Fewer Application Outsourcing Providers Can Mean Greater Success for Automakers

Nov. 19, 2009
Companies, on a total cost of ownership basis, can save 22% to 28% of ADM costs by working with fewer suppliers.

The economy has made reducing costs more critical than ever for automakers, as they not only try to survive, but transition into producing more alternative fuel vehicles. Application Development and Maintenance (ADM) outsourcing has gained favor as one way to meet the challenge.

But, there is another challenge -- too many ADM suppliers.

In attempts to leverage the benefits of ADM, some companies have amassed a complex network of multiple suppliers to meet their needs. But, more often than not, managing this type of network can increase costs rather than reduce them. In contrast, leading-edge organizations are achieving more by engaging fewer ADM providers.

According to new research conducted by Accenture and the Everest Research Institute, companies, on a total cost of ownership basis, can save 22% to 28% of ADM costs by working with fewer suppliers. This includes both one-time and recurring cost reductions. For example, one-time costs can be reduced 35% to 40% by working with existing suppliers instead of new ones, through savings in specifying, tendering, evaluating, selecting, negotiating, contracting, transitioning, managing and governing the additional work. These are largely hidden costs, since often times companies are not aware of them or do not qualify them.

Moreover, the research found that recurring costs can be reduced 20% to 25% as fewer contracts, invoices and compliance relations are managed. But, mostly the reductions result from economies of scale that enable fewer providers to offshore more and more senior roles into their global delivery networks.

Accenture, for instance, is working with one of the world's foremost car manufacturers to help consolidate a vendor network of its application operations service providers in areas, including production, sales, logistics, finance and human resources. This undertaking covers more than 500 applications the automaker uses around the world in its automotive and component manufacturing plants and within its sales and distribution units.

The goal is to make the company's IT processes more reliable, predictable and efficient, while helping it simultaneously achieve lasting cost reductions and improve the overall service levels provided to its business users. Other leading car manufacturers, recognizing that the competitive challenges of the auto industry will only intensify, are pursuing similar strategies.

Limiting Complexity to Achieve More

The findings show that the motivation for using multiple providers runs the gamut from variations in suppliers' capabilities to localized decision-making across an enterprise, or the simple desire to retain competitive tension. But, in any case, to build an effective ADM supplier portfolio, companies must first reduce the complexity arising from multiple suppliers. This includes:

  • Limiting the number of suppliers by achieving consensus on the principle that fewer suppliers are nearly always better.
  • Segmenting suppliers into strategic or specialist categories
  • Ensuring appropriate scale necessary to build mutually beneficial relationships with suppliers.

Making a Leaner ADM Portfolio Work

Once complexity is addressed, there are three areas companies need to focus on -- organizing, operating and managing a leaner supplier portfolio.

Organization -- Deciding the form the ADM organizational structure will take, such as enterprise level versus specific business units and/or geographies will be highly important, as it will become the foundation from which future decisions are made. For example, will it be more effective to take an enterprise-driven approach to ensure optimal performance versus starting off with a few major groups and then expanding the scope?

The Operation -- Next, there will be a need to evaluate and choose between two broad engagement models -- harmonized or orchestrated. The harmonized model involves companies acquiring talent at the best price and defining the primary tools and processes for service delivery. The orchestrated approach comprises attaining results from suppliers through defined objectives, while requiring the supplier to determine how to attain results.

Managing the Process -- With the proper engagement model determined, achieving optimal performance from the day-to-day operations will require careful management of three key areas that include:

  1. Division of work: Highly interdependent delivery increases the impact on productivity, thereby requiring greater coordination.
  2. Scope and scale: The scope of work outsourced has implications on the complexity associated with managing it. Also, the extent to which the supplier is provided scale benefits determines the potential cost savings.
  3. Governance model: This creates a more predictable environment through the re-use of Internet protocol and frameworks. And, it reduces both one-time and recurring costs associated with managing the performance of multiple suppliers.

In conclusion, whatever reasons there may have been for using multiple ADM suppliers in the beginning, high performers are now consolidating their vendor base. When a company succeeds at reducing or limiting the number of suppliers in its ADM portfolio, it can achieve significant benefits that not only include lower costs, but higher productivity and greater business impact. The auto industry is undergoing unprecedented change which will require automakers to take advantage of any and all costs-saving strategies that can help them remain competitive and continue on the road toward high performance.

Richard Spitzer is a senior executive for Accenture, a global management consulting, technology services and outsourcing company.http://www.accenture.com/Global/Outsourcing/default.htm

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