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Outsourcing Strategies: Four Keys to Manufacturing IT's Future

Dec. 17, 2007
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 safe to say that the business technology environment is ever-shifting. In fact, to many involved in strategic decision-making, it feels a lot like quicksand underfoot, and the drive to adopt new information technologies while keeping budgets and headcounts stable is just more weight for management's shoulders.

In such a high-pressure environment, outsourcing seems like an easy call -- put IT in the hands of outside experts, and let them do the dirty work while your hands stay clean. In fact, such an attitude characterizes many of the tactical-level decisions made in the manufacturing arena over the last decade, as one process after 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 and when will it end? 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.

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For starters, the outside vendor might not know where to start, or even what questions to ask to find that out. Hader points to the complexities of a company with various methods for assigning a price to a customer for a particular product. "In this case, 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 may be native knowledge to the internal IT staff, but often lose much in the translation to outside consultants. "You can see how improving these processes 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 insider's hand is necessary to keep the company's business needs steering the ship. "You have to be involved in managing the process to ensure that the design and functional goals of the system are being met," he cautions. "Otherwise everyone can lose."

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. As the leader of a robust internal IT department at a process manufacturer, he is responsible for strategic planning, personnel decisions, contracts and equipment purchasing, and is finding himself faced with a different impetus for outsourcing -- namely, the graying of the workforce. "My main challenge isn't cost," he says. "We've got money to fund programs, and expansion even. My main challenge is that 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 perform a comprehensive analysis of their internal 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 solutions in play -- both of which can be expensive in their own right.

"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 it's cheaper on the in-house side of the cost equation, part of his job description is to find and train local talent, and so he's developed a two-stage solution to stem the brain drain. The first is a knowledge capture project that should help document the native knowledge of his older, highly-experienced workforce; the second revolves around aggressive campus outreach programs, similar to those pioneered by Xerox at North Carolina State University, that are designed to recruit and train enough entry-level talent to inherit these well-documented legacy processes and help facilitate the coming transition to service-oriented and enterprise 2.0-type platforms.

On the bright side, he notes that "these 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 insourcing, and even re-outsourcing, from deep in the enterprise manufacturing sphere. Lately, Pass 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. "In some companies, IT is an underperforming function, and has been for as long as people can remember -- and everyone in the company knows the reasons why. Executives are saying I'm willing to pay a premium just to get it off my plate.'"

According to Pass, much has been made of manufacturers "insourcing" formerly outsourced IT functions -- a dynamic he likens to the rocky beginning of any relationship. "In the past, all too many companies started off on the wrong foot," he says, setting a confrontational goal that led inexorably to a "zero-sum game." Not surprisingly, this set the stage for failure. "Saying everything that is good for me is bad for you' is no way to do business," he says.

Another big mistake in the first wave of outsourcing? Underestimating the need for flexibility on both sides of the table, says Pass. "Locking things in stone has proven to be far less in the business's interest than was thought at the start," he observes. "Writing a contract and locking things in with a provider that prevents them from turning a profit is not a good thing either, especially if the provider then goes out of business."

Vendor management is another strong theme that Pass sees going forward, albeit in slightly different form. "In the past, if you said you were a vendor management expert, what it meant was that you could produce a ream of reports and beat them over the head with them," he says. "Now it's more elevated, more of a conversation."

As far as offshoring is concerned, Pass says that the global chess match of "shore versus shore" is still in flux. "Companies that rushed to get in and establish services in cheaper labor countries are finding wage inflation and turnover rates well into the double digits," he says, which underscores the fundamental mistake of chasing cheap labor alone. "Tuture decisions won't be about which location is cheapest; they will be about which location has a competitive advantage in a specific function. Companies need to keep these inherent advantages in mind when planning for the future."

Also, if companies do outsource, they will likely be looking to their outsourcing provider to figure out the tactical aspects of the overall strategy, says Pass. "Not only are you going to outsource the function, you're going to outsource the decision about where that function will be performed," he says. The result? Increased competition for customers and talent between firms like the U.S.-based EDS and India's Infosys that will change the global game even further.

When companies do reverse an outsourcing decision, it's typically because there's disillusionment with the vendor, the level of service and the quality that's being provided, says Pass. "Things go out, and they come back a lot, but it's not because the company didn't understand the nature of the contract. It's usually because the cost, the quality or turnaround time didn't meet expectations, or just plain underperformance by vendors."

Key 4: Skills Management

Bob Gault, managing vice president of Siemens IT Solutions and Services, has witnessed the emphasis in manufacturing IT departments shift away from reducing cost and toward adding value, and he sees the convergence of IT and engineering as both a macro trend and an area for workforce training and development.

Gault says that the companies with internal IT departments that are flexible and skilled in business will see results in other areas. Ideally, CEOs want IT managers that can "manage business processes and capabilities and suppliers, and then can take those same management disciplines and apply them to other areas of the company, including innovation," he says.

According to Gault, every company should make sure to resource its IT security department with smart people. "You need professionals to understand how to put up the proper defenses within an IT infrastructure to assure that your data stays protected," he says.

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