Tag: capacity

Outsourcing Success

tomkapostasyLeave a comment

After four decades of outsourcing in many functions and industries, it is clear that success requires more than leverage.  Outsourcing success requires a compelling rationale, a clear and flexible framework and positive personal relationships.

The rationale for outsourcing is based upon core competencies, provider capabilities, economics, strategy and fit.

  1. Buyer core competencies can not be outsourced.  The provider must deliver the outsourced function as a true core competency, not just a low price.  The provider is able to own responsibility for the outsourced function.  The provider has world-class skills and invests in improvements.  The provider is well-capitalized and experienced in the customer’s industry.  There is no beta site or learning by doing dimension.
  2. The provider has the skills and culture to be a third-party provider, including a customer service mentality, flexibility, creativity and change management skills wrapped around professional competence.
  3. The contract allows the buyer and provider to both win financially.  The provider is capable of reducing unit costs each year.  The provider’s initial bid and investment make economic sense.  The provider can justify a fully qualified account manager dedicated to making this contract work.
  4. The buyer has a clear strategic reason for outsourcing and has structured the deal to ensure its delivery.  This can be cost, quality, capacity, service, delivery time, risk management, creativity, technology, systems or intellectual property access.
  5. The hand-off from buyer to provider is a good fit.  Either the function can be very well-defined and delegated cleanly or the function is inherently virtual and both firms thrive in a matrix environment.  The buyer emphasizes product innovation or customer intimacy and the provider delivers operational excellence (or some other clear division).  The provider is able to perform in the buyer’s steady state or high growth and change environment.  The provider is comfortable with the buyer’s status in the Fortune 100, Fortune 1000 or middle market world.

 

The framework for an outsourcing agreement is well-defined, flexible, empowering, balanced and aligned.

  1. The contract is detailed, comprehensive and robust and meets the needs of finance, legal and operations.  The strategic objectives and measures of success are clearly defined.
  2. The contract is a model of world-class delegation.  Important results are defined, but the means to achieving them is left to the provider.  Micromanagement and administrivia is avoided like the plague. 
  3. The relationship between single agents for the buyer and provider is clearly defined.  The provider account manager is welcomed as a full business partner on the buyer’s staff.  A competent buyer rep is assigned to manage the contract, with his career depending upon its success.  The two reps are given the authority and flexibility to manage day-to-day issues.  A dispute resolution framework, including billing, is defined.  The contract supports a wide range of operating conditions and triggers for re-opening negotiations.
  4. The provider has adequate capacity and power in the agreement to succeed.  The minimum and maximum volumes are reasonable.  The provider has a fair economic deal and leverage to negotiate as required.
  5. Contract incentives align the interests of the buyer and provider.  The contract provides time for the provider to digest start-up costs and benefit from learning curve effects.  Each side benefits from greatly increased service volume.

 

The relationship between the buyer and provider reflects a true partnership, shared resources, trust, opportunities and planning.

  1. The partnership anoints the provider as the sole provider of services in their category.  The contract gives the provider reasonable security and expectations of ongoing business unless someone clearly outbids them.  The business is not re-bid based upon opportunities.  The business is not divided by high and low margin components.
  2. The buyer and provider work together to find every opportunity to leverage their skills, suppliers and knowledge.  Terms reflect the firm with the lower cost of capital.  Transaction and billing costs are minimized, assuming good faith.  Everything learned in the bidding process is incorporated into the contract.  The contract recognizes that there are inherent trade-offs between costs and services.
  3. A trusting relationship is developed.  The provider is on-site, attends meetings and communicates with the buyer daily.  The provider has a quality management system that provides confidence.  The provider is transparent in sharing information and risks, including competitive intelligence. 
  4. Both parties actively promote win/win opportunities.  The buyer is an active reference for the provider.  The buyer seeks new products, services and applications from the provider at list price. 
  5. The provider is involved in the planning process.  They attend strategic planning meetings.  They get 90 day notice of annual budget targets.  Both parties negotiate annual changes in good faith.

 

Buyers tend to have greater leverage in outsourcing services.  To achieve the best long-term results, they need to negotiate long-term win/win deals with providers.

Banking in Bedford Falls

tomkapostasy1 Comment

As the Great Recession moves along into its third calendar year, the focus in Washington is on “Financial Reform”.   The backlash at Democrats and Republicans alike over the “bank bailout” continues to grow.  The politicians are posturing to allocate credit for the so-called reforms, but seem destined to “give the people what they want”.  It might help the politicians and the people if there was a shared understanding of the inherent factors universally at play in the home lending market.

I propose that everyone take an evening off and watch the classic 1946 film “It’s a Wonderful Life”, starring James Stewart as George Bailey, the initially reluctant but eventually heroic, manager of the Bailey Building & Loan Association in Bedford Falls.

http://en.wikipedia.org/wiki/It’s_a_Wonderful_Life

The essentials of banking are exhibited in this film.  Bedford Falls is the whole universe.  All of the actors know one another.  The cast is composed of depositors, owners, board members, bankers, borrowers, regulators and landlords. 

There are inherent conflicts between the roles.  Depositors don’t really trust the bank as shown by the bank run.  Landlords would like to see lending restricted to boost rents.  The owners are motivated by self-interest (enlightened or not) and set policy accordingly.  The board seeks a trustworthy banker to be its agent, and provides incentives to attract and retain him.  The banker has fiduciary and personal motives.  The regulators enforce the laws, unaware of all key facts.  The borrowers want loans, even if they can not afford them, in order to escape the costs of the landlords.  People act out of self-interest.  They respond to incentives.  There are trade-offs to be evaluated and decisions to be made.

A bank fills a valuable social role, attracting deposits in order to lend money.  A bank profits by the spread.  A bank is in business to lend money whenever it sees a profitable opportunity, irrespective of the moral concerns of owners, depositors or borrowers.  Banking is subject to real risks such as bank runs.  Banks are subject to poor decisions by bankers, mistakes by employees and fraud by anyone involved in any transaction. 

Historically, banks have operated by the 4 C’s of credit: capacity/cash flow, capital/collateral, conditions and character.  This is especially effective in a small town such as Bedford Falls.  Although George and the audience might hope that every citizen should qualify for a loan, some may not have the earnings to cover the principle, interest, insurance and maintenance of a home.  Some may not be able to save for a down payment to create adequate collateral.  As business conditions change, the income of the citizens is at risk and the ability of the bank to manage its affairs fluctuates.  A banker with a long-term perspective and proper incentives adjusts lending accordingly.  Finally, character counts.  Past financial and personal performance are good predictors of future performance.  Character is part objective and part subjective.

Even in this simplified setting, risks abound.  Public pressure for universal home ownership can result in too many loans.  Regulators can enforce laws mechanically while missing larger problems.  Institutional knowledge can be lost through staff turnover.  A single fraudulent act can threaten a bank.  Changing external business conditions can disrupt the bank.  Lending policies can be too loose or too tight.  Business judgments can be wrong.

The film delivers an escapist, idealist, overly simplistic view of life.  Mr. Potter is the evil bank owner and plotting, fraudulent landlord.  George Bailey is the selfless hero.  Yet, behind the scenes, we have a social institution performing a social function.  We need banks to provide the social function of collecting deposits, allocating credit and collecting from borrowers.  In spite of the vastly more complex institutional structures today, the role of a “building & loan association” is essentially the same.  As a society, we allow these institutions to connect savers and borrowers across varied time frames because this is a necessary function.  Our laws and regulations should be based on this real-world understanding, not upon the simplistic dualism of “good and evil”.