Outsourcing Strategies: Four Keys to Manufacturing It"s Future
What to outsource, and what to hold close? Keep these keys in your pocket to unlock a more competitive, business-centric IT organization -- both inside and outside your walls.
It is an understatement to say that the business technology environment is ever-shifting. In fact, to many involved in strategic decision-making, it already feels a lot like quicksand, and the drive to adopt new information technologies while keeping budgets and headcounts stable is just more weight for management's shoulders.
In such an environment, outsourcing seems like an easy call -- put IT in the hands of outside experts, and let them do the dirty work. In fact, such an attitude characterizes many of the tactical-level decisions made over the last decade, as one process or another has been tossed over the wall into the waiting hands of a growing crowd of global outsourcers.
Is this a good trend? And like all trends, where will it end? Has going "over the wall" hit a wall? IndustryWeek asked experts from inside and outside the enterprise for a status report, and uncovered four strong themes running through the state of IT in manufacturing.
Key 1: Project Management
When implementing the types of new technology continually being called for by business teams, it's natural for the complexity to feel a little overwhelming, says Mike Hader, director of information technology at Odom's Tennessee Pride Sausage Inc. Unfortunately, in many cases, this leads to a situation where the company delegates too much of the responsibility to the outside vendor, which "may have the domain expertise, but usually lacks the organizational and internal process expertise," says Hader.
For example, the outside vendor might not know what questions to ask. Hader points to the complexities of a company with various methods for assigning a price to a customer for a particular product. "The questions might be, ‘Do you know all of the ways in which customer pricing is derived? Do you have a list of each customer and their pricing method? Is it always derived this way or are there exceptions? If there are exceptions, what causes the exceptions and how does that change the pricing formulation? Is there a process that must be adhered to for a pricing variation to be allowed?'" According to Hader, the answers are native knowledge to the internal IT staff, but often lose much in the translation to outside consultants. "You can see how this can't be accomplished purely with outside help," he says.
Even if the knowledge could be transferred, the pitfalls of throwing too much over the walls are clear. "If a company places too much dependence upon the outsourcing company and fails to manage all of the required tasks, then they are bound to have major complications," he says. According to Hader, whether dealing with a large ERP implementation or a specific point solution, strong project management skills are absolutely essential, and a firm and knowledgeable hand is necessary to keep the business needs steering the ship. "You still have to be involved in managing the process to ensure that the design and functional goals of the system are being met," cautions Hader.
Key 2: Talent Management
The CIO of a diversified global manufacturer, who spoke on the condition of anonymity, illuminates the seriousness of the situation from the inside. He leads a robust internal IT department and is responsible for strategic planning, personnel decisions, contracts and equipment purchasing, and is seeing a different impetus for outsourcing -- namely, the graying of the workforce. "My challenge isn't cost," he says. "My challenge is somewhere near half of my headcount is at the point where they can retire at any time."
His company recently partnered with a global tech consultancy to do a total cost analysis of their business technology services, and they found that the "total cost" of outsourcing (including the necessary legal and contract work, compliance, governance, disruption and transition costs -- not to mention the cost should the decision be reversed) far outstripped their present in-house labor and overhead costs. In fact, he sees outsourcing as no different from any other sourcing decision, with competing instincts at work, both of which can be expensive.
"If you outsource to one company, you're only managing one provider, but you've lost leverage," he says. "If you're outsourcing to a number of companies, you've got a classic systems integration challenge. Either way there are hidden costs."
The very real challenge he faces lies in having a number of older employees with the option to retire, and not having the younger employees with the skills and training to replace them. But so long as that total cost discrepancy stays on the side of in-house talent, he's been instructed to look elsewhere by his CFO, and has come up with a two-stage solution for the coming brain drain. The first is a knowledge capture and documentation project that should help quantify the native knowledge of his highly experienced workforce; the second revolves around aggressive campus outreach programs, similar to those pioneered by Xerox at North Carolina State University, designed to recruit and train some entry-level talent who can then inherit these well-documented legacy processes and help facilitate the coming transition to enterprise 2.0-type platforms.
On the positive side, he notes that "our younger IT workers bring the kind of application flexibility that we're going to need to be a bigger part of the business teams going forward."
Key 3: Vendor Management
Russ Pass is a founding member of Chicago-based business consultancy Bridge Strategy Group. He's been watching the outsourcing, offshoring, nearshoring and re-sourcing, and even re-outsourcing, from deep in the enterprise manufacturing sphere, and lately has noticed a change in the basic rationales behind -- as well as the basic nature of -- the decision to outsource.
"In the past, outsourcing was a very simple decision," says Pass. "There was lots of talk about service and turnaround time, but once you got into the contracts, negotiation and agreements in the manufacturing industry, it was all about cost."
More recently, this formerly cost-centric equation has expanded in scope, says Pass. "There's a much greater willingness now to look at outsourcing those core processes that are not critical to the competitive edge," he says. "IT is an underperforming function -- it has been for as long as people can remember -- and everyone knows the reasons why. Executives are saying ‘I'm willing to pay a premium just to get it off my plate.'"
It is an understatement to say that the business technology environment is ever-shifting. In fact, to many involved in strategic decision-making, it already feels a lot like quicksand, and the drive to adopt new information technologies while keeping budgets and headcounts stable is just more weight for management's shoulders.
In such an environment, outsourcing seems like an easy call -- put IT in the hands of outside experts, and let them do the dirty work. In fact, such an attitude characterizes many of the tactical-level decisions made over the last decade, as one process or another has been tossed over the wall into the waiting hands of a growing crowd of global outsourcers.
Is this a good trend? And like all trends, where will it end? Has going "over the wall" hit a wall? IndustryWeek asked experts from inside and outside the enterprise for a status report, and uncovered four strong themes running through the state of IT in manufacturing.
Key 1: Project Management
When implementing the types of new technology continually being called for by business teams, it's natural for the complexity to feel a little overwhelming, says Mike Hader, director of information technology at Odom's Tennessee Pride Sausage Inc. Unfortunately, in many cases, this leads to a situation where the company delegates too much of the responsibility to the outside vendor, which "may have the domain expertise, but usually lacks the organizational and internal process expertise," says Hader.
For example, the outside vendor might not know what questions to ask. Hader points to the complexities of a company with various methods for assigning a price to a customer for a particular product. "The questions might be, ‘Do you know all of the ways in which customer pricing is derived? Do you have a list of each customer and their pricing method? Is it always derived this way or are there exceptions? If there are exceptions, what causes the exceptions and how does that change the pricing formulation? Is there a process that must be adhered to for a pricing variation to be allowed?'" According to Hader, the answers are native knowledge to the internal IT staff, but often lose much in the translation to outside consultants. "You can see how this can't be accomplished purely with outside help," he says.
Even if the knowledge could be transferred, the pitfalls of throwing too much over the walls are clear. "If a company places too much dependence upon the outsourcing company and fails to manage all of the required tasks, then they are bound to have major complications," he says. According to Hader, whether dealing with a large ERP implementation or a specific point solution, strong project management skills are absolutely essential, and a firm and knowledgeable hand is necessary to keep the business needs steering the ship. "You still have to be involved in managing the process to ensure that the design and functional goals of the system are being met," cautions Hader.
Key 2: Talent Management
The CIO of a diversified global manufacturer, who spoke on the condition of anonymity, illuminates the seriousness of the situation from the inside. He leads a robust internal IT department and is responsible for strategic planning, personnel decisions, contracts and equipment purchasing, and is seeing a different impetus for outsourcing -- namely, the graying of the workforce. "My challenge isn't cost," he says. "My challenge is somewhere near half of my headcount is at the point where they can retire at any time."
His company recently partnered with a global tech consultancy to do a total cost analysis of their business technology services, and they found that the "total cost" of outsourcing (including the necessary legal and contract work, compliance, governance, disruption and transition costs -- not to mention the cost should the decision be reversed) far outstripped their present in-house labor and overhead costs. In fact, he sees outsourcing as no different from any other sourcing decision, with competing instincts at work, both of which can be expensive.
"If you outsource to one company, you're only managing one provider, but you've lost leverage," he says. "If you're outsourcing to a number of companies, you've got a classic systems integration challenge. Either way there are hidden costs."
The very real challenge he faces lies in having a number of older employees with the option to retire, and not having the younger employees with the skills and training to replace them. But so long as that total cost discrepancy stays on the side of in-house talent, he's been instructed to look elsewhere by his CFO, and has come up with a two-stage solution for the coming brain drain. The first is a knowledge capture and documentation project that should help quantify the native knowledge of his highly experienced workforce; the second revolves around aggressive campus outreach programs, similar to those pioneered by Xerox at North Carolina State University, designed to recruit and train some entry-level talent who can then inherit these well-documented legacy processes and help facilitate the coming transition to enterprise 2.0-type platforms.
On the positive side, he notes that "our younger IT workers bring the kind of application flexibility that we're going to need to be a bigger part of the business teams going forward."
Key 3: Vendor Management
Russ Pass is a founding member of Chicago-based business consultancy Bridge Strategy Group. He's been watching the outsourcing, offshoring, nearshoring and re-sourcing, and even re-outsourcing, from deep in the enterprise manufacturing sphere, and lately has noticed a change in the basic rationales behind -- as well as the basic nature of -- the decision to outsource.
"In the past, outsourcing was a very simple decision," says Pass. "There was lots of talk about service and turnaround time, but once you got into the contracts, negotiation and agreements in the manufacturing industry, it was all about cost."
More recently, this formerly cost-centric equation has expanded in scope, says Pass. "There's a much greater willingness now to look at outsourcing those core processes that are not critical to the competitive edge," he says. "IT is an underperforming function -- it has been for as long as people can remember -- and everyone knows the reasons why. Executives are saying ‘I'm willing to pay a premium just to get it off my plate.'"
