President Obama quipped in an interview with CNN. On May 14, 2010 "you had executives of BP and Transocean and Halliburton falling over each other to point the finger of blame at somebody else...The American people could not have been impressed with that display, and I certainly wasn't." The legal wrangling continues and will take considerable time and expense to resolve. We need not go into the gory details of dollar numbers too big to even fully comprehend, but from our perspective in this Chapter three key points stand out:
While these 3 key take-aways are still relevant to our discussion here, what is more relevant is the fact that all the companies in question will have to continue to outsource (and insource). So the practice of outsourcing itself will continue unabated. What will change after this learning experience is that the practice will be carried out in a much more sophisticated manner. That is the whole point of this book.
Before more on to newer, more sophisticated models of outsourcing that are emerging and examining them in more details in the next few chapter, let us consider the evidence on the satisfaction from current outsourcing arrangements.
Data, anecdotes and case histories abound on the misapplication of information technologies for supply networks. Not too many years ago, a very large corporation operating worldwide, made news with the downgrading of their earnings expectations due to supply chain system’s implementation setbacks. The expectation was that the new system would reduce the new production cycle from 1 month to 1 week. Furthermore, it would better match the demand and supply of its products to place the correct products in the right locations and quantities, all at the right time - a very lofty goal. The company spent an enormous amount of money, exceeding US $400 million in order to achieve its aim. However, the software system 'never worked right'. It caused the factories to crack out too many unpopular products and not enough of the trendier ones in high demand. While making the earning downgrade, the CEO asked the rhetorical question, ‘is this what we get for $400 million?’
The market analysts were not surprised. One respected market analyst [AMR] commented, ‘fiascos like this occur all the time but are usually kept quiet unless they seriously hurt the bottom line.’ Another respected market analyst commented that while the CEO made it sound like it was a surprise for him, if he did not have checkpoints for the projects, he does not have control over his company. A third analyst commented that companies are confused by escalating market hype and too often underestimate the complexity and risks. Another [Forrester Research] commented 'when the software projects go bad companies are more likely going to scurry up and cover it up because they fear that they are the only ones having trouble. But far from it; our conversation and research reveals this company was not unique or the only one having this kind of trouble'.
Despite their lofty goals, many of the large information technology deployment projects derail. It takes time for the word to filter out because, in most cases, the executives involved in the process are far too embarrassed to talk about what happened. They do mutter among themselves; after several similar instances the mutterings become more vocal and a trend emerges where a number of people start talking about the shortcomings of the system itself or the implementation process or of the time taken for implementation. Because the cost of this failure is so high – greater than $400 Million in the above case – it is instructive to understand the real root causes of this failure. I am not looking to apportion the fault or apportion the blame in this chapter.
It is common knowledge that the failure rate of complex outsourcing arrangement remains stubbornly over 50% depending on which survey you read. With such a long history and accumulated lessons from outsourcing, this is simply unacceptable.
However, it is not only outsourced projects that fail. Internal projects – especially large scale IT systems development or technological developments have an equally unimpressive track record. For an amusing example of the reasons, I encourage the reader to peruse this blog post:
So, what exactly do we do in the preparation stage? We should ask and answer several key questions:
So what happens when you fail to prepare? The obvious answer is that the outsourcing arrangement turns out to be sub-optimal, and sometimes even disastrous.
30 Years Of Accumulated Wisdom Is Now Available
However, it will be a fallacy not to learn from all the accumulated wisdom of the past. After all, those who do not learn from history are condemned to repeat the same mistakes again and again. This will enable us to understand the steps we can take from the very beginning to increase your probability of success. This will also allow you to confidently move forward with Business Network Information Technology system selection, integration and use in order to achieve the results that you set out to achieve.
The supply networks information technology projects have become bigger and bigger over the last 15 years. It is quite customary now to start with an expectation of spending around $ 50 million but end up spending in excess of $200 million on systems renewal projects.
Rough estimates indicate that, even today, about one third of these projects are cancelled without delivering any benefits, after spending more than $100 million. Another third of the projects are not cancelled, but fail to deliver significant parts of what they set out to achieve. Only one third of the projects achieve most of their strategic goals, but many still incur several budget upgrades and time overruns.
Why is this pattern of failure repeated over and over again?
To answer the key question above, let’s first examine a typical project cost structure. It is estimated that the software costs are no more than 15-20% of the overall cost of systems renewal. Programming and configuration costs run from 20% to 25%; external consulting costs generally associated with process changes run from 15-20%, data conversion costs run around 10-15%, training costs run from 10-15%, systems startup costs run around 10%, applications support costs are between 5-10% and hardware costs are between 2-5% of the overall cost structure. Out of these costs only the software costs generally remains fixed through the systems renewal cycle. Pretty much all the rest of the cost buckets are estimated ambitiously at the start and tend to run over quite considerably as the project progresses.
Not a single day goes by without a mainstream newspaper decrying the job losses or closure of some facility due to outsourcing. These are legitimate concerns. However, if outsourcing is carried out for the right reasons (and we discussed the reasons in detail in the previous chapter) it provides ample growth and profitability opportunity to the businesses and the economies. Certainly there are displacements and adjustments in the economies that need to be handled with compassion, creativity and flexibility. At the same time, we must remember that if the luddites had carried the day, we might have never seen the industrial revolution.
I say this at the outset of this Chapter in order to ask you to be objective and rational when you examine the myths surrounding outsourcing. There are probably dozens, if not hundreds of myths that keep circulating on this topic. Most are self-serving rumours started by people directly affected by the decisions and events. Some are part of the sales arsenal of the service providers, while others are defensive myths designed to freeze any potential moves towards outsourcing in their tracks.
So, why should you read this chapter with interest?
Recognizing the key myths, and understanding the reasons why they are false will help you discern specious arguments, whether during sales process, or in subsequent management of the outsourcing arrangement. It will also spur you on to dig out facts, and use facts to foil attempts of disinformation. Using facts to make decisions, and to present information will help you gain credibility, profits and promotion. Moreover, if you think deeply enough about why people perpetuate myths about outsourcing, you will discover what questions to ask of your outsourcing service providers in order to retain the leverage and advantage.
I have been writing about the myths and communication issues prevalent in outsourcing almost since I co-founded Global Supply Chain Group in 2000. Many of my articles and white papers on the topic have been published in a plethora of business magazines from which I have distilled the key essence in this chapter.
Meanwhile, as you cast your mind wide and far within your company – how many services did you think of that can be outsourced. Think about all the various departments in your company – the Information Technology department, Human Resources, Marketing, Sales, Production and Manufacturing, Logistics, Purchasing, Finance, Administration, Legal – and try and imagine all the various possibilities for outsourcing that exist in each of these departments.
Fundamentally, each of the department carries out its tasks at four different levels – the highest level being strategic, the next lower level being tactical, the next lower level being operational and the finally the lowest level is the executional level. At the lowest level the execution of the task is carried out, while at the highest level the plans are long term all-encompassing plans.
Let’s take the example of a typical finance department. If you make a list of all the activities carried out in the finance department they will roughly fall in the pattern of a pyramid shown in Figure 1.1.
Figure 1.1: Activities carried out in a typical Finance Department
The exact details and the nature of the tasks at each level will differ based on the type of company we are talking about and the industry it is part of. However, the pyramid of tasks will look somewhat similar in most companies. In fact we have drawn similar pyramid of activities for most other departments as well – Information Technology, Operations, Sales and Marketing, Human Resources and Administration.
In case you are interested, you can do the same thing for your company too. In our workshops where cross functional teams from the same company can come together for strategy formulation – we frequently like to encourage executives to jointly draw up a similar activity pyramid for each department.
Each industry has a highly unique and valuable supply network that its participants have created in response to the circumstances, regulations, customer needs, and economic situation in the industry. Either by trial and error or by intelligent design somewhere along the way, each of these networks has evolved over the past several decades to reach into its current state as a result of all the changes in economics, technology, regulatory requirements and customer tastes. Sometimes a new player, such as Red Bull, enters the industry and causes a major disruption to the established supply relationships and networks. In most cases, the established supply relationships and networks in every industry will go through a gradual evolution as the environment evolves. Most CEOs are now familiar with the power of supply networks transformation. Currently in many industries these supply networks are rapidly undergoing massive transformations as CEOs adjust their business strategies to global realities.
We will cover business networks and supply networks in great detail in Section II and III. For this reason, we will devote the rest of this chapter to looking at some other types of networks familiar to you.
The most familiar network to you is your own. A network of
business associates and contacts. Inevitably, they come to your rescue when you need help and vice versa. They are also good sources of information, job leads, business leads and even guidance or inspiration. LinkedIn and Plaxo have put the Rolodex of old online and added far more functionality and possibilities with their web versions In that sense, online networks enhance the possibilities and functionalities far beyond what is possible with the offline networks. An enriching, quasi-structured and purpose oriented interaction is possible using online networking tools - it would be difficult to replicate this in an offline context.
Other examples of offline networks are alumni networks from your schools, colleges, previous work places and similar locations. Many of these are now online, though very few are doing much beyond basic database creation and sharing. Just this year, one of my graduate schools has started systematically co-creating executive education programs with the help of its alumni network - even though the possibility has existed in technological capability for almost a decade.
Some of the more well known formal networks are organisations such as the Freemasons, the Rotarians and clubs including the chambers of commerce. Each of these was created for a different mission and most still adhere to their original formal charters. Many of these formal networks are moving online, at least for the purpose of database creation and sharing. Contrary to some beliefs, most of them are rather benign associations that create a forum for gathering and sharing interests. Many networks of professionals with similar interests exist online either at LinkedIn or through professional bodies where the only condition of entry is your interest in the topic of discussion.
One such offline network where I served on the Global Advisory Board broadened its membership by tens of thousands during the five years I was on the board.
The professional courses, seminars, forums and lecture seminars, forums and lectures series run by the organisation contributed significantly to the body of knowledge on the subject. At the same time, numerous
individuals found suitable jobs and professional progression
advancement though the network.
Another online informal network I have created on a social networking website has grown to more than 6,500 members globally and business opportunities worth more than $650 million are offered every year. It is difficult to estimate the actual trade that results from the network as trade is mostly carried out offline. This network is growing rapidly. Now I am grappling with the question of how to keep its in formal nature and yet enhance its usefulness and relevance
to the participants of the network.
In the rest of this book, we will focus primarily on the
business networks, their efficacy - efficiency and effectiveness and their utility to the participants. More specifically, we will demonstrate how the business leaders of the future are busily building networks that will underpin their business aspirations. There are five key leverage points of the business networks and we will discuss these in details in the next section.
Jumia started with a relatively similar aim and manifesto to Amazon, which puts customers at the heart of its operation. In the same vein, the Nigerian site also reaps benefits from being one of the pioneers in Africa’s emerging online retail market. “Being first is good, but it is not everything. What fuels Jumia’s success so far is somewhat akin to Amazon’s evolution into a Five-star business network” – said Vivek Sood, CEO of Global Supply Chain Group.
Jumia is not shy of innovation either, given the fact that people are still skeptical about online retailing as well as online payment in Africa. The Lagos-based retailer launched a range of online payment options but steers its technology-shy consumers by accepting cash on delivery and offering free returns. “It’s very important that people know it’s not a scam,” said co-founder Tunde Kehinde. They even take a step further and deploy a direct sales team of 200 to educate Nigerians about secure online shopping, which also serves as a means to build trust. Now with pick-up stations spanning over 6 locations, a warehouse facility, 200 delivery vehicles in Nigeria and 4 other country-specific microsites, Jumia seriously strives to become a one stop shop for retail in Sub-Saharan Africa. “Here you are collecting cash and reconciling payments almost like a bank desk, here you are building a logistics company,” said co-founder Raphel Afaedor.
Both co-founders and Harvard Business School graduates built the business from $75 billion in funding and are bringing “a couple of million” dollars in monthly revenue, a growth rate of nearly 20%. Vivek Sood, author of the book “Move Beyond the Traditional Supply Chains: The 5-STAR Business Network”, said: “Jumia is taking the right steps towards building the five cornerstones of a super networked business: innovation, efficiency, profitability maximisation, product phasing and result-oriented outsourcing. With the promising results so far, perhaps we could see the next perfect example of a 5-star business network besides Amazon.”
I have been asked this question a lot on Quora, as well in my board and other speeches. A lot of supply chain commentary is becoming too technical and mysterious. Supply Chain Software sellers have a vested interest in creating the mystique – similar to what McKinsey used to do about 20 years ago. But Supply Chain Management (SCM) need not be mysterious. Remember, if someone cannot explain it easily enough – they do not understand it well enough.
The purpose of one of my books – Unchain Your Corporation – was precisely this – to demystify the supply chains. This books is written for layperson, can be read in 2–3 hours, and had more than 200 stories and anecdotes to help the readers use complex concepts.
Supply Chain Software sellers have a vested interest in creating the mystique – similar to what McKinsey used to do about 20 years ago. But Supply Chain Management (SCM) need not be mysterious. Remember, if someone cannot explain it easily enough – they do not understand it well enough.
At its core, SCM is just about two things – integration, and optimisation.
Integration of various functions (purchasing, production, logistics, inventory management, finance, sales) within a company. And, Integration of of various companies that form a supply chain together to serve an end consumer.
Optimisation – is the art of getting the best results from the same inputs. You will be surprised to know that most GPS software do not even give you the optimum route even if they have real-time traffic information. The key to testing optimisation is by doing the same exercise manually and comparing against the results of the software. There are clearly degrees of Integration and Optimisation. Higher levels of Integration and/or Optimisation will lead to higher level of efficacy in supply chains.
See the figure below – that comes from one of my board speeches:
If you supply chain consultants are not telling you these two simple truths, then all the talk of automation, big data software and driverless vehicles is a pipedream without a purpose.
And, if your Supply Chain MBA is not teaching you these two basics then you might have wasted 2 years and thousands of dollars.
Here is why… …Everything else in supply chain stands on those two foundations. Your supply chain relationships are part of integration effort, and automation is part of optimisation effort.
Yesterday (on 2nd November 2017) I happened to briefly glance at the Australian Financial Review – the key finance newspaper in this country while I was waiting in the lobby for a meeting. Almost the entire paper was devoted to just one single topic – AMAZON’S THREAT TO AUSTRALIAN RETAILERS!
No more do I subscribe to this newspaper, because it appears to be growing more and more out of touch with business reality, and becoming more a shill for vendors with deep advertising budgets, and small brains. Its content, in terms of financial and economic news is excellent, but somehow the financial journalists always seem to miss the major shifts in the business models – inclduing the latest move towards B2B Networks.
Yesterday’s newspaper seemed to be predominantly dedicated to a conference on e-commerce related subjects. I do not remember the specific topic of the conference, and it does not even matter because the entire debate was centered around Amazon’s entry into Australian market place, and the threat it poses to the Australian retailers and businesses.
Indeed, the organisers, and the newspaper, had identified the burning issue of the day for Australian businesses. They had not only highlighted all the right red flags, but had clearly heralded Amazon’s threat to Australian Retailers as the key front shaping the battle into the next year. Looking at the issues, I almost reconsidered my decision to stop subscribing to the newspaper.
But, alas, a little more unpacking of the pages revealed that almost all the solutions (to Amazon’s threat to Australian retailers) were merely window dressing costing a lot of money. Most of them were marketing and sales related, or new age technology related.
What people forget is that Amazon’s success is even more dependent on its incredible supply chain. Amazon’s threat to Australian retailers in not based on its new age technology, as much as it is based on its carefully crafted integral supply chain.
Fighting this successful behemoth without an equally effective supply chain is akin to deciding to fight against nuclear missiles with swords.
Sad reality is that most people, even in the lofted positions such as boards, still do not still know what supply chain really means. If you doubt me – just watch the short (1.5 minutes) video below, and conduct the experiment with 10 people you know:
Lest I leave you with a wrong conclusion, I am not totally writing off these marketing and technology solutions. Indeed, they do have a place in the overall campaign.
But, if you get an impression from the newspaper (or the conference that seemed to dominate yesterday’s paper) that somehow you are going to outmarket Amazon just using such solutions – you better think again.
Whether you are a corner store, or the world’s largest retailer of the decade – one reality stands firm above all else: Nothing beats a carefully crafted supply chain strategy, executed with precision and flexibility. This point cannot be emphasised enough.
If, it is your job to combat in your company the looming Amazon’s threat to Australian retailers, read the following line 100 times.
I have written extensively in many other blog posts on how to do just that – all you have to do is explore a bit in the categories and tags on the right of this page. Some of the titles from over the year are in the image on top of this page.
For substantive business leaders, who want to make real and deep positive impact – I do recommend my book The 5-STAR Business Networks.
If you have the budget, it is also worthwhile asking for a workshop based on the same material – but we only have limited slots, and normally have a big backlog for that.
He wanted to encourage us to do the same thing. We listened to him politely, thanked him for his opinion, and refused to go down that path.
He was firmly in the camp of people believing that you have to fake it till you make it.
Obviously there is a huge contingent of people who follow this philosophy. To justify themselves they often quote Richard Branson saying this:
I don’t know if this phrase was truly said by the man himself. However I would feel a little bit uneasy if pilots in their airlines adopted this mantra. It basically means that they accept the job as a pilot hoping to figure out how it works later, meanwhile they are going to fake it till they make it.
I know I have carried the example to an extreme, and pilots do need certification before anyone offers them a job as such.
However, I am also aware that there are more subtle considerations such as aircraft types, routes and even airport characteristics where most pilots will not accept command of an aircraft till they know for sure they can do the job.
Like them, I am firmly in the camp which says ‘make it real and keep it real.’ The risks are far too high; and the numerous opportunities to train and learn without exposing your passengers (or business network partners) to the unnecessary risks make it almost callous to do otherwise.
Yet, many people persist.
This belief – fake it, till you make it – is usually based on the assumption that nobody will offer you a job if you’re perceived as not qualified for it.
On the contrary, you are the best person to judge whether you are truly competent enough to take on a job. At the same time, with the job offers comes the responsibility of choosing, whether to accept it, or not; the responsibility of evaluating your own skills, experience and competence for this particular job.
Unfortunately, there are far too many people forsaking this responsibility that can only apply at a personal level.
That is also the reason why there is a lot of trust deficit in the business world.
If you are faking it, your reader, your audience, your client, your customer will most likely know that you’re faking it. It is just a matter of time.
Whether you are a motor mechanic who’s faking the knowledge of the type of motor that you’re repairing or you’re a heart surgeon or any job in between. Faking it is definitely not going to make you happier or more successful for the simple reason that your customer will always be uneasy with you. Furthermore, in your heart you will always know that you are faking it, which is not the best thing for your self-confidence and self-respect.
Supply chain management is not a unique field which requires a large amount of trust between people to collaborate. In fact, trust is a fundamental requirement for all collaboration, cooperation and joint activities between human beings.
It becomes even more significant in supply chain management where it is both individual trust and institutional trust.
Why is trust so important anyway?
There is an important reason why I mention it.
As supply chains become more and more sophisticated, as they become more entangled and evolve into business networks, the need for trust within the supply chains becomes more and more intense.
Let’s take a specific example to make this generic statement more real.
Suppose you are a soft drink manufacturer, and the suppliers of empty cans has a captive plant right next to your bottling plant, you have a good chance of hearing about their business ups and downs and know well in time about events that might affect your supply. Now just substitute this captive supplier of packaging by a bunch of suppliers half way around the earth who might have significant cost advantage (because of manufacturing cost, for instance), and see how important it will be for you to keep open clear lines of communication in order to run your business smoothly and efficiently.
Companies typically want to engage with supply chain partners who will be able to deliver on what they promise, barring a totally unanticipated event. If your business network partners are not fakes themselves, most likely they will not engage with you further when they find out that you’re faking it.
Although trust in supply chain management is a very popular topic, it is evident that establishing trust within the business network can be very challenging. It takes time, patience and effort of each and every supply chain partner. It can be even more difficult to maintain trust over time. As the concept of trust is rather abstract, it is also hard to measure. At the same time, despite all the difficulties and efforts you can be sure that developing trust with your suppliers and customers is worth the efforts.
So what is trust and what are the components of it?
How to make sure that there is enough trust between you and your supply chain partners?
Is it always worth the investment of your time and effort?
Is there such thing as too much trust within the business network?
First of all, trust in supply chain management, as in any other cooperation between people, includes numerous factors.
You should maintain good communication at all times between you and your partners. Communication also means honesty and openness. Fairness and loyalty can also be very helpful in establishing trust. Another integral part is the competence and your openness about whether you are qualified for this particular job or not. This kind of relationship requires goodwill and willingness not to exploit your partner’s vulnerabilities. This is even more important because of the confidential information which is shared between supply chain partners and with management consultants.
My colleague, who was at the meeting mentioned at the start of this article, wondered aloud about the advisability of trying to create some websites to generate additional leads for our training business.
And my answer was an unequivocal “no”.
The reason was very simple.
I like to make it real – and keep it real.
I gave my colleague an example of the difference between level of trust required for a pharmacist, a general practitioner and an open-heart surgeon.
When you go and buy a medicine from a pharmacy, you do need a certain amount of trust. You need to be confident that the pharmacist will indeed give you the formulation that the doctor has prescribed. You need to be sure that it is pure, unadulterated and sold at the market price.
However the level of trust required from a general practitioner is much higher. Because you will have to literally remove your clothes in front of him. In this case you need the confidence that your general practitioner is able to examine you, to find out what was wrong.
This trust requirement further multiplies when we are talking about a heart surgeon. You need to be completely sure of your heart surgeon as you need to entrust him your own body, because he will be actually cutting you open and looking literally at your heart. Imagine a heart surgeon who lives with the philosophy mentioned earlier.
In the situation where people need to share confidential information, where the profitability of your business depends largely on the competence and honesty of someone else, it is critical to make efforts in order to develop trust. A low level of trust in this case may give a bit more independence and space at first but later on it will definitely result in lower productivity and profitability in supply chain.
Management consultants by their nature need to establish a very firm bond of trust with their customers. The clients need to be able to entrust them with a lot of confidential data and information as well as their innermost strategies so that management consultants could work successfully and effectively.
To be able to establish this kind of firm bond of trust you have to make sure that there is no possibility that your customer misunderstands any of your marketing messages. You should be unambiguous about your market position. It takes us to the next point.
It is always better to say clearly and honestly if the required skills or competences for a particular project are not within your company’s skillsets.
Let me make it real with another example. Very often when we formulate segmented supply chain strategies for our clients’ business, we need to understand the customer segmentation criteria. As part of that activity we need market research data, which is obviously outside the competency set of our business. I am very clear with my clients when such situations arise. I also say that I am in a position to recommend a few good market research firms, if necessary, but customers are welcome to choose any others that they want to use so long as the required segmentation data is available at the end of the exercise.
Sophisticated clients always appreciate a consulting company which is honest about where their competency starts and where it ends. On the other hand there are consulting firms who pretend that they are able to magically do everything.
In most cases they end up doing nothing well enough, and in the long term they usually lose not only the trust of their clients, but also their own self-respect.
Looking beyond management consulting, as mentioned before, trust is important for collaboration between supply chain partners. When you are working with your supply chain partners – suppliers and customers – in innovation, in order to create new products faster, in enhancing the profitability and reducing the cash-to-cash cycle, you know that relying on fakes will only come back and bite you at the worst possible time.
Typically deep understanding of customer segments is required to be able to configure a segmented supply chain so that the end-to-end business strategy is in coherence. This activity obviously requires an immense amount of trust running all the way through the entire business network.
However, similar to the example comparing a pharmacist, a general practitioner and a heart surgeon, the required trust will always depend on the situation and on the level of collaboration that we need from each participant within the 5-STAR Business Network.