A Decision Matrix to Guide Outsourcing

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The Global Supply Chain Executive MBA

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Background & Experience

Caterpillar Inc.

Product Development, Marketing Remanufacturing, Supply Chain Mgt.

Caterpillar Logistics Services Inc.

Integrated Supply Chain Services Global Scope Performance Based Long Term Client Relationships University of Tennessee Department of Marketing and Logistics Center for Executive Education

“The significant problems we face cannot be solved at the same level of thinking we were at when we created them.”

This session is designed to make you think differently about outsourcing 3

The University of Tennessee…

Has been studying performance based approaches for over 4 years to understand how a performance-based business model can bring significant benefits to the supply chain profession.

Studied over 20 companies - Over 500 facilities/operations observed/reviewed

Companies Outsourcing Service Providers Consultants

Commercial Companies Benchmarked

Contract Logistics Property / Facility Mgmt

• Dell • JetBlue • Southwest Airlines • Lockheed Martin • UPS • Jaquar • Microsoft* • Edward Jones • H&R Block • Philips • InSource • Caterpillar Logistics • Eagle Global Logistics • Unipart • Grubb & Ellis • Jones Lang LaSalle • Colliers

A&AS

• Oracle • Honeywell • Boeing • Xerox • AFMS • Expense Management Solutions * With Grubb & Ellis

Reasons Outsourcing Agreements Fail

Buyers multi-supplier environment Poor cultural fit Poor performance Other Not mutually beneficial Poor communication Poor governance Misaligned interest over time Unclear expectations 3 5 8 11 11 11 13 15 0 Source: Outsourcing Center Survey, Outsourcing Center 5 10 15 20 The top 5 reasons outsourcing fails are not due to a bad supplier – but due to bad outsourcing process 23 25

Truisms from the Outsourcing Business Companies fail to understand the “why, what, and how” of the outsourcing process.

Many outsourcing projects are activity focused and fail to assess the strategic opportunities and benefits.

Outsourcing projects are led by company experts who either don’t understand the business or have all the answers and eliminate any opportunity for thinking that is “outside the box”.

Roles, responsibilities, and contractual obligations are poorly defined.

Communication is inconsistent and typically activity focused.

The relationship focus is “short term”.

Risk and reward are not balanced.

Why?

Think strategically, how can outsourcing significantly improve my business?

- Lower costs - Improved performance - Investment avoidance - Asset leverage - Market entry/exit - Network expansion/consolidation - Risk sharing - Focus on core competencies

What?

Think “integrated”, how do I provide the most seamless and effective solution?

- Transportation - Inbound/Outbound Logistics - Inspection/Quality - Warehousing - Information Systems - Inventory Management - Reverse Logistics - Safety/Security - Value Added Services - Environmental Sustainability

How?

Think relationship, how do I find the best outsourcing partner?

- Team based - Move beyond the RFI as soon as possible - Effective in focusing on: industry best practices performance metrics & measurements innovative delivery methods the correct balance of risk & reward

The Choices We Make in Outsourcing

Cooperate Cooperate Command

How is your relationship?

Command

Cooperative Games Win!

In non-zero-sum games , a gain by one player does not necessarily correspond with a loss by another Win-win game theory emphasizes the importance of cooperation, sharing and over-all group success personal gain in contrast to domination and All players are treated as equally important and valuable When both parties cooperate they both win! When they don’t , they end up with less or both lose!

Cooperate Command Cooperate Win Win Win Much Lose Much Command Lose Much Win Much Lose Lose Is Win-Win the Real Deal?

5 Rules for Success

2. Focuses on the WHAT not the HOW 3. Clearly Defined and Measurable Desired Outcomes 4. Pricing Model Incentives are Optimized for Cost/Service Tradeoffs 1. Outcome Based vs. Transaction Based Business Model

Win/Win (WIIFWe) Relationship

5. Insight vs. Oversight Governance Structure

Rule #1: Outcome Based vs. Transaction Based Business Model Transaction based relationships pay service providers for every transaction whether or not it is needed.

Performance based relationships pay service providers based on outcomes.

- Availability - Reliability - Cost - Revenue generation - Employee or customer satisfaction - Asset investment targets

Rule #2: Focus on the What, not the How The company outsourcing specifies “what” they want and moves the responsibility for determining “how” to the outsource provider.

The focus is on “performance expectations”, not the processes to be followed.

Service providers become responsible for more services and integrating services that may be provided by others.

Rule #3: Clearly Defined and Measurable Desired Outcomes Both parties must be explicit in defining the desired outcomes.

Each outcome is expressed in terms of limited (usually less than 5) high level metrics.

KPI’s vs. results and process measures The parties collaborate to establish explicit definitions for how success will be measured.

Rule #4: Pricing Model Incentives Optimized for Cost/Service Tradeoffs Pricing model must balance risk and reward for both organizations.

The agreement should be “solution” not “activity” focused.

It is essential that the agreement be based around reducing the total cost versus the cost of transactions.

Rule #5: Insight vs. Oversight

Identify and align the interests of the parties Provide flexibility and encourage innovation Think strategically Balance risk and reward Leverage the assets Think “long term” for relationships Measure outcomes, not activities

Benefits of Performance-Based Relationships Better competition and outcomes - solution vs. activity focused - service provider buy-in - flexibility and innovation encouraged Focused on intended results, not process steps no detailed “spec” needed - better alignment to goals and objectives - shared incentives encourage innovation and cost effectiveness Better value and enhanced performance

Top Six Things to Ensure Success Understand what you are outsourcing and focus on “outcome” vs. “internal” metrics.

Link performance to success.

Understand that outsourcing relationships must be “dynamic” and capable of changing with the business.

Ensure senior leadership is fully engaged. Don’t underestimate cultural compatibility. Communicate consistently and effectively.

Best-in-Class Companies

Beat competitors in most areas, not all Are not best-in-class in every performance category, but win in areas that match their strategies and priorities Know their own competencies, strengths, and weaknesses Likewise, know the same about their competitors Spend most of their resources in those areas in which they must excel Minimally competitive in every performance category

“

Intellectuals solve problems, geniuses prevent them

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Can Customer and Provider think differently about outsourcing? 22