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.
Job descriptions are difficult enough to write when roles are clearly defined. The ambiguity of vendor management organizations and the fuzzy lines that separate them from procurement, finance, project management, business analysis, and operations organizations make vendor management job descriptions many times more difficult to write. The importance of attracting and selecting the right talent to manage major outsourcing or service vendors is essential for the well-being of a company.
This article covers the details of vendor management job descriptions.
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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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Performance management is a fundamental aspect of managerial effectiveness. Establishing clear goals with your boss, peers, and employees is essential. With vendors, you have contractual service level agreements.
At certain points in the year, good managers check-in with their team members to provide feedback on progress to goals. At the end of the year, employees get final reviews - complete with bonuses and merit increases. With vendors, you have the quarterly review - one of the most important tools in a successful vendor manager’s tool belt.
In this article, we review the essential aspects of quarterly reviews.
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A couple of weeks ago, Phil Fersht kicked off a firestorm of conversation with his Horses for Sources article on HR Outsourcing. We shared our opinion on the topic in our article debating the value of HR Outsourcing.
Well, this week, Jason Busch published his opinion on procurement outsourcing on Spend Matters. Jason is one of the preeminent strategic sourcing, procurement, and spend management experts, and we encourage strategic sourcing and spend management professionals to keep a keen eye on his blog.
In our opinion, the value of procurement is more than the output of it’s processes. Procurement’s specialized category and commodity knowledge, as well as it’s deep relationships with customers that takes years to develop to the high level of trust necessary for business executives to allow procurement to be a strategic partner, are the key fundamental core aspects of “procurement”. Vinnie Mirchandani, of Deal Architect fame, comments on this in his recent article, “Procurement Outsourcing Perspectives“.
We simply do not believe that wholesale procurement outsourcing can realize the value of an internal organization because of the entrenched customer relationships that enable and empower strategic sourcing initiatives. A deep analysis of core procurement would show that procurement functions have a few key processes: sourcing, spend management analysis, and requisition/purchase approval. Fortune 100 procurement teams add: supplier diversity, ethical sourcing, supplier performance, and green alternatives. Organizations that allow procurement teams to have real influence, also further differentiate their sourcing expertise by direct versus indirect goods and services.
In our opinion, there is little opportunity to achieve value in procurement outsourcing after analyzing these core processes. Here are a few opportunities:
Application Development and Maintenance - outsourcing application development and maintenance of the procurement/spend management software the team uses. Given the high fees Ariba and similar companies charge for software support, there is opportunity, but there is little offshore expertise in this application, much less knowledge of a strategic procurement function. With more and more companies are using hosted solutions, there’s dwindling value here.
…that’s it, and here’s why:
Not Offshore Compatible - The greatest savings in an outsourcing deal is frequently arbitrage. In this case, the internal customers are highly unwilling to accept the difficulties of offshore accents, culture, and relationships. At the very least, it wont motivate them.
Insufficient Scale - Each of the processes we’ve identified have very small scale, frequently amounting to 5-15 FTEs. For most companies, that’s too small to consider viable. The savings are minimal, too.
Process Improvements - The second greatest savings opportunity, and frequently the greatest savings lever, is outsourcing a function to an expert vendor that can make major improvements to the process due to their domain expertise. The main process of a procurement function is the management of purchase approvals, which is likely already electronic and automated. The costs of moving to a new platform are unlikely to offset the very tiny incremental value of moving to a new platform and the process improvements are likely to be equally small, with the greatest opportunity lying in the ability to provide better and more granular analytics.
Core - Generally speaking, companies should avoid outsourcing core functions. Sourcing direct goods and services that makeup of a company’s product or service is about as “core” as Michael Porter’s “core” gets.
Vendor Management Challenges - Managing outsourcing vendors for results is very, very difficult. Other than ensuring requisition approval processes flow smoothly (and these are frequently slowed by internal customer reviews anyhow), what operational metrics can be established to ensure a smooth running procurement function? There are a few, but they are difficult to track and you will frequently excuse excuse the vendor from paying penalties because your company was at fault for the failure.
Finally, and this is the most important item:
Lack of Vendor Expertise - Review the list of procurement processes and then compare that to the vendors’ expertise and you will see a significant gap. Most outsourcing vendors have little to no expertise in strategic sourcing, domain knowledge, supplier diversity, negotiations, etc. Vendors entering this space will play up their domain expertise in accounts payable and receivable functions. While there is a great opportunity for outsourcing those areas, the type of domain expertise necessary to run a spend management function is not the same. Given the specialization necessary to run this function, CFOs who really consider outsourcing procurement teams, don’t understand strategic sourcing.
Instead of outsourcing procurement functions, CFOs, CIOs, COOs, and CPOs should consider building vendor relationships with niche specialty consulting firms that can assist with specialized and infrequent sourcing activities or that can jump start ethical sourcing or green initiatives. In fact, more and more procurement functions should consider allocating 30%-50% of their budget to consulting or advisory firms to assist with strategic initiatives that their internal teams lack the skills to manage. Outsourcing vendors could not begin to tackle items such as outsourcing and advertising, among many others.
In summary, ignore the hype of outsourcing vendors and their paid advertisements in “research” papers and news articles. Procurement outsourcing is a dud today. However, we look forward to a vendor developing sufficient expertise and internal teams developing sufficiently strong performance metrics to make procurement outsourcing viable some day.
Operations teams have historically organized themselves very effectively around their core operations centers. Dedicated training, quality, reporting, and operations professionals were located very closely to the daily riotous call center and back office operations. With little argument, close proximity ensured clear lines of communication, close collaboration, and the ability to quickly bring the right talent to daily operations issues.
As Phil mentions in his article on globalization, your focus as a vendor manager or outsourcing executive is on the global labor market. Now that your operations are located in India, Jamaica, Central America, or the Philippines, effectively managing operations from North America or Europe is far greater challenge. Your domestic teams are asleep during the action, or they are separated by thousands of miles and significant cultural differences. In addition, reading real-time or daily reports does not give you the same information that a walk through a call center floor does, where you can see opportunities to improve efficiency and keep the peace among agents. It’s simply more difficult to manage operations from a distance. If you have not considered an alternative management model, maybe you should. In this article, we will address some of those opportunities.
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Outsourcing vendor management is not any easy discipline to learn. In fact, as compared to project management, vendor management is terribly difficult to understand and learn. Immature certifying bodies, generally limited outsourcing experience, dissimilar outsourced operations, internal personalities, and the social politics of outsourcing all create an environment ripe for limited vendor management standardization. What should you expect when you are climbing the steep learning curve?
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We recently completed an analysis of the value a series of outsourcing programs had created for a very large company. That company had never truly baselined and tracked value outsourcing programs had created. So, the exercise was similar to a paleontology event trying to find the old bones. The client had created value through offshore labor arbitrage, but because senior executives didn’t enforce a “take it to the bottom-line” approach to outsourcing, which is what they had desired, day-to-day operations leaders years later continued to expand outsourcing relationships - with absolutely no savings. Instead, continued expansion was driven by limited investment in automation and process improvement. If the client had invested in technology and process improvements, there would be no need to keep some resources - regardless of where they were located.
Human resources outsourcing has a similar problem…and today we’ll look at the value Human Resources Outsourcing provides. Rather, what it fails to provide.
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