Monthly Archives: November 2011

Outsourcing in an increasingly complex world

Outsourcing in an increasingly complex worldSometimes posts become a tad to long and unwieldily to drop onto the blog. One such post was a thing I put together around some work I’ve been doing over the last few years on outsourcing. A friend suggested that, rather than letting it languish, it could be interesting to clean it up and publish the result as a (short) ebook; which is what I’ve done.

Find the blurb below, and to can grab the complete text from the iBookstore or Lulu (epub) (Amazon is in the pipeline).

Outsourcing in an increasingly complex world

by Peter Evans-Greenwood

Support independent publishing: Buy this e-book on Lulu.

Pressure on margins is driving organizations to increasingly rationalize and externalize supporting functions as they search for more efficient and flexible delivery approaches.

Most common approaches to outsourcing center on establishing target service levels and a unit cost, treating the negotiation of an outsourcing engagement in a similar fashion to the procurement of other materials that the business needs.

Outsourcing, however, is becoming more complicated as we move functions closer to the heart of the business into the hands of partners and suppliers. This represents a shift from an approach based on paying invoices for the raw materials we need to run the business, to one based on delegating core, business-critical functions to suppliers, and then requiring them to deliver the outcomes that we need.

Crafting a successful outsourcing engagement in this environment requires us to align the supplier’s incentives, and therefore their objectives, with the client’s business drivers. It’s not enough to take a piecemeal approach, imposing additional requirements and constraints in the hope that these will shape supplier behaviour.

It’s a truism that what gets measured is what gets done; outsourcing is no different. Existing approaches to crafting outsourcing agreements attempt to shape supplier behavior by imposing large and inconsistent sets of requirements, with the result that both parties search for loopholes in an attempt to optimize their position.

A successful contract will be based on the customer’s business drivers, aligning supplier incentives with them to ensure that the agreement drives the right behaviors

Is Salesforce.com already legacy IT?

The more I think about it, the more I feel that we need to rethink what “application” means.

The IT industry – and therefore “application” – has been defined by businesses’ need to acquire IT assets. The roles companies play in the industry have accreted around this need, as I’ve pointed out before{{1}}.

[[1]]Business models for the old rules of IT @ PEG[[1]]

The big shift we’re seeing in the market at the moment is a move from companies wanting to acquire IT, to a need to engage services enabled by IT. I know, for example, one airline that has externalised flight planning and pays per flight plan, rather than worrying about the tools need to support a team of flight planners. It’s a capability and process centric view, rather than a technology centric view.

If we follow this line of thought through then we quickly realise that the future of IT in business will be determined by the need to knit together a fabric of IT enabled services, many of which will be obtained externally. I don’t need a project portfolio management solution, I need a portfolio management capability backed by the tools and skills required to make it work. I don’t need a CRM solution (SaaS or not), I need a sales management and reporting methodology (Holden? Miller Heiman?) supported by technology to enable it to scale. It’s outside in thinking, rather than inside out.

What will the industry that accretes around this new need look like? If we look at many of the current on-demand / SaaS vendors, then they could best be described as enterprise software, but in the cloud!. Take the old model and make it multi-tennanted. We should probably call this Cloud 1.0 (where MySpace was social media 1.0). Cloud 2.0, however, will be something different and might be just over the horizon, rendering the current incumbents obsolete, legacy while they’re still young.

Death of the shopping mission

When did you last go on a mission to buy something? Something specific that you had decided you needed. Were you looking for a book to read, heading to a nearest bookstore to browse the shelves? Was it a trip to the local big-box store to stock up on toilet paper and other household odds and ends? Or did you wander around a department store at the local mall looking for something to wear? Our behaviour – consumer behaviour – has changed. Shopping has historically been a search problem: how do we find the products we need need? Today, though, we increasingly buy on impulse, selecting the cheapest – or the best at the most competitive price – from the wealth of products and merchants around the global. The shopping mission is going the way of the dodo. If we see a book we like, then we add it to our list at Amazon or Book Depository and it’s delivered direct to our front door. We’re getting household consumables delivered direct to our homes. And we’re even sourcing clothes online where we can find lower prices and a larger selection. Our behaviour is changing, and the retailers and merchants who don’t adapt are being left behind. A lot of the turmoil we’re seeing in the current economy is likely due to a reconfiguration of business, driven by the changes in consumer behaviour.

We used to engage in a shopping mission, a quest to find the goods we need to solve problems that we know we have. This was a journey that would bring us into contact with quirky in-store marketing displays designed to influence our purchasing decision. Product companies tried to build brand awareness, hoping to create a spark of recognition that, when you found yourselves standing in front of the shelves, would tilt you toward selecting their product over the others. Will be it Heinz tomato sauce? The store’s home brand? Or something gourmet from a boutique manufacturer. Merchants worked hard to ensure that they had the best selection of products they could find – the brands that would pull the customers into their store rather then those of the competition.

Standing before the grocery shelf or clothes rack, we would sort through the brands on offer, trying to find the one that we though to be the best value. This roughly translates into selecting the best quality that we could afford. The only products and information at our disposal was what the retailer chose to present us with, unless we were willing to trudge over to another shop so that we could we see what products it had on offer (and what it was willing to tell us about them). The result was usually a compromise: we’d select the best product we could see in front of us, knowing that it was probably neither the cheapest we might find if we kept searching, nor would it be the best we could find. Finding a better solution to our problem – that pair of jeans with a nicer fit, or the tomato sauce with just a hint of something interesting – was too hard.

The world has changed a lot since then. Firstly, globalisation means that it is now possible to reach around the global, conducting an extensive search for the cheapest, or the best (at the most competitive price). This is as simple as typing a few words into Google or visiting you favourite comparison shopping site. Secondly, quality is a solved problem. Twenty years ago that store brand ice-cream or tomato sauce, or the no-name t-shirt, were obviously inferior to the brand name product. Twenty years is a long time, and manufacturing’s relentless focus on quality management over that time means the cheapest product in the market is virtually indistinguishable from the brand names. They were probably even made in the same ingredients or components in the same factory by the same people.

Consumers no longer need to compromise. With little difference between products and the ability to source them from around the globe, many consumers opt for the cheapest they can find from the global market. Nor are consumers who are willing to pay a premium restricted to selecting from the products on offer locally, reaching around the globe find to the exact product they want at the best possible price.

“Price comparisons would be between first and second, or fourth and fifth. What we’re seeing now is a consumer who shops either on price, or on quality – the number one premium, or the retail price point. All the middle brands have gone.”

Sue Morphet, CEO PacBrands1)Speech at the Australian Institute of Company Directors lunch in Brisbane, May 26, 2011.

The balance of power has shifted from retailer to consumer, and the shopping mission is collateral damage. A consumer standing in front of the gaggle of tomato sauces offered by a merchant now has enough information to make an informed decision, and a brand means nothing unless it offers something unique. Consumers are buying the cheapest product, or they are buying the most interesting product (to them). The mass-market brands we grew up with, those labels we trusted because they were reliable, are being demolished, caught in a no man’s land between cheap and premium.2)Eli Greenblat (Aug 30, 2011), Heinz cans Coles, Woolworths, The Sydney Morning Herald

An avid reader wanting a specific book will source it from an online retailer such as Amazon or Book Depository who can offer lower prices and a larger selection, delivered direct to the front door. The time poor professional at the supermarket will often simply pick the cheapest bottle of tomato sauce they can see in front of them, knowing that it will be as good as any of the other. That teenager interested in those green sneakers with black skulls will try on their friends for size and then use an comparison shopping site on the Internet to find the best deal globally. Now that the consumer is in control, and they have the information and services they need at the tip of their smart phone, they are becoming much more impulsive with their approach to buying the goods they want.

The cost of finding the goods and services has plummeted, and consumers are responding by taking a much more opportunistic approach to purchasing. Rather engaging in a search to find goods we need, we’re deciding to buy them impulsively once a need is recognised. Consumers are building relationships with organisations that provide the premium products they desire, or who can be relied on to provide them with the lowest cost items that can be found. Purchases are made opportunistically, built on the shared social connection that has already been established. Customers skip across channels – both real and virtual – learning more about the company’s products and how they can help them. Eventually they realise that there is something they would like, and purchasing is now simply a matter of acknowledging their desire. They might purchase a TV from a company known for bringing cheap but innovative electronics to market, one more focused on putting all the features the customers want into one box, rather than trying to up sell and cross sell. It might be an expensive meal at a restaurant, triggered by the knowledge that a table had just become free for that night. It could the milk man offering to drop off some veg and a steak with the morning milk and bread, guaranteed to arrive before you leave for work. Or it might be that premium computer or tablet with that carefully designed case that you were playing with at your friend’s house.

Retail is reconfiguring, splitting into the cheapest and the best, with a gap appearing the middle. Apple, for example, seems to be the only consumer IT brand still experiencing robust growth and profits,3)Charles Arthur (July 2011), Apple profits up 124% year-on-year after record iPhone sales, The Guardian with the majority of PC manufactures struggling to pull slim margins from a declining market. At the other end of the market, Kogan Technologies is rapidly building a profitable business4)Neha Kale (August 2011), Kogan Technologies reports 100% increase in revenue, PowerRetail around a low cost, direct to consumer model founded on using a community of low cost manufacturers to rapidly create cheap but functional products target at specific consumer needs. Harvey Norman, a traditional bricks-and-morter retailer, is seeing revenue fall and profits slump.5)Anhar Khanbhai, Harvey Norman profits fall 20%, Connected Australia

The new generation of companies – the Apples and Kogans, the Zaras and the explosion of boutique fashion houses – are playing to our new tendency to buy impulsively. They build relationships with their customers, allowing them to skip across channels without purchasing, to reduce the resistance to transacting when the time comes. They avoid sales and regular discounting so tht there’s no reason to hold off a purchase. Some, such as Betabrands, are turning this art into a science, using our desire to be seen as original and our tendency to want to grab bargains when we stumble across them to overcome our reluctance to buy something we can’t touch and feel and accelerate their sales cycle.6)Amy Wallace (October 2010), Whimsy (and clothes) for sale, The New York Times

A chasm is opening up under the traditional mass-market brands, brands that rely on the shopping mission, while companies which can establish themselves at one of the two ends of the spectrum are seeing robust growth. Companies caught in the middle, companies built around the traditional shopping mission are seeing their margins decline and revenues fall, unable to compete. The shopping mission is dying, and it appears that many companies might die with it.


Update:

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