DMA

From Wikipedia, the free encyclopedia “Elephant in the Room” is an English metaphorical idiom for an obvious truth that is being ignored or goes un-addressed. The idiomatic expression also applies to an obvious problem or risk no one wants to discuss.

I completed a large infrastructure outsourcing deal a couple of months ago and enjoyed a well deserved vacation with my children. Now, I have been busy the last few months building the Sourcing Practice at Senority. (www.senority.nl)

During this period of design and build, I have been thinking that my faithful reading public would appreciate hearing about some lessons learned during the last €3billion plus transactions that I have managed for clients and suppliers. Most of the articles or white papers that I read tell you “how to” but never discuss the “because that’s why” aspects of sourcing. Hence the Elephant in the Room.

My ideas for topics are below:

Part 1: Outsourcing Savings: The Forgotten Budget
Part 2: Shared Services: The Japanese “Yes”
Part 3: Transition Preparation: Too Little to Late
Part 4: Outsourcing Team: When Full Time is Part Time
Part 5: CxO: “Great project, let me know how it goes”
Part 6: Understanding What Interests Suppliers
Part 7: The Toughest Project Your Team will have Worked On
Part 8: The Internal Sales Process isn’t for Sissies
Part 9: It’s about Multiple Projects running in Parallel

I would most certainly appreciate your feedback on the series topics. Please feel free to suggest additional ones.

Until we meet again with the Elephant in the Room.

The first time any of us do anything, it is always a learning experience. Unless of course, you don’t want to do it again.

Imagine the first time you bought and ate an ice cream cone… It cost a weeks allowance, it melted quickly, you may have lost one scoop to the ground, your clothes were most likely stained but the intangible benefits were incredible.

Imagine the first time you outsourced your entire global IT infrastructure… the cost to outsource exceeded your plan (outside lawyers, HR specialists, consultants, internal transfer costs for resources) but your business case covered it, it start well enough but degenerated into a “we thought, we didn’t” discussion, your business case continued to be reduced, you lost your good people who left when they could with a package, business clients are even more dissatisfied than before and but you are still showing savings but it has been delayed by 18 months and the intangible benefits (future savings) is uncertain.

You can explain to Corporate Executives about lessons learned but until you burn your fingers yourself on the stove that your mother told you about… it is hard to get the right level of attention unless of course,

You use all the available resources to quantify, qualify and define your strategy and success criteria by doing all the necessary homework. Hire at least one internal resource to be, not the leader of the new project, but the guiding light and sounding board. Internal executives buy from internal experts, not consultants.

First time outsourcing is all about using common sense. Unfortunately, common sense isn’t so common.

The proverbial chicken and egg issue… Many Company’s decide to outsource (insert chosen process area) to put out a corporate fire, namely, to halt run away expenses and hence, save money.

The problem is no corporate sourcing strategy has been agreed including local adaptations to guide their decision making.

Outsourcing contracts are vastly different than indirect procurement contracts. The Master Services Agreement has numerous variances with standard procurement contracts. In addition, all the exhibits and attachments have a thread that ties all the documents together. So there are many places for points of failure for the first time as well as experienced company who outsource services.

Rather than answer or try to build a strategy here, let us try to pose some key questions that you will need to answer prior to building the strategy as well as some golden rules.

- Do you envision the strategy as a project or a journey?
- Does your sourcing strategy take into account your business strategy? Are they aligned?
- Have you socialized this within all levels of management including employees?
- Do you have a communications plan?
- Is Human Resources involved?
- Do you have the right experienced people to lead:
- The outsourcing contract
- Govern the contract after signing
- These are two different sets of skills!
- Have you properly budgeted for the 2 teams in question 3 above?
- Are you returns realistic with regard to timing and amount(s)?
- The probability of saving any money in year 1 of the contract is very small unless you financially engineer it
- Since an outsourcing contract is very different from indirect procurement, you should consider outside counsel with outsourcing expertise
- If you have out-tasked other services (e.g. pension admin, help desks, etc), be sure to leverage the lessons learned in these deals
- If this is your first time outsourcing, be wary of trying to select more than 1 service provider to gain leverage. You will be challenged enough with 1 supplier, let alone trying to separate the wheat from the chaff with several suppliers.

The strategy should take you from 6 to 12 weeks to complete. Ensure that your data for the business case is recent. Do not forget, if you are making people redundant (taking into account TUPE and the like), to budget the cost of redundancy. It is very expensive especially the pensions!

I could go on and on but these are some high level points that you should not forget. Want to learn more? Send me an email.

I remember the first time that I managed Managers. Flush from my successes as a leader of several different teams… poised for yet another success in a series of successes…

Boy did I get a rude awakening. Managing Managers is a whole ‘nother kettle ‘o fish!

It took me almost four months to figure out the problem… It is a double blind. And it is directly related to Business Strategy. It is one of many issues with executing a Business Strategy successfully.

So what happened? Within the first month or two, I realized that there was something significantly wrong with the business that I was running. Things were not right; people were unhappy, sales were down and expenses were up. Certainly a recipe for disaster!

I missed the human aspect of managing people who are Managers. People are human and will interpret any given message the way they see fit. What I had to do was understand that my once “one on one” management style no longer worked. I needed to manage Managers who managed people who were not managers.

So what did I do? I got all my Managers in a room and explained the situation and what I had failed to see. Going forward, I could no longer effect directly 300 plus employees rather I needed to manage these people THROUGH my Managers. I could no longer expect that my charisma and intelligence would permeate through the team directly. I asked my Managers how we could solve this problem. I knew how but better to let them come to the conclusion themselves. After all I had tried to hire Managers who were smarter than me.

How did we succeed? We all agreed that the big messages (our Business Strategy) was owned by me and the little messages (how we manage people directly) were owned by the Managers with their people.

It sounds simple now that I have explained it. How many of you have overcome the last Managerial hurdle? I would love to hear your feedback!

Good I have your attention. At least I didn’t use the word “sex” in my title to lure you in. Actually there are 2 reasons why I used this title:

1.    Most times (30-40%), outsourcing does not work
2.    Google uses keywords in titles to rank and rate blogs (At least I am honest)

Let’s cover the first item which is obviously of interest. Why does outsourcing not always work? (no particular order!)

Businesses do not:
1.    Align their sourcing strategy with their business strategy. Sourcing can imply shared services, captives, on-shoring and offshoring.
2.    Approach sourcing as a potential solution to different situations
3.    Take the time necessary to make an informed decision
4.    Understand the difference between a sourcing agreement (internal or external) and typical procurement agreement (direct or indirect)
5.    See the need to create an internal organization (light or heavy) to manage their sourcing solution
6.    Align their internal organizational groups with the planned solution

Other than that, businesses usually get it right. And these are only few of the things that are not done correctly!

So it is no wonder that the media portrays businesses as failing with their sourcing initiatives. Sensationalism sells.

Most often businesses strategies are the “Emperor’s New Clothes.”  But that will be the topic of another posting.

Outsourcing is a journey and not a project in which everyone must participate. It is not a smart bomb to be unleashed on your users. Outstanding results require a change program, a sense of urgency and commitment to purpose. Let’s face it, vacuum cleaners are the only things that should suck and not your sourcing strategy.

I remember when I first started to play golf… in addition to lessons, I started reading everything I could get my hands on. This is the way I go about learning a new topic; voracious reading.

I learned after about 2 or 3 months that this doesn’t work with golf. Why is that?

Although most articles and books label themselves as beginner, intermediate or advanced, they do not take into account a few small details such as:

1. physiology: weight, height and any physical handicaps
2. ability: are you athletic? have you ever played golf? do you take lessons?
3. equipment: what type of equipment do you use? (this is a whole culture unto itself in golf)

I think you get the point. Written golf instruction is lacking in guidance given numerous outside attributes that are critical to your success or failure.

I am sure that like myself, you have read many books and articles on business strategy. They most certainly never have beginner, intermediate or advanced warnings. Sometimes, they are specifically written for a given industry. By and large, they never take into account your specific “outside attributes.”

So why would you ever read a book about business strategy when it does not address your given attributes necessary for success?

Caveat Emptor!

Companies plan their strategies in many different ways. There are numerous factors that influence this planning within a company:

1.    The culture
2.    Management style
⁃    P&L driven
⁃    tight command and control structure
⁃    small management teams
⁃    Consensus driven
3.    Number of employees and geographic spread
4.    Industry
5.    Established or New Kid on the Block
6.    Ownership structure – privately held, venture capital funded, listed
7.    Governmental regulation
8.    Media

I am sure there are more influencers that you can think of as well. In short, it is no small feat to plan and execute against a company strategy.

You may ask why I chose the title, Democracy versus Dictatorship? Well, my experiences with clients as well as planning my own corporate strategies shows that the most influential aspect during the strategic planning exercise is politics… hence the title.

The Scenario:

The top 200 managers from a company of 10,000 employees with revenues of $15 billion located in 22 countries in the US, Europe and Asia Pacific who provide services and products are gathered in August for the strategic planning session. The company is P&L driven by country with a thin regional management layer. They have enjoyed a CAGR of 11% over the last 3 years including 2009! The Board of Directors are young and the shareholders are pleased with the current returns. Their employee turnover is around 7% which is below average for their industry.  There are minimal government regulations in all their areas of operations. They have a good services and product pipeline. From a financial perspective, their cash-flow is excellent and they are not over extended in any area of operations. They are meeting in Amsterdam for a period of 5 days.

In short, life is good.

Excellent brainstorming sessions broken out by groups previously determined by the senior managers… results after 3 days are presented back to the 200 managers as a whole. On day 4 agreement is reached with all the groups and on day 5, the actual plan for implementation is designed and agreed upon.

Fast forward to July of the following year after the 2nd quarters results are in…  total disaster.

The profit margins are down by 8%, revenues are down by 14%… No one really understands what has happened?

The Results:

What happened to life is good?

1.    Alignment
2.    Everyone on the same page
3.    Sure, we agree but we can manage that to our own business
4.    No planned on competition
5.    Clients budgets were being curtailed
6.    The Company’s products were not delivering the promised results
7.    Competitors were poaching the best sales people
8.    The current dividend of 4% was not meeting shareholder expectations

In short, everything that could possibly go wrong had!

The Analysis:

Back to politics… When a ship is sailing under calm seas, no one plans for the storm. Since the Company was P&L driven, in a flash, no P&L was delivering agreed to results… Would it have been better if another management style had been used?

I think not.  What happened here was the classic case of thinking that a business is run as a democracy. This is all well and good until the storm comes…

The captain of the ship needs to feel the rudder’s messages through the helm… this is not a wire guided bomb or self-running operation.

The captain must be prepared to be the dictator!

As Peter McArthur so eloquently stated:  “Every successful enterprise requires three men – a dreamer, a businessman and a son-of-a-bitch.”

The captain missed the warning signals or choose to ignore them.

The point of this posting is simple. Sometimes, the ultimate holder of the responsibility needs to be a dictator and ignore democracy.

Hence, some days it’s a democracy and some days it’s a dictatorship.

This of course is just one persons opinion.

It seems that everyone who advises on sourcing has a method…

From Answers.com,

“A means or manner of procedure, especially a regular and systematic way of accomplishing something: a simple method for making a pie crust;”

This makes sense. If you are setting out to accomplish a goal, a systematic method would seem advantageous, even for a pie crust!

But are there so many different methods, hundreds if not thousands…

Is there a common denominator? numerator? Are they similar? Why all the difference?

I think method is a guise for marketing… aha, now we are getting some place.

People who provide advice on sourcing need to differentiate themselves, obviously marketing of a method is certainly one way.

Now if said Sourcing Advisor has intellectual property and best practices attached to each step in their method, it is now valuable and not marketing.

Don’t you wish that there was a standard? Something that can be reused and measured against various outcomes?  There are several out there, Carnegie Mellon’s eServices Capability Mode for Client Organizations comes to mind.  Better than Gartner’s Sourcing Oriented Service Taxonomy which seems self-serving, buy more of our analysis, please.

So where is the madness in the method? If you have designed a sourcing strategy (and you should prior to calling in the Advisors) than, have a commitment to purpose and not be lead astray.

Don’t let someone else’ method become your madness.

Strategy must be important, Google shows over 181 million hits. Than again, sex shows 651 million. While business shows 2 billion and 30 million…

Thank goodness, something has more hits than sex.

So interested reader, what parallels can we draw from this search?

I remember a time when you had to go to the library to get quality information. You could also pay for an analysis or access to a database to gather your information in support of your strategy. The costs were and still are exorbitant.

I recently had to write a point of view for a client on labor arbitrage in India and what the future held. I wa able to gather a lot of useful information for free via the internet. My position was that there are numerous variables in determining how much longer the labor arbitrage advantage in India will last. My client wanted a definitive judgment. I explained that to get to that point we needed to procure some analytics from 2-3 sources at a cost of about 15 to 30 thousand euros. He was incensed!

The moral of the story is that you get what you pay for… even in the internet age… perhaps even more so.

Welcome to Square Pegs in Round Holes, the blog about balancing strategy with tactics.Together we will take a strategic sojourn through many wide and varied highways.

There are several fundemental parameters guiding our discussions:

1. This is a dialogue and not a monolgue. Your comments and opinions are required to our mutual benefit. That’s why it takes two to tango
2. There are no bad ideas
3. There is no box. Mark Appel says that, “people who think outside the box are already at a significant disadvantage by having a box to begin  with.”
4.  ”The important thing is not to stop questioning.”  Albert Einstein
5. “Of course, finally… A round man cannot be expected to fit in a square hole right away. He must have time to modify his shape.” Mark Twain

The premise of the blog is that most strategies are like square pegs in round holes… They just don’t fit.

So sit back and enjoy the dance of strategy as we partner together on the global dance floor!

Steve Koutros
Managing Director
Delta Management Advisors