provided by: Supply Chain Management Review Today's supply chain executives face the complexities of managing suppliers, production centers, and so-called partners scattered across the globe. At the same time, they also must handle an ever-increasing set of "best of breed" or "point solution" service providers for the various processes within an integrated supply chain.
Senior management may tout the cost savings and efficiencies provided by such arrangements. But to fully realize the benefits, an organization must appreciate the unique attributes of such relationships and plan for how to manage them. In fact, an EquaTerra study of more than 250 IT and business process outsourcing decision makers in North America found a direct correlation between the investment that organizations make in outsourcing management (OM) and their satisfaction with their outsourcing engagement. That investment takes the form of personnel, processes, software and tools, and external services. Typically, the optimum OM investment levels range from 4-7 percent of the total annual contract value, irrespective of the function being outsourced.
The more relationships you have-especially if they span the globe-the more important relationship management becomes. Global supply chain organizations tend to have multiple "best-of-breed" service providers with expertise in different components of the supply chain-for example, procurement, logistics, accounts payable, or warehousing. Due to the intricacies associated with coordinating all the components of a global supply chain, those organizations with multiple service providers face particularly weighty challenges.
Form a Cohesive Strategy
The roots of relationship management must be formed at the earliest point possible in the outsourcing process, ideally as an organization determines its strategy and before a service provider is selected. A cohesive strategy enables it to determine which processes are to be outsourced and for what reason. The strategy should also help managers prioritize and define the importance of their OM relationships.
For instance, a multinational may make a strategic decision that it wants an edge in logistics and transportation to outperform its competitors through on-time delivery and quality performance. If this is the case, it would likely seek the best outsourcing providers for those processes-providers with the ability to perform equally well anywhere in the world. The company's goal would be a much higher level of performance in these functions than it could achieve in-house; any cost savings would be a bonus. For its procurement-linked accounts payable function, however, it may seek a level of performance on par with its current in-house level but at a much lower cost. This will be reflected in its choice of service provider, as well as the type of relationship structured.
The Outsourcing Governance Organization
It is common for companies that outsource multiple business processes to have separate governance teams for each outsourced function. But many companies do not yet have an approach for assessing which skills and tools they need to develop and utilize to manage these outsourced processes. EquaTerra suggests that as companies evaluate outsourcing governance models, they consider three key models:
1. Outsourcing Management Center of Excellence (COE): The aim for this model is to ensure consistency and implementation of best practices across all business process outsourcing (BPO) efforts. Services provided by the COE might include training, evaluating BPO management tools, and ensuring coordination among the BPO management teams.
2. Outsourcing Management Shared Services: The shared services model is designed to serve as the back office for managing all BPO relationships. These services can include contract management, financial tracking, and benchmarking.
3. Central BPO Management Office: This model is designed to ensure that BPO remains an effective sourcing strategy. Its critical services are to ensure regular evaluation of the market, assessment of the relationships, adjustment of sourcing strategies to business planning cycles, and initiation and oversight of new provider selections.
A company may choose one of these models or utilize select components of each to accomplish certain objectives when managing multiple provider relationships. But how can a company determine what can be centralized and what should be managed "locally," as well as which of the aforementioned models might be appropriate? A simple rule to follow is that any activity that requires a high degree of unique expertise, such as deep knowledge of transportation and logistics management within a certain industry, is not likely leverageable in a centralized process. Conversely, outsourcing industry research (such as service-provider profiling) or transaction-based work (such as invoice review and verification) can be aggregated and streamlined on a through the use of tools and a common, trained staff.
The Supply Chain Team
The supply chain team within a larger outsourcing governance organization should be responsible for strategy and policy setting, planning, key decision making, "business case" attainment, and managing the service provider relationship.
No matter how many outsourcing service providers a company may work with, or where their key teams are located, it is advantageous to have a single team (whether within a larger organization or standalone), led by a single, empowered decision maker. This person is held responsible for the governance of all supply chain relationships. These individuals should also develop and manage any standardized processes that are specific to supply chain outsourcing-such as monitoring of inventory turns. If the company decides to use a standalone team to manage supply chain relationships, this team should maintain close links to the governance teams supporting other business functions. This will ensure that service providers are managed efficiently and consistently.
In addition to monitoring and interfacing with service providers, the team also should ensure that there is coordination among the various outsourced platforms-processes and technologies-and any residual teams from the outsourced functions. As with any well-oiled supply chain, communication with internal company stakeholders is also a key function of the governance organization. The governance team must be continually seeking feedback about both the qualitative aspects of the outsourced relationships and the internal perceptions about them.
Individuals involved in governance should possess specialized outsourcing management skills. These competencies are often forfeited when teams are simply built from the internal remnants of an outsourced function. Even with the best governance procedures in place, when a team does not possess the right type of experience and leadership, governance will suffer. If hiring skilled staff is not an option, a company may benefit from retaining outside specialists and advisors on an ongoing basis to help provide the expertise required to select, develop, and maintain the team and processes. This expertise includes:
- Service quality management: ensuring all aspects of service quality are met, problems are resolved, and business stakeholders are satisfied with the service performance and quality.
- Issue management: ensuring that issues affecting service or the relationship are effectively and expediently resolved.
- Change management: facilitating anticipated business change with the service provider, including new services and transformational programs.
- Commercial management: ensuring the agreement is managed and the financial benefits are tracked and realized.
- Compliance: ensuring all applicable internal and external compliance requirements are met.
- Communication management: communicating with all key stakeholders, including the service provider and other third parties.
Technology tools are available to help with the governance of service provider relationships, and should be seen as important elements of a comprehensive management program. These tools are particularly useful in measuring and gauging the quantitative measures of service provider performance.
Investing appropriately in governance is perhaps the best way to protect a company's far greater investments in outsourcing. The complexity of supply chain outsourcing only amplifies this need. Building OM costs into an upfront business case, selecting service providers that are aligned with your strategy, and implementing a robust governance solution are critical. With these elements in place, the odds of success are vastly increased.
Robin Shahani leads Supply Chain Advisory Services at EquaTerra, a business transformation and outsourcing/ insourcing advisory firm.
author: By Robin Shahani
Supply Chain Management Review. Copyright © 2007 Reed Business Information, a division of Reed Elsevier Inc. All rights reserved.