Tag Archives: Shared Services

The Case for Backshoring

Finally, leaders are starting to recognize that offshoring is not “the magic pill”.  One has to look at the total cost of these offshoring efforts; not just labor cost and rent.  As a LEAN practitioner,  the wholesale transfer of just about any and every service or manufacturing effort has never made sense.  Yes, in some cases its the way to go; but, for a long time there it seemed like it was just the fashionable thing to do…it was a mantra…what all the cool kids were doing.   Whenever I would ask why are you doing that, they would at me like I had two heads. I just wanted to know the info so that I could build a model or rule of thumb for future use (the engineer in me is rearing its head).  Well, we’ll see were this goes; maybe there is hope.

The Case for Backshoring

Which manufacturing operations should return to the United States?

For years, the NCR Corporation simply followed the pack. Like many other large U.S. manufacturing companies, in the past couple of decades the maker of automated teller machines (ATMs) relied heavily on outsourcing to trim factory costs. By hiring Singapore’s Flextronics International Ltd. to make much of its equipment in cheaper offshore locations in the Asia/Pacific region and South America, NCR could slash hundreds of millions of dollars in plant expenses and be reasonably certain that its ATMs met quality standards.

But recently, NCR has rejected this strategy — at least to a degree. In 2009, the company decided to reclaim responsibility for making one of its most sophisticated lines of ATMs from Flextronics in Brazil and instead manufacture the machines in Columbus, Ga., not far from the NCR innovation center, where its new technology is on display. The reason: The company was concerned that outsourcing distanced its designers, engineers, IT experts, and customers from the manufacturing of the equipment, creating a set of silos that potentially hindered the company’s ability to turn out new models with new features fast enough to satisfy its client banks. “I think you’ll see more of this occurring,” says Peter Dorsman, NCR’s senior vice president in charge of global operations, who says he has been contacted by dozens of U.S. companies studying whether they should make similar moves. “You’ll see a lot more people returning manufacturing to America.”

NCR’s change in direction has raised the possibility that U.S. manufacturers are getting serious about “backshoring” some of the production they shifted overseas in the wholesale offshoring movement that started in earnest in the 1990s. General Electric Company Chief Executive Jeff Immelt recently attracted attention for remarks he gave to a West Point leadership conference calling for U.S. companies to make more products at home. Demonstrating Immelt’s commitment, GE announced in the summer of 2009 that it would build two new plants in the U.S. — a factory in Schenectady, N.Y., to make high-density batteries and a facility in Louisville, Ky., to produce hybrid electric water heaters currently made in China. Dow Chemical Company CEO Andrew Liveris similarly has appealed for a renewed focus on manufacturing in the United States.

Backshoring is primarily an American phenomenon, because U.S. manufacturers have been much more aggressive about outsourcing than their Asian or European counterparts. Japanese companies experimented with outsourcing high-end items to factories in Southeast Asia and China, but quickly changed course after growing concerned about the loss of intellectual property and about disrupting the link between research and manufacturing. As a result, Japanese companies generally farm out only the manufacturing of commodity products.

Cynics might conclude that pronouncements about the need for manufacturing in the U.S. are simply aimed at currying favor with the Obama administration, which is worried enough about the issue that it named former investment banker Ron Bloom as manufacturing czar. Moreover, although cases such as NCR and GE are noteworthy, many U.S. jobs are still going offshore. For example, the Whirlpool Corporation recently announced the closing of an appliance factory in Evansville, Ind., amid plans to move less-skilled jobs to Mexico. And in the financial-services and information technology sectors, there is no letup in sight in the rush toward India. IBM, for example, has more than 90,000 employees in its Indian outsourcing operations.

But the logic behind backshoring is compelling enough that it cannot be easily dismissed as a mere short-term aberration. Higher transportation costs as well as rising wages and raw materials prices in China, inevitable by-products of the huge gains that the developing country’s GDP has made despite the global recession, have frightened some U.S. companies away from Asia. An apt illustration: Wright Engineered Plastics Inc., a Santa Rosa, Calif.–based maker of injection molds, has expanded its West Coast plants and decreased its use of Asian facilities because many of its key customers have shifted their own manufacturing operations back to the U.S. in light of prohibitive increases in the prices for raw plastic in China.

Moreover, some companies are amplifying materials and logistics savings from backshoring by modernizing their U.S. plants to outpace Chinese facilities. Such is the case with Diagnostic Devices Inc., a maker of blood glucose monitoring systems. In August 2009, the privately held company based in Charlotte, N.C., announced that it was moving the manufacturing of its Prodigy line of audible glucose monitors to North Carolina, ending a five-year agreement with a contract manufacturer in China under which Diagnostic Devices sent components overseas and then had the finished devices shipped back to the United States. By automating its U.S. factory with robots and other high-tech hardware and software, and by taking advantage of lower shipping fees for a mostly local customer base, Diagnostic Devices reduced its production budget by 40 percent. And there is an added bonus, according to a company spokesman: “We will also have far more control over and protection of our intellectual property, which you don’t have in China.”

NCR’s decision to backshore goes well beyond dollars and cents — and, in fact, may provide the most convincing rationale for the gains that backshoring can produce. The ATMs being made in Columbus now are NCR’s most sophisticated, capable of scanning checks and cash and eliminating the need for the customer to fill out a deposit slip. This feature has provided a welcome revenue lift for NCR — bringing in as much as US$50 million a year, significant for a company with $5 billion in annual sales. But these machines likely never would have been developed had large customers like JPMorgan Chase and Bank of America not persistently prodded NCR to move in that direction. That type of potentially profitable interaction between NCR and its customers is difficult, and launching desirable new products is slowed considerably, NCR’s Dorsman says, when the manufacturing facilities are offshore. “We take our cue from our customers,” says Dorsman. “They are heavily involved in the development process. And with this new approach we’re taking, we can get innovative products to the market faster, no question.”

NCR also found that having Flextronics manufacture high-end ATMs in Brazil — and relying on the vendor’s third-party suppliers, many of which NCR was unfamiliar with — left important internal constituencies in the dark, further slowing and complicating new product launches. Hardware and software engineers, sourcing executives, manufacturing and operations staff, and customer service managers all had trouble applying their expertise throughout the many remote handoffs between separate organizations.

Despite backshoring’s growing appeal, it’s hard to call it a trend yet. Indeed, most Western CEOs remain convinced that offshoring and outsourcing are still the least expensive approach for manufacturing products — and notwithstanding recent anecdotal evidence to the contrary, their position is rigid. For example, Boeing CEO James McNerney Jr. still clings to a radically outsourced supplier model for the company’s wildly ambitious 787 Dreamliner aircraft even though the plane is more than two years late and is facing numerous customer cancellations because of supplier glitches in distant factories. Of course, CEOs are also attracted to offshore destinations because the manufacturing tax breaks offered by governments in many developing countries are more generous than those granted by the United States.

Author Profile:

via The Case for Backshoring.

But what may be at stake in the schism between offshoring and backshoring is a company’s long-term ability to innovate. The making of commoditized staples like shoes, clothing, and consumer electronics will mostly remain in Asia. Backshoring will be more prevalent at the high end of the technology spectrum, in industries such as telecommunications and health care that are sensitive to quality and fast product cycles or in cases in which companies feel they can profit from getting immediate and ongoing feedback from U.S. customers. Those aspects of manufacturing, many experts believe, are where the best opportunities for earnings growth lie. “That’s where we can be competitive,” says Ron Hira, associate professor of public policy at Rochester Institute of Technology and coauthor of the 2005 book Outsourcing America: The True Cost of Shipping Jobs Overseas and What Can Be Done About It (with Anil Hira; AMACOM).


The Elusive Right Path to Offshoring Engineering

First it was IT and transactional functions. Now its Engineering’s turn.  Same horse, different rider. If you have followed the whole offshoring conversation, there is nothing new here but this article is a tight and tidy summary of the pitfalls and some of the considerations.

I’m a Total Cost of Ownership (TOC) fanatic, so I tend to remind folks that is not just about the immediate cost.  Always step and look that the big picture and the affect of “collateral damage”, remedial activity, governance, contingencies, insurance, additional overhead, etc…  All those costs are part the decision and the cost in going offshore.

Now if you’re really super-cool, you’ll also do some formal risk analysis and weigh the cost of failure(s) and value key intangibles into your decision model.  Heh, but that’s for the advanced class…

BTW, I thoroughly enjoy reading strategy+business, strongly recommend.

The Elusive Right Path to Engineering Offshoring
Farming out product design and development can be a risky venture, as many organizations have learned the hard way. Here are five steps to making it work.

Few companies today would hesitate to outsource routine operations like IT services, call centers, or back office functions, but farming out engineering and product development is difficult or off-limits for most companies, and rightfully so. By their very nature, engineering and R&D are mission critical. What comes out of these units — the hits or misses, the innovation or lack of it — often determines the future of the larger organization. Letting another company, particularly an enterprise thousands of miles away, handle engineering tasks could be an invitation to disaster. Everything from knowledge transfer — dispensing a company’s design and development procedures and preferences to an outsourcing firm — to quality of work may suffer when the supervision of far-flung engineers in offshore locations is left to vendors often woefully ill-equipped to manage complex projects or adequately meet the client company’s needs.

Yet, despite its clear downside, engineering outsourcing has been slowly gaining in popularity over the past decade and is expected to be a business worth US$150 billion a year by 2020, which would make it five times larger than it is today. In most cases, companies are seeking to cut costs for an expensive activity. Engineering R&D can run anywhere from 3 to 10 percent of revenues, depending on the industry.

Western companies are also increasingly interested in tapping local engineers in emerging nations to develop products suited in culture and language to the needs of consumers in areas of the world where sales are growing. When companies fail to outsource these activities to regional operators, wasteful errors occur that would be laughable if they weren’t so expensive to mitigate. For example, a German machine tool company recently attempted to design, entirely in Europe, a product destined for the Brazilian market. As a result, drawings, service manuals, and equipment tags were improperly translated. One instruction was supposed to read, “Advance the ram,” but was translated into Portuguese as “Squeeze the goat.” That mistake and many similar ones ended up costing the German company dearly in reworking tags, text boxes, callouts, and service manuals and hindered sales of the new product in Brazil.

The largest engineering offshoring country is India, with about 25 percent market share, but China is also a big player and its influence in the sector will increase in the coming years; together, India and China graduate more than 800,000 new engineers each year, most of whom are willing to work at pay scales far below those enjoyed by their Western counterparts. The Philippines, Malaysia, Thailand, Brazil, Hungary, Ireland, and the Czech Republic are also notable engineering outsourcing countries. As for client firms, North American companies are the primary engineering outsourcers, accounting for 70 percent of the business, with Europe and Japan responsible for the rest.

Given that more and more companies will likely see the financial virtues in engineering outsourcing, which will overtake their hesitation about entering into such an arrangement, it’s worth considering what it takes to do it right. A successful program is predicated on doing five things well.

1. Choosing the Right Project
The best candidates for offshoring are engineering jobs whose scope, roles and responsibilities, and hardware and software needs are clearly delineated; that require minimal face-to-face interaction between clients and offshore resources; that require no interaction between offshore resources and end customers; that have carefully documented task maps and testing procedures; and that do not involve proprietary or classified activities.

Many companies make the mistake of picking projects to offshore by cost or complexity — the most expensive and tedious are farmed out. Unfortunately, it is only by luck that these criteria can produce successful projects. This was borne out recently when a consumer goods company decided that only the most costly engineering activities should automatically qualify for outsourcing, in part because the company believed their high price indicated that they were arduous and difficult to manage internally. But the project failed, producing no cost savings, precisely because the company was unable to grasp that managing the complexity of the engineering tasks required significant in-person interaction between client and vendor, as well as substantial vendor-supplied on-site resources. Moreover, the offshore vendor was attempting these difficult engineering tasks for the first time, adding a greater dimension of risk to the project.

2. Identifying the Appropriate Business Model
Typically, offshoring models for IT services or business processes are either vendor-run operations or captive arrangements, in which a company opens up its own offshore subsidiary. However, because engineering is a core function, many more models are possible that give companies a bigger stake in the remote operations and more control over the R&D activities. Besides vendor and captive sites, other approaches include captive with staff augmentation resource (a company has its own remote engineering facility that employs some staff from outside vendors); closed JV (a joint venture that exists only to serve the client company); tripartite JV (a joint venture among three companies — the client, the outsourcer, and an engineering design firm); open JV (a joint venture that serves the client company as well as other outfits); BOT (build, operate, and transfer — a vendor builds, runs, and staffs the outsourcing operation for the client for a period of time before selling it to the company); and reverse BOT or R-BOT (the client builds, runs, and staffs the outsourcing operation for a period of time before selling it off to a vendor to continue to operate it).

Each model has its pros and cons. For example, although concerns about protecting intellectual capital can be allayed by choosing the captive or the closed JV model, the level of investment and management to oversee either of these arrangements is often significantly higher than a straight vendor-run approach. As a result, companies that choose vendor-run models often do so for strategic value, such as tapping into the outsourcer’s mechanical engineering skills or to get access to an emerging market. In those cases, to the greatest degree possible, the client company would likely allow only in-house personnel to access intellectual property.

3. Teaming Up with the Right Vendors
The capabilities of the engineering services company should matter even more than price in selecting outsourcing partners. A low bid by itself is a poor predictor of whether a vendor can actually meet the requirements of the project. Companies considering engineering outsourcing should do a capabilities assessment through a carefully designed request for quotation (RFQ) or request for proposal (RFP) that includes questions about the vendor’s expertise in supporting the engineering processes required in the project; the number of full-time employees and the skill sets they possess; employee attrition; the vendor’s business model, experience, and pricing structure; and the anticipated number of resources needed on-site at the client’s facilities to learn the culture and tasks and transfer them to the outsourcing location (if many people are needed to support this aspect of the venture, it could raise the cost of the project significantly).

In a perfect example of how not to put together an RFQ/RFP, a U.S.-based Tier One automotive supplier distributed a skimpy, single-page questionnaire to seven offshore and onshore engineering vendors. Because the company showed little eagerness to have the vendors detail their true capabilities in a uniform way so they could be compared with one another, the exploratory process had little value. As a result, incumbent onshore vendors that were well known to the client won the bid and offshore companies that were considered the top experts in the field were shut out.

But the RFP is just one step in picking the right vendor. Once the top five vendors are identified through the questionnaire process, a robust interviewing and negotiating effort must follow. Companies should closely review vendor presentations related directly to the job at hand, visit vendor sites at offshore locations, and have numerous rounds of discussion relating to process, task completion, price, and ability.

4. Creating Iron-Clad Performance Metrics
Just as employees on the job are evaluated, the performance of contract companies must also be assessed. Surprisingly, in only rare instances do clients and vendors establish specific criteria for measuring performance, and when they do, the criteria are hardly ever enforced. Two approaches to metrics should be employed: service-level agreements (SLAs), which include incentives for good performance and penalties for underachievers, and key performance indicators (KPIs), which lack incentive plans. In general, it’s best to limit the SLA to three or four tangible and measurable items, such as project timing and scheduling or budget performance. By contrast, KPIs should reflect aspects of the job that can be readily monitored, such as employee attrition or the length of time it takes to resolve a problem. If improvements are needed in KPIs, they should be negotiated in collegial, not legalistic or contentious, discussions.

To their detriment, many companies define SLAs loosely and leave too much to interpretation, making these agreements difficult to enforce. Alternatively, client companies feel that negotiating or determining the best metrics to track is too time-consuming, so they choose easily achievable benchmarks or agree to the performance levels proposed by the vendors. Either way, the relationship sours when a couple of projects fail and the client company attempts to penalize the contracting outfit for failing to live up to the SLAs.

It is critical that SLAs and KPIs are planned, negotiated, and agreed on before the contract is signed. Contracts should include clear and concise definitions of expected work and performance levels; quantifiable and measurable benchmarks; who tracks performance, when, and how; how frequently these agreements are reviewed and perhaps renegotiated; and, in the case of SLAs, incentives and penalties.

5. Establishing a Strong Governance Structure
Governance is the most important pillar. Strategic and cost initiatives, including engineering outsourcing, are better managed when they are supervised by an executive who champions the project. In the case of engineering, the vice president of engineering or product development is the likely candidate to take on this job.

But the governance structure must go beyond just a single individual assigned to the effort. The most effective setup for an engineering outsourcing initiative includes a steering committee composed of key executives from both the client and vendor companies; a program management office made up of senior managers from IT, finance, engineering, and purchasing, among others, to review the project monthly or quarterly; and at the bottom of the pyramid, execution teams, including the client’s project managers and the vendor’s project team, to oversee daily and weekly activities.

One of the common mistakes that companies make in engineering outsourcing is failing to create a separate governance structure. More often than not, these initiatives are led by a vice president with multiple responsibilities and little time to pay much attention to the offshoring program. As a result, outsourcing-related issues are dealt with perhaps once a quarter under the umbrella of an operational meeting, which includes a slew of other organizational issues. The amount of time spent discussing any of these issues is usually driven by the urgency of the matter — projects in crisis get the most attention — and not its long-term importance. Such omnibus operational meetings are the wrong venues for granular discussions about outsourcing and whether it is delivering the anticipated value to the company.

A clear governance process not only increases the efficiency of sourcing initiatives but also ensures that objectives are met and financial benefits are realized. In addition, it can ensure that disputes and conflicts involving the engineering outsourcing agreement are resolved quickly, with little strain on the organization, and that the long-term relationships with contract companies are strong.

Clearly, engineering outsourcing comes with an array of risks that make it unpalatable for some companies. However, used wisely, engineering offshoring can give a company significant leverage over competitors, not only in lower labor costs but also in product and process innovation and through gaining a foothold in emerging markets. But given how critical engineering is to product design and development, offshoring and outsourcing cannot be taken lightly. By following the right steps, a robust and productive offshore engineering initiative can be built that will deliver the right outcome.

Author Profile:

  • Vikas Sehgal is a partner with Booz & Company based in Chicago. He specializes in product strategy, innovation, emerging markets strategy, and globalization for automotive, transportation, and industrial companies.
  • Sunil Sachan is a principal with Booz & Company based in Chicago. He specializes in engineering offshoring, globalization, product development, and innovation, with a focus on emerging markets.
  • Ron Kyslinger is general manager of manufacturing and director of corporate strategy for Comau Inc. Previously he was the senior manager of business strategy for Chrysler Corporation reporting to the office of the chairman.

via The Elusive Right Path to Engineering Offshoring.

  • Also contributing to this article were Heral Mehta, an associate with Booz & Company in Mumbai, and Sreedhar Vangavolu, a contractor with Booz & Company in Detroit.
  • Evolution of Solvay Shared Services; Recognizing ‘total cost’ as a real factor

    I just posted a discussion of Total Cost of Ownership and here is another example of its power.  I’ve underlined the relevant paragraph below. I also like his discussion on “nonsensical behavior” in the second to last response (“quality indicator”).  How often have we seen that!!  Process for the sake of process without regard for the actual total cots to the business.  Ugh, I’m getting flashbacks….


    Evolution of Solvay Shared Services; Recognizing ‘total cost’ as a real factor

    Reengineering before shared services implementation pays off. Interview with Guy MERCIER, Managing Director, Solvay Shared Services

    By: Barbara Hodge, Editor, Shared Services and Outsourcing Network (SSON)

    Guy Mercier is managing director of Solvay Shared Services — 3S — having previously held a number of senior financial roles within the Solvay. As head of 3S, he has spearheaded not only top-ranking results, but also a renewed definition of what cost means to the shared services group, and to the business as a whole. Here, he speaks with SSON’s Barbara Hodge, offering a glimpse of what he’ll be sharing with delegates at the Shared Services Exchange in the Netherlands, 6-8th December 2009.

    SSON: Mr. Mercier, thank you for taking some time to speak with us. To start, would you explain how 3S came to be?

    GM: Gladly. Let me begin by explaining our set-up to you. Solvay’s organization consists of three types of units: First, we have the traditional strategic business unit, which includes everything related to sales, production, and logistics. Second, we have what we call ‘competence centers’ relating to expertise which Solvay would like to retain inhouse. These specialize in strategy, policy, market surveillance, R&D, process design, etc. Third, all that remains, ie, that which is not directly related to the business or at the level of expertise of competence centers, is classified ‘business support center.’

    These BSCs originally included IT, HR, finance, and procurement. The idea was that if the processes were not exclusively dedicated to one business, then they were more transversal. And it was in this area that we launched our re-engineering project, which we called ‘shape 3S,’ five years ago.

    Shape 3S was the process by which we moved towards what is today ‘3S’  – namely Solvay Shared Services. We wanted to optimize certain processes by redesigning them, and including the concept of a single support center. That is where we are now: 3S today runs finance and HR services for the Solvay group mainly in Europe for Chemical & Plastics sector and globally for Pharmaceuticals.

    SSON: So, what determined which processes went into 3S and which stayed in the BSCs?

    GM: A good question. Not everything is a good fit for 3S. Using the traditional criteria of what was ‘ transactional and repetitive,’ we qualified certain activities as suitable for 3S based on scale and maturity of the process targeted, but determined that other activities needed to remain closer to the business, as they were too country specific, and so these processes stayed in the local business support centers.

    To explain this, I really need to go back 10 years, when the Solvay group went through a strategic realignment. The result of this was that the group was divided into a) ‘market- and product-oriented businesses ‘ b) ‘expertise-oriented businesses’ and c) ‘support businesses.’ Hence, the group emerged as business units, competence centers and business support centers.

    The concept of shared services actually emerged under the leadership of Finance, which was already well-matured, mainly because of the advanced migration of SAP. Leveraging the SAP platform, the CFO at the time recognized an opportunity to redesign many of the financial processes, which were being run from the business support centers, and arrange them into either transactional,’ meaning repetitive; or ‘specific’ processes — whereby specific could relate to business-specific or country-specific. If the work was deemed ‘specific,’ it was out of the scope of ‘shape 3S.’

    We dedicated 50 of our financial experts and local accountants to this project, who were supported by three consultants. They spent almost two years untangling and redesigning our financial processes. By the time they had finished, we had gained some real competitive advantages through this approach, far beyond what might have been gained through just SAP optimization — ie jumping straight into shared services. Using ‘shape 3S’ as a driver, our strategic approach was to re-engineer first before migrating processes to the 3S SSC.

    SSON: And what are the results you’ve been able to achieve through 3S?

    GM: ‘Shape 3S’ proved to us that there were tremendous synergies to be gained — not just in terms of process efficiency but also in terms of cost effectiveness — by running the transactional elements into a shared services organization. So that is what we did in 2005.

    Two years after full 3S deployment, so that brings us to 2007-2008, we achieved fantastic levels of optimization in SAP. For example, through tools like ‘schedule manager’ we’ve been able to gain two days in closing the books — moving from D+7 to D+5. And now we are dreaming of D+3!

    So, as far as Finance goes, 3S is a real success — weve achieved more than 43% savings, and we’ve migrated 95% of AP processes to 3S. The remaining 5% will remain local, in BSCs, for now because of the procurement element. Procurement, right now, is still considered too specific to the local business to centralize. We’ll need to move to e-procurement and e-invoicing to gain additional optimization in this area.

    In terms of closing the books: we’ve migrated 50-60% to 3S. In fact, we want to keep 40% local, because we want each finance manager to remain the owner of the books  – ie, 3S won’t be doing statutory accounts.

    SSON: So you have opted to drive 3S geographically instead of widening your scope, is that right?

    GM: Yes, absolutely. While other shared services centers choose to go broader in service scope, but not as deep in terms of geographical expansion, we chose to limit ourselves to transactional processes, but delve deeper into geography. I believe the big savings are gained in the redundancy of the transactional element.

    SSON: It sounds as if much of what you’re achieving with 3S is based on years of preliminary work. I mean that you spent a lot of time analyzing and re-engineering before moving to a shared services environment. And it seems the results are more powerful for this?

    GM: I would agree. Here is an example. In AR, right now, I believe our center is among the best in the world. However, this is based on some work with cash collections, which we started 15 years ago. At that time, so well before 3S or Shape 3S, we implemented a factoring center called CICC — Commercial International Cash & Credit — which I headed at the time. We collected all receivables from all Solvay affiliates world-wide, and paid back the amount on the next day, in the local currency and at a discounted rate. As a result of this, we managed all treasury activity, all invoices, and all collections.

    Today, in 3S, we are doing all the cash reconciliations for that center. I am proud of our results: on a monthly turnover of 400m Euros, we have, on average, less than 200,000 Euros unreconciled, after 48 hours. That is an excellent result, I think anyone would agree, and it is the result of many years’ progress in SAP.

    But underlying these results are a few things. First, we have Solvay Commercial International, an affiliate that delivers electronic invoices to customers. They own the delivery, the logistics and the order transfer, and manage the inventory globally for most of the products. On top of electronic invoicing, we have assignment of receivables to a factoring center; and on top of that we have an integrated SSC, using state-of-the-art SAP for automatic reconciliation, and bank file transfers being done overnight.

    SSON: So what is the true value of 3S to Solvay today? How do you measure it — in cost savings?

    GM: What I’ve just described are competitive values. Beyond that, cost reduction is a consequence of how you work. It does not need to be the only driver. If you make cost the driver, you’ll miss out on opportunities to invest in breakthrough competitive advantage, quality management and continuous improvement to move to another level of competitiveness not just in cost but also in quality and reliability.

    Most SSCs are still looking at reducing primary cost. They are using enough value creation to generate long-term savings. But the challenge we have is that in these SSC markets, the businesses aren’t buying long-term value these days — rather, they prefer short term ‘cash savings;’and I understand them. We have to keep the right balance because, after all, we in shared services are in it for the long run, too.

    I prefer to work on the concept of total cost. It’s a well-known concept  but not always well-used! The idea is that you measure, from the shared services perspective, the total cost of running transactions end to end. It’s almost akin to a business transaction, if you think about it: You buy, sell, deliver, produce, collect money, reconcile etc. You have to see it from the concept of macro-process versus data processing.

    Most people are focused only on the unit cost of processing a transaction. This is not the same thing. You can indeed make the artificial argument that you can drive the cost per transaction down to almost zero if you only take into account the incremental cost to process a transaction in a shared services center. Because it’s true that you need only a couple of seconds, at full automation, on a computer so well-depreciated or outsourced that you cannot even put a number on it. So, the absolute target for processing transaction could become close to zero. Today, the best in class are close to, or below, $1/invoice processed — but with full e-procurement, e-invoicing and automatic matching by the computer. What about the other, indirect costs generated in the business to arrive here?

    Does that mean that we will all have to achieve a zero cost level? No! Total cost includes the physical as well as the intangible, digital part of running the business — direct and indirect costs. Optimizing the digital part simply means running your transactions. But you need to add to this the cost of reporting, of measuring efficiency, of optimizing processes, fixing exceptions; etc. Add to that some qualitative subjective elements, namely ‘responsiveness’ and the ‘quality indicator’ — and you have the indirect cost of running your shared services business, too.

    SSON: What do you mean by ‘quality indicator?’

    GM: To understand that, let’s look at the ‘non-quality’ indicator, which is important. It drives perceived non-quality for our customer (the opposite of ease of use and full reliability). As much as we measure quality ratings and achieve high percentage scores on our KPIs, etc, a ‘perceived non-quality’ does sometimes remain with the business when they work with our SSC. This perception stems from: exceptions which are difficult to manage; unnecessary or redundant questions sent back; desperate searches for urgent payment solutions; or simply too many tickets going back and forth. This represents a cost. It results in lower customer satisfaction, even pain, but also in real money to the business. It means for example that, ‘yes, you pay the invoice on time; but if it requires three calls, tickets or questions, the business will perceive your service at a good price, true, but at lesser quality — generating higher indirect costs for them which you may not be aware of.’ And this, despite the fact that you are hitting your well-known KPIs.

    Think about it: shared services enjoy the best reputation when no-one hears any complaints, right? That means the level of perceived non-quality is right at the tolerance level, and is not worth raising.

    Another thing to bear in mind, in terms of ‘cost to the business,’ is that standardization is great — but we are pushing it, sometimes selfishly, to the limit of the absurd. Take, for example, ordering material — say a book — online. Do we really want to take a Chemical PhD engineer in a research center off his or her job for half a day’s training, just so that they can enter a purchase order to buy their own books online? Is that a good use of their time? No! Think about what it costs the business. It’s a huge cost!

    At the root of this phenomena is standardization pushed to the extreme — by universal rules like the requirement for a three way match, in a perfect world: you need to pay to have a purchase order equal to the invoice equal to goods receipt in all terms. But everybody knows that the business world is not that perfect, because it needs some natural flexibility to adapt quickly to market conditions.

    Pushing desperately for this standardj forces the kind of nonsensical behavior I’ve just described. Focusing on perceived ‘non-quality’ issues helps you change such behaviors. At Solvay, I’ve proposed to introduce new rules for small value purchased items: under 1000 Euros [about US$1,460], we skip the ‘goods receipt’ part of the match. I pay automatically based on e-procurement, knowing full well that if the ordered item is not delivered, someone from that department will raise a complaint or the alarm. So we wait and make the correction when the need arises, instead of trying to control all goods receipt. This is far more cost-effective for the business.

    SSON: Many people are talking about increased partnering with the business units and making costs more transparent. It shifts some of the focus from just shared services to operating as part of the whole, right?

    GM: Sure. At the end of the day, competitive advantage is based on the total cost of running the transaction which is only a part of the cost to run the business. We need to remember that we serve the business. So we have to partner with the business in lowering its total cost  – not only our SSC operating cost. That is a crucial differentiator for SSC, whether in-house or outsourced — to be considered as a real business partner. I think that is only just beginning to be understood.

    SSON: Mr. Mercier  – thank you so much for taking the time to outline your work with 3S for us.

    Guy Mercier will be speaking at the Shared Services Exchange in The Hague, Netherlands, in December 2009.

    via Evolution of Solvay Shared Services; Recognizing ‘total cost’ as a real factor.

    Top Ten Mistakes Made When Offshoring [not just IT]

    Another bandwagon that’s coming full circle.  Just like in high school, everyone needed to do this just because that’s what all the other girls are wearing.  If got to the point that one was continually challenged as why we are not doing it.  Panacea are such wonderful things.

    The topic of  “sourcing” is so similar to that of “Manged Services”.  In both situations, the TRUE Total Cost of Ownership (TCO) is VITAL in the decision making process.  Even if all your competitors are doing it (or not doing it), that is not an indicator that its the right path for your company.  Look — every company is a unique entity; go back to your Org Behavior 101 textbook to see why.  Also, every company has its own cost structure and unique considerations; any of these variables  can easily drive the same equations to a different conclusion.  (I’m not even going to mention doing a correlation analysis).  Bottom line: you have to look at your unique situation, your true total cost of ownership, and compare that to the total cost of ownership of the alternatives.

    [Now that’s one of may favorite topics–total cost of ownership.  Learned that one in the mid 1980’s in the DOD Acquisition Corps.  I am so amazed (and disappointed) at how such a powerful concept is ignored or worse yet manipulated to satisfy personal agendas.  Engineering and tech folks  seem to have such difficulty in talking to CFOs.  That shouldn’t be.  Learn TCO, decision trees, and few finance concepts such as: apportionment, absorption, realization, materiality, Time Value of Money, and accrual.]


    Top Ten Mistakes Made When Offshoring

    Our experts look at some of the most common errors companies make when transferring work overseas

    By: Jamie Liddell,

    Sending work offshore can be a valuable tool for firms looking to enjoy the benefits of labor arbitrage, increased geographical penetration and strengthening ties with national governments. It can also be a nightmare. Done incorrectly, offshoring can undermine the very foundations of a company with bills that could draw tears from a stone. It’s amazing, then, how often it all goes pear-shaped…

    The Shared Services & Outsourcing Network asked a number of experts for their thoughts on the most common, and the most potentially dangerous, mistakes companies make when sending work offshore. So here it is: the SSON guide to the Top Ten Mistakes Made When Offshoring. Recognise anything?

    1. Not allocating sufficient time and resources to transition

    Especially when cost-savings are a primary driver, there’s an understandable impulse to get an offshoring move completed as quickly as possible. The organization’s biggest cheeses – not to mention the shareholders – may find it hard to resist the temptation to push hard for a speedy transition so the big move can start demonstrating cold hard gains speedily (as cash spent on the transition – especially to a new captive center – tends to be seen as dead money). However, that way lies if not madness then at least the risk of creating significant, and potentially very costly, difficulties in the longer term.

    “Oftentimes companies consider offshoring as part of a cost -cutting exercise,” says Steve Reynolds, MD North America at WNS. “Savings needs to be substantial and delivered as soon as possible.  Unfortunately, this results in an accelerated time for transition which can short cut the required processes for moving complex work offshore.  The average tenure in a shared services center should not be ignored and process mapping and documentation cannot capture every detail of a process.  Gaps are filled by sending the right number of staff for the right amount of time to observe the processes in the SSC location.  In addition, subject matter experts from the company should plan on spending a substantial amount of time in the offshore location insuring that training is done accurately and be available for escalation during ramp-up and production cut over.”

    2.  Not making the appropriate choice between outsource and captive

    Offshoring work can be done whilst keeping it within the organization, or of course as part of an outsourcing deal. There are pros and cons to either solution (and indeed to the hybrid model as well). However, companies sometimes make the mistake of looking at offshoring itself as the key to solving the particular problems they’re addressing, without looking fully into all the options as to who might be best-placed to carry out that work once it’s been sent overseas. There might be overwhelming advantages for some firms in retaining the work within a captive set-up; similarly, outsourcing might be a preferred option for others. The critical issue is that in many circumstances the outsource/captive decision might well be a more important one than the onshore/offshore debate; simply voting for “India” or “Malaysia” over onshore locations isn’t taking a sufficiently big-picture perspective.

    “The threshold issue is, of course,” says Peter Brudenalll, partner at Hunton & Wiilliams, “whether to ‘go it alone’ and establish a captive or to use a third-party outsourcing vendor.  Clearly, if a company is a large, well-known organization with intellectual property or data too core to the business to be outsourced then there is a very good chance it will be able to succeed in running a captive in an offshore location.  However, captives can struggle to succeed where there is a lack of management expertise on the ground and a high attrition rate among employees.  Attrition rates can be extremely high in places such as India where there is always a wealth of opportunities for talented individuals to change companies.  If a company is not well-known, or is not able to provide its staff with a distinct career path, then attrition rates can start to become a big issue.  It should also be recognized that salary costs have risen in India over the last few years so establishing and running a captive may not necessarily generate the cost savings anticipated in the original business plan.”

    3. Having insufficient disaster-recovery plans and backup

    It’s a dangerous world out there – and with climate change and associated socio-political instability looming, it’s probably only going to get more so – and moving work and resources to a new location means having to prepare for new dangers. Even over the past few weeks we’ve seen catastrophic natural calamities in the Asia-Pacific region (including devastating floods in the offshoring hot spot of the Philippines) damaging infrastructure and placing serious obstacles in the way of beleaguered workforces. Failing to plan correctly for negative phenomena is an unforgivable sin that tends to be uncovered only when it’s too late to be redeemed. Don’t be a sinner.

    “Earthquakes happen. Flooding occurs. Underwater cables get knocked out. Water disputes on regional borders can cause strikes. Ageing thespians can die. Be prepared for the unexpected. Items like this can strike, and have in our experience struck, when you least expect them. Make sure that you can quickly leverage resource elsewhere to another center or back up SSC location or move to a backup plan at a fast turnaround time. Ensure your key local employees in the new offshore operations have laptops and can work remotely if required. You do not want to be the one having to explain to your CFO at a month- or quarter-end, that you cannot close the books or process key transactions, just because you have not thought of adequate business continuity.” cautions Chris Gunning, Director Global Shared Services, Europe, Bangalore and Asia Pacific regions at Unisys.

    4. Skimping on the due diligence

    There’s no excuse for this one. Whether investing bundles of precious cash in an offshore center or handing over key processes (and more precious cash) to an outsource provider, failing to carry out the requisite due diligence isn’t just asking for trouble, it’s walking up to the counter, slamming your fist down and demanding it. An organization needs to be as diligent as possible even at the expense of a delay in implementation. No matter how close the relationship between buyer and provider, or how confident an organization might be in the integrity and stability of a proposed new location, the due diligence must be seen as an indispensable part of any offshoring process.

    “In offshore arrangements, particularly when outsourcing to a third party, the importance of due diligence on the vendor cannot be underestimated. We always advise clients that they must visit offshore sites so that they fully understand where the services will be provided from, and what security arrangements are in place. [When outsourcing] nterest from a senior level in the customer’s organization is essential to this process, and will also assist in getting the contract negotiations concluded, rather than both the vendor and customer beating each other up to obtain small wins while the big picture gets lost,” says Hunton & Williams’ Peter Brudenall.

    5. Lacking a corporate offshoring strategy

    Offshoring is a major proposition with major consequences. A failure to look at this proposition holistically across the organization means some of these consequences could impact negatively on areas which might have been off the radar for those behind the drive to offshore who might have their own horizons limited by their own responsibilities. A corporate offshoring strategy will allow the company to make the very most of their offshoring while preparing everyone within the organization for the changes which are about to take place.

    “Companies can no longer allow every process manager to determine their own strategy when outsourcing,” warns WNS’ Steve Reynolds.  “The complexity of multiple agreements, minimum volume commitments, disparate terms, multiple locations, lack of BCP, etc. quickly erodes the expected savings.  A company quickly becomes frozen trying to manage and meet commitments across too many suppliers.  A much better approach is for senior management to think through a high level strategy of what is to be outsourced, what can go offshore, an ideal set of vendors to utilize, optimal locations, and expected results.  Once this strategy is in place, procurement can then determine the appropriate set of suppliers.”

    6. Letting advisors and attorneys lead the negotiations

    It’s a common problem when outsourcing, particularly when work is to be sent to locations into which the organization doesn’t already have commercial penetration: allowing the legal eagles to drive the conversation during negotiations. Now, it’s obvious that legal representation at negotiations is indispensable (and having a good stable of experienced advisors on your side is increasingly de rigeur): but it’s imperative that negotiations proceed according to the interests of the organization – and that means the organization leading negotiations and being supported by its advisory team, not the other way round.

    “During the negotiation of the agreement between a vendor and a client, all too often, the customer takes a back seat during the discussions allowing the advisor and/or attorney to take the lead.  Many times, the customer isn’t even present.  The result of this style of negotiation is a substantial increase in the amount of time to negotiate an agreement due to battles being fought over every term and condition whether big or small. One would assume that a client would get a better agreement but in reality it’s the opposite.  The spirit of partnership is typically lost as both sides dig in their heels. Attorneys and advisors should give advice and/or an opinion then get out of the way and let the customer and vendor figure it out,” advises WNS’ Reynolds.

    7. Not creating sufficient visibility around offshore operations

    Sending work offshore isn’t getting rid of responsibility – especially if you’re operating a captive center. The adage “out of sight, out of mind” when applied to offshore work is a recipe for the kind of disaster that leaves hardened professionals weeping into their whiskies. Offshore operations need to be highly visible – to encourage engagement among many other reasons – and must not at all costs be seen as anything other than an indispensable aspect of global operations. Keeping your offshore work and employees in the dark could mean you’ll be blind to potentially destabilizing events down the line.

    “Just because you have moved work offshore, does not mean that you can hope to disconnect yourself from the new offshore operations. If anything, the opposite must apply.  Be visible. Our captive offshore Global SSC in Bangalore is an integral and key part of our overall Finance operations. They have the same access to employee development and training as every other Finance employee in our company.  Being seen is important. Visit them as often as you can.  Hold regular All Hands Meetings.  Leverage other forms of communications on a daily and weekly basis.  Invite and encourage your CEO, CFO and regional Finance Vice Presidents down to meet the new offshore teams.  Get your customers out to meet them. Stay connected with them. Invite the key members to your own strategy meetings. Engage.  Communicate. Remember, they are ‘the finance of your future’ so nurture and develop your key leaders and team members, as you would with staff in Corporate or Regional HQs, or in your retained captive organizations onshore,” says Unisys’ Chris Gunning.

    8. Insufficient ongoing management

    Just as you can’t hide your offshore operations out of sight, you can’t take your hands all the way off the controls – even if you’ve outsourced the work that’s gone offshore. Ongoing management is essential – after all it’s still your organization that is affected by the work being done, even if it’s someone else doing it. The management of the work itself might be out of your hands to a certain extent – but the management of the contract and its terms, and the management of the relationship itself, shouldn’t be considered any less crucial simply because work’s now being done a few thousand miles away.

    “This is a typical mistake in many outsourcing arrangements, but it becomes particularly bad when made in an offshoring context.  Customers need to understand that any outsourcing arrangement will require them to provide on-going direction and management – not only to ensure that they are actively engaged in the outsourced services but so that they understand how the services are being performed in case they need to very quickly transition those services to another vendor.  In the event of a vendor suffering an event such as that experienced by Satyam earlier this year, or running into financial difficulties, many customers will quickly evaluate the potential reputational and service delivery issues and decide that they would feel more comfortable with another vendor.  Assuming that the legal basis for terminating the agreement is there, only those customers who have a very good understanding of the way in which the services have been delivered will find it possible (let alone easy) to quickly transfer the services to another vendor.  When services are being provided from an offshore location, it can often be even more difficult to quickly transition services to a replacement vendor unless the customer has been actively engaged with the vendor,” says Hunton & Williams’ Peter Brudenall.

    9. Not having clearly defined roles and responsibilities

    Offshoring is complicated enough without the added confusion of people not knowing specifically what they’re going to be doing, where and when. Obviously during the transition period it’s critical that everyone adheres to a well-defined timetable; even beyond that, though, the usual need for shared services staff to enjoy clear role-definitions becomes extra-crucial once distance is placed between the SSO and other areas of the organization – even something as simple as changing time zones can lead to problems at both ends unless people are certain of their own responsibilities.

    “This goes much beyond the need of simple Service Level Agreements (SLAs) or Statements of Work (SOWs),” says Unisys’ Chris Gunning. “Ensure that each of your key team members, including managers and those responsible for delivery of services as well as your process owners,  have cleared defined roles and responsibilities. And for that matter, encourage your customer to do the same for his or her organization. No matter how much governance you have in place, or how wonderful and detailed your SLA and KPI metric structure looks like, if you take your eye off the ball on simple things such as clear role descriptions, and who is actually responsible for the delivery and meeting of those metrics and services, then you will forever be embedded a series of finger-pointing and looking the other way, when trying to make people internally accountable and responsible for their actions, as well as trying to explain to dysfunctional customers, that their C-Sat issue really starts and end with them, and not shared services.”

    10. Not achieving a level of partnership with a vendor

    A successful outsourcing relationship requires both parties to work together. This is just as true – in fact more so – when work is transferred to another country. The buyer organization must trust the vendor to work successfully within a social and legislative environment with which the buyer may have no experience; the vendor needs the buyer to give sufficient support to enable it to take on processes and activities smoothly and successfully. Failing to develop the requisite level of partnership can destroy any outsourcing relationship, let alone one that involves crossing oceans, timezones and international boundaries.

    “Outsourcing has matured to achieve a new level of relationship between a customer and vendor. With many customers, the relationship has gone way beyond a typical customer/vendor arrangement.  For those clients that are able to achieve this level, their satisfaction with outsourcing and offshoring is significantly higher than most.  Both parties are in the game together.  Strategies are shared and the offshore provider is an extension of the clients operation.  Too often, this level of relationship is not achieved resulting in a commoditization of work and inability to achieve the expected transform of the operation,” says Steve Reynolds of WNS.

    via Top Ten Mistakes Made When Offshoring.

    Top 10 Mistakes When Implementing Shared Services

    Having recently led the start-up of a Share Service Center that provides $800MM/year of order-to-cash operations, I can agree with this list. Yet, some of the “mistakes” are unavoidable; it’s all dependent on the environment and culture.

    For example, take item #1: Not measuring costs or service levels before a move to shared services.  Sometimes the very act of determining the existing cost can jeopardize the entire project.  Why?  First, where and how will you get the data and cost model for the present state (pre-SSC)?  Well, usually from the very people that will be losing their jobs.  So, you need to accept that the data and models will need to be thoroughly confirmed and tested.  This resulting effort can extend the overall timeline substantially, which can be a very bad thing.

    Why is that bad? Well, it’s mainly because you are dealing with people and, at its core, this is an organizational change project.  First,  you’re hampering momentum. Its important to leverage all that excitement at the start of any project to break inertia and get the ball rolling. Secondly, accept that the word is out and that the people who are in jeopardy know it. Also accept that those that are not in jeopardy will believe that they are. So, the entire organization’s performance and morale are affected.  I believe it more merciful to pull a band-aide off quickly. Finally, the additional pre-work allows the initiatives’ detractors more time to derail the project. We have all been there and seen politics kill the best ideas.

    Now, if you happen to be lucky and are consolidated several tightly run operations that have proven cost models and associated history; well, never mind.  You are good to go.; just archive it all in safe place and carry-on.  As I said in the beginning, it all depends on the environment and culture.



    Top 10 Mistakes When Implementing Shared Services

    “SSON reached out to some of the biggest names in shared services and outsourcing to get their take on the most common mistakes companies make when setting up shared service organizations…”

    via Top 10 Mistakes When Implementing Shared Services.