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.
We will however, briefly focus on three relevant parties - BP, Transocean and Halliburton for the sake of discussion relevant to this Chapter - on modularized outsourcing. BP had outsourced the task of drilling to Transocean. At the same time Transocean had bought the Blowout preventer from Cameron International Corporation. Whether it can be argued that BP or Transocean had outsourced the task of Blow-out Prevention (BOP) to Cameron is not certain; neither is the liability on malfunction of the blowout preventer because of allegations of lack of proper maintenance. Cameron agreed to settle all claims related with the Deepwater Horizon tragedy with BP for $250M - without any admission of guilt. The situation with Halliburton is still unclear. As per a CNN news-report:
BP and Halliburton sued each other in April 2011 claiming each is to blame for the deadly explosion on the Deepwater Horizon rig and resulting disastrous oil leak. Halliburton was in charge of cementing the Macondo well and claims that its contract with BP indemnifies (releases) Halliburton of any legal action resulting from its work as a contractor...
In a response filed Sunday, BP asserted that "maritime law prohibits indemnification for gross negligence."
As part of that four-page filing, BP reiterated that it was seeking to recover from Halliburton "the amount of costs and expenses incurred by BP to clean up and remediate the oil spill." BP has estimated in the past that the total cost will be around $42 billion, and by the end of November 2011 the oil company it has paid out or agreed to pay out $21.7 billion to affected individuals, companies and governments around the Gulf.
In an e-mail to CNN, Halliburton spokesperson Beverly Stafford said "Halliburton stands firm that we are indemnified by BP against losses resulting from the Macondo incident."
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.
The Last business network we will consider in this chapter is the network of finance houses of New York, London and Frankfurt that gained strength in the 20th century. With massive industrialization came the need for massive financing of the industry. At the same time, growing world trade needed the finance network to be global in nature. Imagine an oil trader has no way to ensure that the seller will deliver him exactly what he purports to offer and that the buyer will pay for the oil on time - unless the modern finance house steps in with supply chain financing solutions, such as humble letter of credit.
From such simple finance instruments, the modern world of commerce and industry finance has developed into complex and bespoke financial arrangements that suit the needs of investors, commerce, industry and speculators. Facilitating all these transactions, and keeping trust in the system, is a network of businesses involved in the business of finance. Without going into the history of the finance houses, such as Barings, Rothschild, JP Morgan and others, we will take the key lessons from the outstanding success of these business networks. Undoubtedly, the first reason for their success is the value they create for their customers, since no business can thrive for any length of time without that. This is underpinned by their ability to understand a diverse set of business circumstances that their own customers face and to readily come up with flexible solutions to meet those circumstances.
Ability to attract, train and retain talent is the key to understanding your customers. Patience, ability and willingness to shape legislature, ability to formulate and enforce a trust-building mechanism in the network and a willingness to work through the ups and downs of the business cycles, are some of the other drivers for success. A key feature enabling the success of this business network is the overwhelming practical nature of the participants, without any dogmatic adherence to outdated ideas. To the extent this network retains its ethos of service and humility, it will continue to prosper and retain its relevance in the coming era of simultaneous globalisation and fragmentation.
Business networks have thrived through the ages in various forms. In this chapter, we briefly examine six relatively well known business networks from the history. The Silk Road - a vast, ancient business network - comprised hundreds of sub-networks, each functioning on its own, in order to achieve a vastly superior business outcome. Venice - the powerful business network of the middle ages - started the trend towards consolidation of power for achieving business outcomes. The Spanish empire - an imperial business network took this trend to extremes, where it became impossible to distinguish between the business goals and the imperial goal of the network.
The East India Company - the first multi-national company - established commercial networks that still thrive after more than 250 years. American railroads, a business network that opened up the continent to thriving commerce and led the industrial revolution in the new world. Global finance houses, winning business networks of the 20th century, funded the industrial Revolution in the new world. Global finance houses, winning business networks of the 20th century, funded the industrial Revolution and benefited from its vast reach.
No wonder, then, that the Venetian merchants - the middlemen closest to the end customers and with the most visibility of the entire network - moved to take greater control of the network.
It should not surprise us that consolidation of political power made the business network more effective and efficient at the same time. There are ample historic records, as well as anecdotal writings - from Shakespeare’s “The Merchant of Venice" to Horatio Brown's historical reviews - that make great reading about the business network centered around the Venetian merchants of the later Middle Ages.
In the late Middle Ages, the bankers, merchants, and ship owners of Venice controlled the trade into Europe. At the peak of its power, the Venetian Republic had a fleet of ships exceeding 3000 vessels and controlled all trade from the eastern shore of the Mediterranean Sea to Europe. To assure security of the supply network, the Venetian Republic controlled territories on the Adriatic coast, so pirates could not attack their ships coming from the east. Using their financial power, the Venetian Merchants’ Guild began to dis-intermediate the middlemen in the entire supply chain.
The simultaneous rise of strong Arab empires with central command, first in Baghdad and later in Cairo controlling a vast territory, aided this process of dis-inter-mediation as the caravans could traverse a much greater distance and were assured relatively more security in their travels. A key feature of the Venetian business network was the role of political power, as well as finance, in shaping desirable business outcomes and securing these outcomes for the key participants in these networks.
The SEF 2 or Suppliers Exchange Forum was a premier event in Central American calendar attended by more than 800 participants, exhibitors and speakers. The event was opened by the Foreign Trade Minister of Costa Rica , Mr. Marco Vinicio Ruiz, who stressed importance of international trade for peace and prosperity. The event was televised and broadcast live to more than 2,000 participants in 10 universities and other locations in Central, North and South America . 16 speakers representing perspectives from different corners of the globe were invited to share their experiences and knowledge in the arena of global supply chains. Currently, this is an area of immense importance in the global trade and skills shortages abound.
SEF2 is intended to multiply supply chain and outsourcing resources, practices and efforts by global companies. The core concept of the event was “Outsourcing and Supply Chain: Innovation and added value through suppliers.” The agenda was presented by world class speakers with experience in the development of supply chain programs for first tier corporations, strategies and policies applied by companies and countries that have become today’s role model for development. Participants were in close contact with world companies and have the opportunity to become part of the growing foreign direct investment in Costa Rica ‘s clusters as partners, suppliers, or clients. Also they can be confident of the benefits to invest in a country with a highly skilled labor force, long history of democracy and peace, strategic location in the world, and a strong supply chain network. Some of the topics of interest were
|Supply Chain trends and challenges in High Tech Industries|
|Investing and outsourcing in developing countries|
|Global Strategic Sourcing|
|Using suppliers network to learn faster|
|Suppliers development for global approach|
|Creating strong and flexible Supply Chain: “ Thinking globally, acting locally”|
|Success for 3PL (Third-party logistics)|
|Lean Supply Chain: Best practices”|
|Collaborative Supply Chain|
|Supply Chain Technology|
|Global Transportation Challenges|
The forum was held on November 5, 6 and 7, 2007 in San Jose, Costa Rica.
Vivek is the Managing Director of Global Supply Chain Group based in Sydney , Australia . He has over 23 years of operational and strategic experience in logistics and supply chains. As a management consultant with Booz Allen & Hamilton he has provided supply chain and strategy advice to boards and senior management of clients in a range of industries including manufacturing, chemicals, mining, agribusiness, construction materials, explosives, airlines and electricity utilities. His project work in supply chain management has added cumulative value in excess of $500M incorporating projects in major supply chain infrastructure investment decisions, profitable growth driven by global supply chain realignment, Business Process Reengineering, supply chain systems, negotiations and all other aspects of global supply chains. Vivek has spoken at several supply chain conference, forums and workshops in various parts of the world. He has also conducted several strategic workshops on various aspects of supply chain management. Vivek’s areas of expertise include Supply Chain and Logistics strategies and systems, Network and Footprint optimisation, and operations management. He received his Master of Business Administration with Distinction from the Australian Graduate School of Management in 1996 and prior to these studies spent 11 years in the Merchant Navy, rising from a Cadet to Master Mariner.
Global Supply Chain Group is pro-active in creating, configuring, and formulating effective, secure and sustainable supply chains around the world. With a collective supply chain experience of more than 120 years, the senior team in Global Supply Chain Group has worked on more than 100 blue chip projects on all continents adding in excess of $1.5 Billion in value to their clients’ businesses. Large corporations rely on Global Supply Chain Group to deliver outstanding results in their supply chain strategy, supply chain sustainability, supply chain security and supply chain performance. Global Supply Chain Group works very closely, and sometimes anonymously, with the senior executive teams of large corporations to help them win outstanding Global Supply Chain Advantage through: [list icon=”icon: chevron-right” icon_color=”#37c6f5″]
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.
Yet the four people in the room were all expensively attired, and talked about the high end cars they drove.
The CFO was a tall, lean man. He was perhaps a very good rugby player in his day. Another CXO was a stylish European with trimmed hair. The head of supply chain was the man who was least comfortable in that room. I was the fourth person – and we were discussing how to take the supply chain of this global behemoth to its next level.
It never surprises me that the companies that are making the most profits are also the ones who are always trying to get better and better. Perhaps that is why they always make good profits in the first place.
The conversation was centered around how to upgrade the supply chain to its next level. Our company has not yet decided to accept this project because we were not sure if the company was ready for a real transformation, or was just paying lip service to a trend. In fact that was the only question I was there to answer for myself. The rest of the questions would be taken care of as the project progressed. But, if the answer to this most important question was not not right – a large, branded consulting company would be more appropriate for the project. There are exceptions, but the junior people that they generally deploy on these type of projects rarely care if the recommendations are worthy of implementation. And, so long as the bill is paid by the client, the senior partners rarely care about anything in projects of that type.
Luckily, as the conversation proceeded, it became clear that the company was looking to create a real, positive change in its business. I could relax and spend some more time in this meeting.
But, it also became clear to me that what the other three people called supply chain was actually just logistics. This could cause major problem down the line. When the definitions are not clear, the ambiguity breeds non-accountability. Everyone points fingers are each other.
It would be almost akin to a company contracting you to upgrade their building, but their definition of building is just the lobby (or the lifts). Clearly, you would want to correct that misconception. I pointed out this example to the people in the room, and they wanted me to delineate supply chain and logistics. I told them about my ‘MASTERCLASS WITH MR SUPPLY CHAIN’ which spends a lot of time on stories related to his misconception, and its impact on businesses and their profitability.
We decided that before the project details were agreed upon, it would be a good idea to run an in-house ‘MASTERCLASS WITH MR SUPPLY CHAIN’ for the top 12 people in the company. I think it was a good positive outcome from that meeting. Suddenly, the head of supply chain was a lot more comfortable in the room.
For him, it is a causal connection of two or more psycho-physic phenomena. He started to use this word in the 1920s to describe two or more casually unrelated events happening together in a meaningful way. Although we could write pages on this concept, a short definition would be a coincidence that is not senseless. Carl Jung observed this phenomenon on a patient for the first time.
A patient dreamt about a golden scarab, and the next day, the same insect hit his cabinet’s window. The question that comes up with this kind of situation is: Was the relationship between the events random or was there some hidden force?
The concept of synchronicity has evolved through the 20th century and many studies exist about it, with many theories and explanations. However, this is Carl Jung’s thought in which we are interested. Indeed, his vision of meaningful coincidence is what I think happens with business relationships. Synchronicity is what enables our business networks to expand and to create more value.
To pursue his work, Jung started to collaborate with Wolfgang Pauli. This collaboration lasted for several decades, making conjectures about synchronicity. They conjectured that with a link between the apparently disparate realities of matter and mind were existing. Pauli called it a “missing link”.
While accretion and synergy are two other concepts that create value, synchronicity is the best. Indeed, synchronicity provides even more multiplied effects than synergy, whereas we usually think synergies are the best we can achieve.
Global business networks can become very valuable because of synchronicity power. While synergy provides a good value (2 + 2 = 5, whereas with accretion 2 + 2 = 4), synchronicity is the most valuable. Its mathematical principle is described as follows: 2 + 2 = 22. This is the power contained in this concept.
Therefore, you must focus on this concept to develop your business networks and make it more valuable than by using simple synergies or accretion. Visualization, if not faith, is compulsory to be able to understand this concept and make it work for you. Besides, the concept of synchronicity relies on key principles that may not be available for anyone. In fact, it is all about abundance of outcomes based on wisdom, creativity and cooperative effort. This is the cornerstone of the value of synchronicity.
Consequently, business networks are great and work successfully for your business when synchronicity is the main ingredient. This is the most powerful ingredient that can help you build a great business network. However, this is still a matter of coincidences, although they are meaningful. In fact, the economic metaphor that can be utilized for synchronicity strategy is the free networks.
Accretion relies on free markets. When your strategy evolves to improve the outcomes, through synergies, the appropriate term is “managed markets”. Then, the best strategy, which includes synchronicity, leads to free networks, which is much more significant and valuable than free markets or managed markets.
Thus, step-by-step, you can improve your business strategy, using your business network and gradually implementing strategies of synchronicity. Synchronicity will create the best value through a great business network.
by Anais Lelong