“It is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from their regard to their own self interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.” — Adam Smith, The Wealth of Nations, 1776
We find ourselves in uncertain times caused by globalism and the talk of self-preservation. Where the Western world once sat behind the wheel, driving technology and automation into our businesses and personal lives, poorer countries are now poised to operate, maintain, and improve the technology the West created. Adam Smith’s great “Invisible Handle” metaphor contains a balancing paradox. The West’s businesspeople moved factories and service operations to foreign countries to take advantage of low wages. These wages improved, creating new economies in once poor countries. Over time, an equilibrium will be found and will persist until new entrepreneurs drive innovation, which will again make certain countries mighty until these innovations are outsourced or imported to other countries for the poor countries’ benefit.
And so the seesaw rocks back and forth.
One of the great frustrations of those who see the pattern of globalization is the extent to which the normal, non-entrepreneurs will go to protect their world from change. Like a great freighter’s anchor, the protectionists will dig deep to prevent natural change rather than hoisting anchor and going with the natural flow. The natural flow is unstoppable, because unnatural barriers to change will cause catastrophic disasters.
Your only choice is preservation of self-interest - to become rich and wealthy through innovation.
In the outsourcing world, which started in manufacturing, moved to information technology, and now is squarely focused on services, the challenge is innovation. Driven by economic pressures, more often than not, a company outsources XYZ and takes the entire savings to the bottom line. The savings is just temporary, as the labor arbitrage or a vendor contract negotiation will find equilibrium again. Consequently, outsourcing critics speak truthfully about the impact of outsourcing to local jobs, although most see only the short term impact.
A company that outsources and does not invest in innovation or transformation misses the great value of that could be created by infusing the freed capital back into its operations. The long term impact of the failure to innovate is devastating because competition will, eventually, find balance again.
The problem with outsourcing critics is that the laws they seek to enact are noting more than the proverbial finger in a dam’s leak. Eventually, innovation will be exported and the competitive equilibrium will bypass the very communities the critics wish to preserve. Halting globalism is simply impossible.
The critics need to focus on innovation, not preservation. Thomas Friedman’s “The World is Flat” was not so astounding for its exposure of the extent of outsourcing. Rather, the exclamation point of Friedman’s book was the last few chapters that explained the souring of Western education, the very fuel of innovation.
Companies who take outsourcing savings to the bottom line are no less at fault than our governments and societies. Companies that outsource and do not gain great competitive advantages through their partnerships also are at fault. Communities and politicians who expect protectionist measures to work are at fault, too.
In this global environment, the winners are those who realize their self-interest is tied to creation, not preservation.
CNN is running a video story about the manufacture of US Passports, which as been outsourced to European firms who manufacture the passports in Thailand. Here’s the story from the Washington Times in case you cannot view CNN’s video.
Most of the concerns surround security, which raises these questions: Does the place of manufacture create more or less security than how it is managed? How do you ensure your company and customers’ information is secure?
The Philippines has been an outstanding outsourcing location over recent years. It has an American heritage with close proximity to Hong Kong, Singapore, Taiwan, Korea, and Japan. There is a reasonably robust telecommunications infrastructure and there has been extensive capital infusions from China and many other countries. For foreigners, travel and accommodations in the Philippines is easy. Probably the most impressive opportunity is the abundant, well-educated, and friendly English-speaking labor force. Any outsourcing executive who has traveled to India, China, or Costa Rica instantly finds the Philippine people irresistible.
Despite the never-ending flow of positives clients, vendors, advisory firms, and the Philippine government use to describe the Philippine outsourcing market, the present day reality is much different. The Philippines actually poses a significant future risk to your operations. Here’s why:
- Workforce Attrition - Less than 3-4 years ago, more than one well-known CEO in India explained to us, “There is an unlimited labor pool. Wages will never increase.” Well, that certainly wasn’t true. Vendors and captives also exploited low wages by bidding-up labor markets in a savage back and forth talent war. Many companies sought shelter in Tier 2 cities, but the peaceful period was brief, and companies turned for shelter in Tier 3 cities - where the same fate ha occurred. The Philippines are experiencing the exact same phenomenon. In fact, one CEO even recently pitched opening a center in the Southern islands, which is a place no company should consider, unless tapping into Tier 2 cities along the Indian-Pakistan border or Pakistan-Afghanistan appeals to you.
- Complex Services Meet Inexperience - One aspect of BPO that differs from ITO is that there is no education program to develop call center and backoffice outsourcing operations leaders. Consequently, there are insufficient quantities of talented middle management in the Philippines. Now that most companies have outsourced a little “easy stuff”, they are outsourcing significant amounts of simple work, more complex work, as well as acquiring transformational services. The management challenge is huge. Where a call center used to get by on relatively easy workforce management planning, large operations demand sophisticated WFM skills. These skills are incredibly hard to find in the Philippines, unless you import them or buy them from other vendors/captives (see the attrition issue above).
- Political Uncertainty - One of the great underestimated aspects of the Philippine political scene is its complete uncertainty. You’ve probably already read the annually updated US State Department Travel Advisory. However, take a moment to review all the other countries with similar warnings. Pundits will argue that 1) the problem is in the south and 2) no government would stop the expansion of the outsourcing industry. We generally agree, with two major caveats. First, it takes but one election to ruin a country’s future. Second, if the Philippines become an unsafe destination for business men to visit or for long term deployment of vendor management personnel, outcomes become difficult to manage.
- Currency - Currency instability is challenging in the Philippines. While Indian companies took significant steps to hedge their currency, most operations in the Philippines are owned by foreign companies. These companies don’t hedge, so they pass their costs onto you.
Essentially, the Philippines of today is the India of 3-4 years ago. There is no reason to expect a different outcome.
However, while there are challenges, sophisticated vendor managers can mitigate every one of these challenges if they focus on strategic, long term issues that accompany outsourcing efforts. Vendor managers who focus solely on day-to-day issues will run into profound problems if they don’t diversify locations, manage financial currency risk, or seek creative ways of bridging the middle management talent gap. If managed effectively, the promise of the Philippines is definitely positive.
Vendor managers who manage international operations need to keep abreast of foreign trade disputes. Obama’s bizarre anti-outsourcing comments, even if they do lack concrete strategies, should be enough to get your attention.
The same fear-driven, job protectionist attitude affects a wide ranging industries. If you haven’t witnessed this yet, check out Jason Busch’s article on Anti-Dumping.
Before outsourcing, internal operations teams usually spend significant effort appeasing senior management by explaining every reason why deviations from performance were outside their control.
Marketing launched a new campaign. IT’s servers were slow. The telecommunication vendor’s T1 was hit by a backhoe. The competitor launched a misleading campaign. The weather shutdown deliveries in Chicago.
Well, have you noticed the change in tone after the call center or backoffice team was outsourced?
Customers don’t like foreign accents. The vendor cannot manage attrition. Prices are more expensive than they are [insert nearby city]. Quality is bad. The contract is the problem.
In a classic Dr. Jekyll/Mr. Hyde transformation, internal stakeholders apparently have no qualms with scorching the earth with “it’s the vendor’s fault” or “outsourcing was a bad idea” type comments. Frankly, its disingenuous and doesn’t contribute to the success that is so necessary for today’s competitive environment.
Believe it or not, vendor managers can satisfy internal stakeholders. They can create a productive, opportunity-seeking environment. Use best practices to paint accurate, compelling pictures of your vendor-managed operations.
Here’s how.
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Earlier this week we posted an article describing vendor management job descriptions. Yesterday day, Tim Minaham’s article on the Supply Management Talent Crunch led us to reflect on the “talent crunch” also facing vendor management. Let’s face it - good vendor managers are hard to find. Why?
- The positions require deep operations experience.
- The positions require great relationship-building and alignment-building skills.
- Most vendor manager positions are individual contributor roles, even though they manage operations of hundreds or thousands of FTEs.
- Vendor management positions are typically paid less than their peers managing similar internal operations.
- Vendor management positions require great focus on details: metrics, processes, and contracts.
- Vendor managers must be big picture thinkers with moderate strategic thinking skills.
- Vendor managers rarely have clear career paths.
Sounds like a tough job, right? It is.
That’s why most vendor managers lack all the skills necessary to perform their jobs exceptionally well. More importantly, there are few training courses available to them. Organizations like IAOP sometimes appear to be more focused on developing vendor and advisor sales channels than developing the skills of vendor managers. The COPC offers good courses, but they aren’t hands-on. Companies like ICN offer negotiation, selection, and contract courses, but they are tuned for IT procurement/vendor management teams. All these organizations lack training in the operations or technology that vendors managers typically manage.
Simply put, vendor managers must be developed by building performance management processes that guide activities and gradually increasing the responsibility of vendor managers. Standardized vendor management processes result in regular, predictable performance. Increasing responsibilities of vendor managers allows vendor managers to build experience with more complex issues - experience that vendor managers can leverage with delving into root cause analyses, relationship development, and negotiations.
If you lack an experienced vendor manager to develop our processes and resources, it is usually better to hire an external resource or hire an advisory firm tasked with developing vendor management processes, templates, and stakeholders. Forward thinking executives hire these resources before or during vendor selection, which gives them a leader for transition management and the time to develop the necessary processes in advance of implementation.
Do you have a methodology for hiring or developing vendor managers? Share our thoughts!
One of the most challenging aspect most outsourcing relationships are now facing is the impact of the declining value of the US dollar in the face of the growing foreign economies in India and the Philippines. When the US economy was stable with gradual growth, the impact of foreign exchange rates was manageable. However, with divergent directions, many vendors are faced with significant financial challenges - and they aren’t hesitating from discussing the materiality with their clients.
Most US clients have not budgeted for the level of increases they are now experiencing. Furthermore, the financial business cases associated with offshore labor can be shattered by dramatic price increases. Even if higher rates do reflect savings in comparison to US domestic rates, the multiple is no longer as advantageous…and with no end in sight, it is unlikely that US buyers are going to experience 1:6 savings again. 1:2 or 1:3 savings simply isn’t as appealing when one calculates the high cost of telecommunications, vendor management, and the risk a company assumes by outsourcing (which could cost millions to transition).
Most offshore vendors with experienced financial teams have deep experience in currency hedging, but few vendor managers do. Vendor managers should consult their treasury teams to seek a fast education on the available options. We aren’t financial advisors, don’t wish to offer you financial advice, and don’t make any recommendations. Get advice from the experts.
Keep in mind that most vendors do protect themselves from currency fluctuations. Consequently, don’t necessarily allow your prices float based on indices. Everything is negotiable, but also remember that your vendor will provide lower service if they are not profitable. Vendors track project profitability on a weekly basis and over the entire multi-year contract term. Remaining a strategic client means that your vendor must be profitable.
One element that all outsourcing executives should keep in mind is that labor arbitrage is a fleeting opportunity. Outsourcing should provide your company with significantly improved capabilities and performance. If you’re just outsourcing for cheaper labor, you are truly missing out on the greatest opportunity that outsourcing provides.
How do you manage currency risk with your vendors? Leave a note below or send us one.
Note from the Author: Today’s article is part four in a series of articles discussing outsourcing metrics. We encourage your to read our other three articles: An Overview on Outsourcing Metrics, Operational Metrics, and Key Performance Indicators.
Sustainable, successful outsourcing is all about leveraging other companies’ core competencies. Despite the labor arbitrage low cost country sourcing provides or the abundant availability skilled and unskilled labor in foreign countries, outsourcing is a fundamentally the purchase of another company’s superior service, technology, or product. Vertically integrated companies are simply non-existent. Our companies’ suppliers design products, manufacture components and finished goods, manage logistics and inventory, provide customer service, facilitate payments, and provide administrative human resources, finance, and IT support. While each new senior executive’s arrival will reopen the debate of his or her company’s core competencies (witness the CEO changes at Dell and Yahoo!), the simple fact is that no company can do everything, much less everything well.
Outsourcing provides your company the ability to obtain a level of specialization and performance it could otherwise never achieve - and with a shocking degree of immediacy. The challenge for clients who purchase these services is the transformational journey necessary to take advantage of the capabilities their suppliers provide. One of the chief gripes expressed by many vendors is that their clients fail to adopt some of the best practice processes they are capable of delivering. Vendors will offer free consulting assessments, networking and educational events with experts and other clients, and inexpensive pilot projects - almost anything to get clients to bite. As a result, clients leave quality, service and cost on the table - all elements that drive client satisfaction.
The rationale is simple. Companies who outsource typically see Read the rest of this entry »
Good outsourcing contracts contain service level agreements, which define performance parameters of the services companies procure from their vendors. In previous popular articles, we addressed the general structure of Outsourcing Vendor Metrics and provided more detailed information on Operational Service Levels and Metrics. However, operations are data rich environments with a multitude of metrics that an experienced vendor manager could use to manage the vendor. While typically 4-7 different metrics will be memorialized in the contract as formal service level agreements that trigger penalties and incentives, these alone are insufficient to effectively manage the vendor.
The rationale is quite simple. Believe it or not, but outsourcing vendors have tremendous pricing discipline. They analyze Net Present Value and Internal Rate of Return on their investment in the client contract. All factors are included, such as labor, facilities, technology, telecommunications, etc. More importantly, savvy vendors develop probability models of anticipated performance against service level agreements (which is what they do with your internal performance metric data - if you give it to them). They use SOX-driven corporate guidelines when developing these models which force them to assume some degree of failure. This failure is then built into the price - essentially allowing the vendor to obtain desired financial performance even when performance fails to meet client expectations. This dramatic difference in rewards and incentives between clients and their vendors should encourage clients to drop “partnership” and “partner” from their lexicon, except for the fact that overcoming this financial gap requires true relationship building.
In a nutshell, service level penalties are insufficiently severe to drive vendor performance. That means successful vendor managers must use other levers to compel vendors to perform. One of those levers is a comprehensive key performance indicator program.
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With increasingly complex vendor management programs and more interest in developing outsourcing and services relationships, it is no surprise that measuring vendor performance is an increasingly important topic on vendor management executives’ agendas. We previously wrote a very popular article on Outsourcing Vendor Metrics. Our readers have provided plenty of positive feedback via email. Overwhelmingly, vendor managers have asked for more detail and examples of each category of metric to improve their service level agreements. In this article, which is part one of several upcoming articles, we delve deeper into detailed operational service level metrics outsourcing executives can use to manage their projects effectively
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