The Effect of Outsourcing on Performance and Change
Striving to be competitive involves tremendous risks. The timing must be right, and the resources must be available. It's costly, and the return on investment might be low. In fact, the entire effort might fail. And someone will be held accountable.
But if another company is better at doing something, its risk is lower. So is yours, if you outsource to that company.
Outsourcing is comparable to the leverage achieved from a fifth wheel attached to the front axle of a vehicle. It's not something "extra," like a spare tire. It's the essential mechanism that supports the body of the vehicle while it negotiates turns. Organizations seeking to focus more on their core expertise in order to be more competitive need an outsourcer to handle their important business processes. By shifting risks onto the outsourcer, they are better able to maneuver the upcoming sharp turns in their business objectives and evolving marketplaces or technology.
The Challenge of Resources
Steve Welch, vice president of sales for Advanced Technology Services (ATS), believes that a primary reason to outsource is to inject an element of change into a business. His company provides both onsite and offsite maintenance and technology support primarily for manufacturing enterprises. Caterpillar, Motorola, Honeywell, Saturn, GM, Ford and Chrysler are among the thousands of companies that get more productivity out of their computer systems and manufacturing systems because of ATS.
Manufacturers are faced with the challenge of making products better, faster and cheaper, which only puts more and more stress on their resources. Increasingly they look to outsourcers to help them do it. Maintenance plays a large role in the assets ownership items on a balance sheet. Welch says, "The role of maintenance is really to maximize the revenue stream and profit stream that you can generate from your fixed assets. If I can provide good maintenance for a fixed asset, then it will run better, generate more revenue, and last longer before I have to either rebuild it or buy a new one."
Time to market is a real problem for companies with limited assets. It's not unusual for a company's maintenance department to request funding for the next year, only to be turned down. Maintenance, after all, is not viewed as a manufacturer's core competency, so it's not the focus of additional resources.
In fact, Welch points out that many manufacturers now no longer view manufacturing as their core competency. "We are seeing that in the automotive industry and in the heavy equipment industry. For example, we do a lot of business with Caterpillar and we are finding that more and more of their plants that used to manufacture a lot of discreet components are no longer going to do that. They are going to be an engineering, assembly and marketing company and not necessarily a manufacturing company. In the automotive industry, we are seeing the Big Three really becoming assembly companies and marketing companies more than manufacturing companies."
There is a shift in the companies that turn to outsourcer ATS today. No longer are they just companies with "a mess" in their parts or storeroom or a lack of skilled technicians and management skills. Companies now admit "they have limited time, people and money and can't get things to where they need to be fast enough. Even if they do maintenance well, they realize they need to focus more on core."
Technology is the driver of change in the world of maintenance, and Welch sees that this industry that used to be people based is becoming less and less dependent on people. "This maintenance industry is not one that is being replenished very quickly right now. People are not telling their kids to go into maintenance. And there is no one in the pipeline right now to replenish a very old maintenance industry; the average maintenance guy in the U.S. right now is 52 years old," explains the ATS vice president.
Maintenance -- like many important, non-core processes -- often has not had to be accountable for what it does. Welch says maintenance usually "doesn't have the wherewithal, the methodology and the means to self-justify. Because of the way ATS collects data and converts data to charts, metrics and information, we are able to show our manufacturing customers the value that maintenance really brings to them. They don't realize the value. If you ask most manufacturing people, they'd say that maintenance is nothing but a necessary evil."
Keeping things running used to be the purpose of maintenance. Later, it was perceived as fixing things when they broke. "And that's the whole problem that maintenance has gotten itself into," Welch explains. "It has lost its identity as a maintainer and has gained an identity as a firefighter when something goes wrong. But it needs to go back to being viewed as keeping things running. We need to ensure that things don't break, as opposed to fixing them fast. It's the use of predictive technology to make sure something is flagged when it appears it is about to fail, as opposed to being notified that it actually has failed." It's a different thought process -- one that is essential for companies that adopt lean manufacturing and just-in-time manufacturing.
Most people find it difficult to adapt to change, and the injection of change in a business process is fraught with the risks. ATS has found that a company's front-line supervisors and managers are the most resistant to outsourcing. "Even though they are usually reassigned to other responsibilities -- even better ones -- the old paradigm was that you outsource because they failed," says Welch.
A fundamental premise in the way ATS does business is that it takes on all of the customer's current employees when it assumes responsibility for the maintenance function. "If we are going to bring change to the function that we are going to provide, then we have to be able to change the culture of the people that are delivering it," Welch maintains. "Being a maintenance person in a manufacturing company is a difficult thing, because you really are a second-class citizen. Being a maintenance person in a professional maintenance company is a whole different world, and very quickly they see the advantages. We look for ways to help them do their jobs better, and we give them training and tools and treating them like first-class citizens.
For change management, ATS must retrain the maintenance employees to think of the production crew as customers. "When we bring in the current employees to do the work, the major task is changing their mindset and changing their attitude toward who their customers are." Welch also states that 85% of all problems are process based and 15 percent are people based. "So if I take the same people and simply reengineer the processes and change the culture, I can get good maintenance out of the same people."
Aaron Rubin at Source One Management Services (see "Cinderella Syndrome") agrees that that an organization's culture needs to be understood and factored into any decision to outsource. What processes are in place already? How receptive are the employees and management to change? Are decisions made from the top down, or highly decentralized? Is it an entrepreneurial culture or a very conservative culture? Rubin's recommendation is that if companies are open to change, then it should be done quickly. But if change is harder to absorb, then it's best to go slower and do it step by step.
ATS prides itself on its Service Quality Culture. Besides being customer-focused and built on a cornerstone of continuous improvement, the culture involves technical tools of quality. "Our program includes data recommendations for improvements so that we have a culture where people are always looking for ways to bring some kind of cost improvement to the customer. 70 percent of our employees are onsite at customer locations because we believe our quality culture has to permeate the customer organization if we are going to be successful. We think that how we do our work is every bit as important as what we do. That is a fundamental premise of outsourcing too," says Welch.
An advantage of outsourcing is that the outsourcer assumes total responsibility -- and risk -- for the process. ATS, for example, provides such functions as spare parts, repairs, inventory management, storeroom management, vendor management and MRO procurement; or it assumes total responsibility for all of components in the maintenance function for a manufacturing plant. If technology and marketplaces change, the outsourcer is responsible for keeping up with the changes. Welch cites developments in eProcurement and changes in B2B eMarketplaces as something where ATS has shouldered the responsibility for its customers. "ATS has had to learn how to deliver in that world and also how to use it in the delivery of our services," he says. "We use all of the new technologies in doing maintenance for our customers in a more efficient manner."
What do the following companies have in common?
- eBay (the world's largest retail site, based on number of transactions);
- Prudential.com (the world's largest insurance company);
- eGain (one of the world's largest ASPs); and
- eGreetings.com (one of the world's largest online greetings sites).
The answer is: they recognize the importance of accountability in online businesses, and each is using ProactiveNet to combat lost revenue due to customer dissatisfaction.
ProactiveNet's vice president of marketing, Marty Hollander, believes people are hesitant about outsourcing just because they feel they will have less control. Through his company's product and service, companies can enjoy confidence that they will get good performance from their outsourcing suppliers of online services.
Hollander points out that most service level specifications for online services today are about availability; but a guarantee of 99.99 percent availability for eCRM (customer relationship management) services doesn't tell you much about the quality of service. How fast will that service be? What is the response time that end users will experience?
Hollander cites an example: "Let's say that, although you have worked very hard to make your Web site fast, your email outsourcer's service is slow (but available). If you only has a service level specification for availability, then it would look like the supplier is meeting its commitment of quality service to you. But we know that if a Web site is slow, users will go to another Web site. So what you want to have is a response time service level specification that says the service will perform at a high speed relative to what you and the supplier agree on."
ProactiveNet's product measures response time performance for end users and also helps outsourcing suppliers manage service level specifications with tools that identify where their infrastructure (hardware, software or network) is causing the slowdown (see "High Quality Impermanent Solutions"). It's the ultimate accountability.
One of ProactiveNet's customers, eGain (an ASP for eCRM applications) now uses ProactiveNet to give its customers visibility into the response-time performance for eGain's site and online transactions. Customers can view reports or see the response-time performance reports in real time, online through a Web browser.
"This whole concept of looking at response time service level specifications is very important from a customer advocacy point of view," says Hollander. "I think customers haven't realized that they can get guarantees on response time. Although suppliers can't control the Internet itself, they can control a transaction from the time a request hits their firewall to when a response goes back out of the firewall. You can also measure the round trip so that you understand how long the total is."
ATS, ProactiveNet and Source One Management Services demonstrate that outsourcing is the ideal business tool for effectiveness. It not only achieves accountability, but it shifts performance risks and change management onto the outsourcer. It's a big WIN for the buyer!
Lessons from the Outsourcing Primer:
- Your risks in gaining competitive advantage is lower if you outsource to a company that is better at performing a particular business process than you are.
- One reason to outsource is to inject an element of change into a business.
- Time to market is a problem for companies with limited assets. Most non-core processes, like maintenance of manufacturing equipment, are not the recipients of additional resources.
- In order to bring about change to a business function, it's necessary to change the culture of the people that are delivering it. 85 percent of all problems are process based and 15 percent are people based.
- Accountability is an important benefit of outsourcing, and online businesses should use response-time performance service level specifications.