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Outsourcing: Method for Scaling Steep Slopes

Outsourcing Excellence Award – Most Improved Process Compaq Computer Corporation and Rational Software Corporation

Would you settle for a black and white photograph of a brilliantly colored rose garden? Until the early 1930s, you would have, simply because a color photograph wasn’t an option. Sure, the process for color film had been invented, but it had not been refined, and companies had not invested in the equipment for the new process. Professional photographers didn’t even bother to learn the new color process because there was no market for it.

Along came Kodak. Its Kodachrome images contained no silvery metallic granules, so they were more suitable for enlargement. Plus the film was faster, so it required less sunlight. The rolls of Kodachrome film even made the photographers’ lives easier, for their equipment became less cumbersome. And when Kodak in 1935 released a 16mm motion-picture film on Kodachrome and displayed it in store windows, a new market was assured.

What Kodak did for improving the process of color photographs, Compaq Computer Corporation did for Rational Software Corporation. Rational Software develops and distributes software tools that Al Nazzaro, the company’s senior operations manager, describes as a software development platform that improves the speed, quality and predictability of software projects.

When he arrived at Rational in 1998, the company was using 14 different vendors for its manufacturing and distribution processes. “We were doing the kitting in-house and managing the shipping externally,” Nazzaro recalls. “We had people chasing down parts all the time, and we were basically running by the seat of our pants trying to buy component inventory. Implementing a system to handle this process was too expensive. So we realized it was not our core competency and we were never going to be able to do it well. The process was too costly, and the logistics of managing that on a worldwide basis were too complex.”

But the growing developer aimed to become a billion-dollar company and needed scalability and overseas infrastructure. They looked at adding manpower, but the inconsistencies in their demand stream made that impractical. When they did a costing analysis of the operational part of the business and got some benchmark quotes from other companies, they found out they were “not even in the ballpark” for managing their processes.

Starting up the Mountain

Rational’s decision to outsource was presented to 20 companies worldwide in a Request for Proposal. To get the maximum benefit from suppliers’ ideas as to best solutions, they considered several models, from the Compaq solution (which includes subcontracting some functions to third-party vendors) to looking at printing businesses with media documentation capabilities that were trying to become distributors.

In due diligence, they eliminated half of the companies bidding for the work. “We ruled them out because of financial insecurity,” explains Nazzaro. “We were nervous about getting into this type of relationship because there is an inventory liability position that they have to sit on. So if they are not financially secure enough to be able to manage something like that, it really puts us behind the eight ball.”

Compaq was attractive because of its stability, reputation and financial security. But the drawing card, with 40% of Rational’s business overseas, was Compaq’s infrastructure and its ability to be a global single point of contact. The supplier’s proactive approach was also a deciding factor. “I was one of the few people on the decision-making committee here who was on the cusp,” states Nazzaro. “I said they were too big or we were too small. But, going forward, they proved me wrong. Their management team just blew us away, and they came in with the resources to make this a successful relationship right at the beginning. They were very proactive about giving us ideas about how we could be better at what we do, and that gave us a really good feeling of having a partner instead of a vendor.”

Their two-year contract signed in 2000 includes both penalties for not meeting service level specifications in quality or delivery performance, as well as financial rewards from online sales at Rational Press. The eCommerce site is owned and managed by Compaq, so it reaps the royalties from sales but also bears the liability of receivables and collections. From soup to nuts, Compaq’s fulfillment and distribution division now manages the files, manufacturing, assembly and distribution of Rational’s products.

Tough Territory

The path up the steep slope of process improvement called for some tricky footing and a teamwork approach. The aggressive transition of work and inventory from the existing vendors to Compaq took six months. But, while they were just getting acquainted and learning to work together, they met with big challenges they hadn’t expected. According to Nazzaro, the work that came from the prior vendors was “in a mess. We honestly thought we had a handle on inventory,” he says. “But we didn’t. We thought we knew what the files looked like. But we didn’t.” And the technical issues involved in transferring Rational’s order feeds into the Compaq system and receiving shipping confirmation was on a large scale that caught Rational off guard.

As a result of a series of acquisitions Rational had made, its procedures could be described as “kind of catch as catch can,” according to Nazzaro. So it was an enormous challenge to put a standard operating process together. Against this background, the two began their outsourcing relationship.

“Compaq is a very process-driven company; but our operations really weren’t, to be very frank,” Rational’s operations manager states. “We really had to challenge ourselves and be honest and upfront with the fact that we were not as good as we thought we were. It was a bitter pill to swallow. But Compaq was very helpful in assisting us with consolidating things down from 14 vendors. We were surprised at how quickly they were able to fill the gaps we had. Their project management skills are just stellar.”

View from the Top

Like the engine of a freight train pulling tons behind it, Compaq leveraged its expertise and resources to pull the quality of Rational Software’s manufacturing and distribution processes up to world-class level. Compaq worked with Rational’s pre-press group and its stable of contracted writers to shave five days off the product introduction cycle time. They redesigned the product covers and boxes; besides the better look, it decreased cycle time. Compaq has recommended a different type of boxing material that potentially will save 20-25% of Rational’s packaging costs. They implemented better paper materials, which cut down on costs. And they use print methods that give Rational a lot more flexibility.

Acknowledging his initial doubts about the outsourcing relationship were wrong, Nazzaro says he is “really impressed” with Compaq, especially because of the unexpected customer support. The outsourcer gave everybody at Rational Software an iQuery tool, enabling them to check on orders and inventory. “It really helped to empower some of the users here,” comments Nazzaro.

“We didn’t ask them to do these things. They just offered and said it might help to make the work easier,” he comments. “They have just jumped on board to really help us.” When they call Compaq to request more support at the last minute, or to expedite last-minute, next-day deliveries, there is never any reluctance on the supplier’s part. “Despite the contractual terms, they are responsible and flexible and always find a way to take care of what we ask. Compaq truly is a good partner.”

The supplier’s systems, technology, processes and tools are great, Nazzaro would agree. But it’s the people who make the relationship. They take a team approach “from the top all the way down,” he says. It builds an outstanding feeling of partnership. “They make us feel very important,” he adds. “And that’s a nice feeling to have.”

Lessons from the Outsourcing Journal

  • For a global process, a supplier who is a single point of contact is the best choice.
  • If your process to be outsourced is not well documented or has complexities that will challenge the game plan for transitioning the work to the supplier, choose an outsourcer with a good reputation in project management skills.
  • The key to success in outsourcing relationships is people with a proactive, teamwork approach.

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