Almost as much as rules of any game matter to the champions of that game. If you are a competitive sailor, or a golfer you know how vital it is to know the rules of the game and play by the rules.
Otherwise, you risk being disqualified, or getting penalties.
Just consider Tiger Wood’s two shot penalty at the US Masters in 2013 for a wrongful drop. If even the best player in the world, who has been totally immersed in the game since he was 2 years old can make mistakes about the rules, what chance do we lesser mortals have?
While there are general set of rules as per the legal principals in the country, the rules of engagement are left to the parties.
For this reason it is vital to take complete control of the game by designing the rules of the game in such a way that you meet your objectives for the game.
Now, does that mean your vendors have to lose along the way?
Most companies structure and run the market engagement process in a rather formulaic and archaic manner. Perhaps this is a legacy of procurement protocols or legislation enforced by governments or anti-corruption departments.In my book Outsouring 3.0 you can read the key questions to ask during Market Engagement preparation.
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."
As the exploratory well it was digging nearly came to completion, on 20 April 2010 Deepwater Horizon became front page news on nearly every newspaper on earth. The incident was reported in a press release by Transocean as follows:
“Transocean Ltd. (NYSE: RIG) (SIX: RIGN) today reported a fire onboard its semisubmersible drilling rig Deepwater Horizon. The incident occurred April 20, 2010 at approximately 10:00 p.m. central time in the United States Gulf of Mexico. The rig was located approximately 41 miles offshore Louisiana on Mississippi Canyon block 252.”
“Transocean's Emergency and Family Response Teams are working with the U.S. Coast Guard and lease operator BP Exploration & Production, Inc. to care for all rig personnel and search for missing rig personnel. A substantial majority of the 126 member crew is safe but some crew members remain unaccounted for at this time. Injured personnel are receiving medical treatment as necessary. The names and hometowns of injured persons are being withheld until family members can be notified.”
The details of the incident, as per the figures from popular mechanics were attention grabbing:
4.9 million: Barrels of oil (205.8 million gallons) leaked from the Deepwater Horizon well, about half the amount of crude oil the U.S. imports per day
19: Times more oil leaked from Deepwater Horizon than spilled from the Exxon Valdez in 1989 (10.8 million gallons)
62,000: Barrels leaking per day when the wellhead first broke, roughly the amount of oil consumed in Delaware each day
53,000: Barrels leaking per day when the well was capped on July 15, roughly the amount of oil consumed in Rhode Island each day
397.7 million: Dollars' worth of the oil spilled at current market prices ($81.17 per barrel)
665: Miles of coastline contaminated by oil
The resulting investigation to establish the causality, contributing factors and liability will fill up a book many times the size of the one you are holding.
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.
Outsourcing, or as it was then labeled „contracting out‟, has been in use on an industrial or commercial scale since the advent of the industrial revolution in England during the 1700‟s (Brown & Wilson 2005; Kakabadse & Kakabadse 2003), with firms facing the "make or buy‟ conundrum that resulted from the greater production efficiencies that characterized eighteenth century England (Domberger & Hall 1995). In support of this contention, Greaver (1999, p.10) wrote that "outsourcing is similar to subcontracting, joint venturing, and strategic partnering concepts, which date back hundreds of years‟, citing the following examples: farmers hiring migrant workers; construction companies subcontracting electrical and plumbing activities; and governments subcontracting defence materiél production to private companies.
The first systematic use of outsourcing can be traced back to the 1940's, during World War II, when organizations provided systems facilities management services to the U.S. government (Greaver 1999). However, it was the growing dissatisfaction with the underperforming post World War II ideal of economy-of-scale driven conglomeration (Hunter & Cooksey 2004) and the introduction of timesharing mainframe computer services in the 1950's and 1960's (Factor 2002) that set the scene for the wider adoption of outsourcing methodologies.
Is there a way to distinguish between good outsourcing and bad outsourcing? What are the tell-tale signs? In a later chapter we will deal with the objective measure, but at this point I want to note a few tell-tale signs that generally apply.
Ask any executive, when to outsource, and when not to outsource – you will get a quick answer. If it is a core competence, do not outsource. If it is not a core competence then consider outsourcing.But are there situations when you must NOT outsource? We were faced with a situation like this in one of our projects. One of the directors was dogmatically against outsourcing of any kind. In his executive career, prior to becoming a non-executive director, he had faced several outsourcing situations where the outsourcing service providers did not deliver the promise. In addition, he had seen an erosion of capability within his own company to an extent where it lead to dependence on the outsourced service provider, even for minor tasks related to the service. At times, he felt that the service providers charged inordinately high prices for these minor services, especially if they were not covered by the initial contract. All these memories had created a bias which is not uncommon.
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.
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.
As the business network of the East India Company was getting embroiled in exploitative trades of opium and slaves, another network, far more effective, was being established on the continent of North America. Having won the American war of Independence, the colonies of the eastern seaboard were expanding far into the continent of North America - in all directions. When the technology of railroads eventually arrived, this expansion boomed.
With the rapid industrialization and growth of railroads, it became possible to mine, establish factories and build all the modern transportation and communication networks that underlie modern commerce today. Besides opening up the entire continent and establishing the United States of America as the pre-eminent industrial power of the 20th century, the railroad network also formed the basis of massive fortunes of tycoons such as Stanford, Pullman and Vanderbilt.
Oil, steel, coal, chemicals, power stations, mining operations, grain and passenger transportation were all greatly boosted by the railroad network. It is fair to say these formed the basis of the modern industrial economy of the USA. The key feature of this business network was the clear enunciation of the positive reinforcement cycle, or flywheel effect, whereby other industries got a boost from establishment of the railroad network, which in turn further benefited the railroad networks themselves.