Hidden costs and the challenges of measuring/evaluating outsourcing

March 14, 2014

We had a great program this past Thursday, March 6, 2014, at GN.

Highlights from the day include:

The hidden costs of outsourcing: Marcus Møller Larsen, Assistant Professor, CBS, brought us through a few relevant cases such as LEGO, DELL and Boeing to illustrate the point that mis-alignment between outsourcing sponsors and suppliers can mean significant mis-calculations in estimating costs of control, coordination and knowledge transfer. Marcus’ work has also lead to the development of a model which thus far has been tested on 200 US and European companies engaged in over 530 outsourcing/offshoring implementations. Some of the most intriguing results revealed to date are that the more complex an organization is, the worse they tend to be at estimating configuration and task complexity and thus costs of implementing outsourcing and offshoring engagements.

Can hidden costs of outsourcing and offshoring be avoided or minimized? Marcus’ research has shown that at least two things can minimize the amount of hidden costs and those are:

    Organizational maturity and experience in outsourcing/offshoring; and
    Organizational focus on value, i.e. answering the question: “What does this MEAN for our organization?” instead of focusing on price/costs alone.

Our group discussions on the hidden costs of outsourcing and offshoring backed up this research with real-world experiences from among TON’s members. Most, if not all, have experienced significant hidden costs of outsourcing, often resulting from a substantial underestimation of the costs necessary for communication and control. All acknowledged that organizational maturity is key and that this organizational maturity is inextricably linked to top management’s support of outsourcing.

We then moved onto an interesting topic presented by Claus Holm, Director of Global Sourcing, GN/Jabra; Linking suppliers to GN’s innovation and roadmap planning. GN has been working to involve key suppliers more directly in innovation and roadmap planning so that GN is better able to both generate product and feature ideas while also being better able to produce product in a timely fashion demanded by today’s market. One thing that has become clear to the GN team is that if these discussions start at a project kick-off, it’s already too late. There has to be close cooperation and exploration in place with key suppliers in order to be able to bring innovation to new product development.

Claus’ colleague, Fredrik Cedmert, Director Commodity Management, GN/Jabra, gave us a look at measuring commodity performance, risk and relationship. GN uses a preferred manufacturers list to help its professionals to select from audited and approved suppliers as they develop products. This is a critical element of GN’s product development ecosystem as 85% of material costs come from tier 2 suppliers of which there are 240 suppliers producing roughly 6000 various items. Without this infrastructure of actively approving, including and phasing out suppliers, GN would not be able to compete on the market. One particularly critical measurement is power ratio; that is how much of a supplier’s yearly revenue does GN represent? It’s critical that GN isn’t too big that the supplier is overly dependent upon GN and it’s also critical that GN isn’t so small that it is without influence at the supplier. Fredrik emphasized that it’s the softer values, such as shared vision, shared values, and good communication that are the most critical for ensuring high-value relationships with suppliers.

Rounding out the day’s formal presentations, we were joined by Pernille Bychdorf-Pedersen, Head of Offshoring, Mærsk Tankers who lead a session called Measuring the success of offshoring–What does GOOD look like? Mærsk Tankers is an organization of roughly 4000 employees of which 3500 are sailing at any given time. Mærsk Tankers runs a network of crude tankers moving oil and gas from production sites to refineries; and product tankers moving the end product to consumption markets. Supporting this network, Mærsk Tankers relies upon APMM’s GSC (Global Service Center) which now has over 13000 employees serving the APMM organization. About 30% of Mærsk Tankers’ on-shore workforce is currently being sourced from GSC and this number is expected to go up as Mærsk Tankers moves beyond non-core processes to core areas of operations. Measuring this work revolves around several key indicators such as Mærsk Tankers’ satisfaction; process service level compliance; labor costs savings; value adding benefits; and efficiencies.

Our day ended with small group discussions to talk about our own organizations’ work with measuring and evaluating suppliers and performance. One interesting point that was raised was that there isn’t necessarily just one way to measure but that it was important to be doing so and to use these measurements to open and sustain a dialog with suppliers in order to improve results and grow value.

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