As has been previously mentioned on numerous occasions, outsourcing has various potential benefits and problems, both from a generic and a logistics point of view. It is therefore important to consider it as a strategic decision and to ensure that the necessary steps are taken in the outsourcing initiative to ensure that the benefits are maximised and the potential problem areas minimised. Experiences of failed outsourcing initiatives would often have been avoided had the potential problems associated with a lack of qualified personnel, over-eagerness on the part of the provider to be awarded the contract, and the lack of a detailed scope of work document, been handled immediately. (Roeser, 2001).
The process of implementing a third-party logistics service or agreement should therefore be rigorous and thorough and include at the very least the definition of the scope of the services to be outsourced, including development of the request for proposal (RFP) to be sent out to prospective providers; identification of candidate providers and evaluation based on set criteria; negotiation and finalisation of the contract in terms of expectations, time period and price; and managing and monitoring the outsourcing process and relationship. (Kasilingam, 1998). However, the implementation is often not given the proper emphasis or consideration, and with the numerous value-added services and technologies offered today by LSPs, it has become critically important to make sure that both users and providers have structured approaches for implementing the proposed services. (Boyd & Palmer, 2002).
(i) Potential problem areas
Apart from the various concerns that companies have with regard to outsourcing, often leading them to the decision not to outsource, outsourcing is also fraught with several significant potential problem areas such as the following:- inadequately scoped work; inadequate control systems over how certain services are delivered, which in turn may raise the company’s liability exposures; hidden costs and risks; inadequate, or lack of, high level management support; poor organisational communication; cross-functional political problems; unclear expectations;
uncertainties associated with the stability of the service companies; and issues of confidentiality, security, timing, and lack of flexibility.
Companies are also often understandably nervous about turning over their business to a third party. Other major concerns tend to include the transition process, the depth of the 3PL’s management team, security and safety issues, trust and price. (Sopher, et al. 2002). Greaver (1999) summarises the various potential problems areas into the categories of people, processes and technology.
The least positive impact of outsourcing however is often in the human resources area, in terms of impact on employee morale as well as a high turnover of 3PL employees. These can be significant problems in outsourcing of logistics functions. The human aspect is therefore a particularly critical area for logistics outsourcing decision makers, as corporate cultural changes and staff disruptions play an important part in the success or otherwise of a logistics outsourcing initiative. (Armstrong, 2001).
In summary, outsourcing problem areas can have their root causes in either party, and addressing the problems is a shared responsibility between provider and user. (Greaver, 1999). Ensuring the success of an outsourcing project must therefore include the management of potential problems, and the more planning undertaken around the risk factors before implementation, the higher the probability of success. Developing a comprehensive plan outlining detailed expectations, requirements, and expected benefits is crucial. (Elmuti & Kathawala, 2000; Lonsdale & Cox, 2000). However, in many companies, the outsourcing process is characterised by poor management. (Artosky, 1998). Companies must approach the outsourcing process correctly.
In order to avoid as many problems as possible, certain steps must be taken such as thorough business analysis; correctly identifying core competencies; having a clear understanding of what is to be achieved by outsourcing; developing comprehensive plans to ensure that outsourcing provides enhanced business performance; choosing
and skills to facilitate the inevitable changes resulting from the process. There must also be complete support of the process by top management with the commitment of the necessary company infrastructure.
Embleton and Wright (1998) concur with the importance of making the right outsourcing decisions and identify the following keys to success:
• Strategic analysis and planning • Selecting the providers
• Managing the relationship
(ii) Strategic analysis and planning
From planning to execution, the outsourcing company often aims to re-engineer its supply chain activities, by leveraging the supply chain management skills of the provider, and at the same time aligning its business strategy with its supply chain strategy. This can involve significant changes to the basic structure and thinking of the organisation. (Heroux, 2001)
The key to determining the viability of outsourcing lies in analysis of the organisation. According to Embleton and Wright (1998) this entails the following:
• Determine candidate functions for outsourcing • Determine the cost of providing the service • Determine the quality level of service • Determine the impact on corporate culture • Quantify the outsourcing goals
• Look at both the long- and short-term
Determining candidate functions for outsourcing is critical to outsourcing success and should be central to outsourcing decisions. (Lankford & Parsa, 1999). Kuglin (1998) states that the test for a core competency is that it must provide the company with access to a wide variety of markets; make a significant contribution to perceived customer benefit; and be difficult to imitate. He proposes a process, reflected in Figure 4.5, for determining core competencies and managing supply chain changes which result, for example from outsourcing.
Figure 4.5 Process methodology - determining core competencies
Source: Kuglin, 1998.
The costs and benefits of providing logistics in-house versus outsourcing them must also be determined. According to Nell (2001a), one of the most basic and fundamental aspects of business is for a company to know its costs.
Lankford and Parsa (2000) state that investigating the benefits of outsourcing is a lengthy but important evaluation process as outsourcing is a major event that a company would want to avoid repeating. Companies must take a long-term view of the move to outsourcing. The company must understand its vision, core
Perform a core
competency assessment
Internally identify the company’s core competencies
Perform the test for core competencies
Isolate the internal core
competencies that pass the test
Survey customers & suppliers for what they believe are the
company’s core competencies
Compare, then isolate the company’s true core competencies
Survey customers & suppliers on core competencies needed in the marketplace
Analyse the gap between actual and needed core competencies
If the company’s core competencies do not match marketplace needs: Proceed to the next phase i.e. outsourcing (see also Figure 4.6)
If the company’s core competencies match marketplace needs: Stop & exit
1999). There are certain functions that a head office can best sustain and in downsizing, without due care for such functions, companies risk dismantling the very foundations of their success. (Stephenson & Russell, 1995; as quoted by Embleton & Wright, 1998).
The company must, in their strategic analysis, determine which areas are not core and will provide the company with the best return on investment if outsourced. A function that is outsourced should be routine and well-delineated.
Management must therefore understand the nature of their business and determine core competencies as well as analysing current costs and performance and exploring the strategic implications. This is key to the outsourcing decision.
In line with Figure 4.5 which outlined the important step of assessing a company’s core competencies, and the preceding paragraphs, Figure 4.6 which follows shows key steps in the process for activities which have been deemed not to match marketplace requirements of the company and which are thus suitable for outsourcing.
Figure 4.6 Process methodology - after determining core competencies
Source: Kuglin, 1998.
The aspects of selecting a provider and completing the outsourcing step are also discussed in the rest of this section as well as Section 4.3.13, key components of which are further illustrated in Figure 4.7.
Determine the advisability of outsourcing: the outsourcing strategic decision process
Review the competitive frame of reference & core culture, values
Review the mission, vision & the core competencies
Review the objectives, goals & operating strategies
Perform a current assessment of internal capabilities
Analyse the strategic options
If needed, core competencies can be developed internally
Do nothing internally/ Upgrade capabilities
Select a supply chain/ 3PL provider
Identify the core competencies needed in the marketplace
Establish a short list of qualified companies
Conduct virtual-company team evaluations
Select the most qualified company
Develop & implement the transition plan
Complete the outsourcing step If needed, core competencies cannot be developed internally
Action
In summary, guidelines for the logistics outsourcing assessment process, are provided by Artosky (1998), and are outlined in Annexure A to this thesis and represented graphically in Figure 4.7 which follows.
The various steps in the outsourcing assessment can be summarised as follows:
Figure 4.7 Third-party pre-assessment process
Source: Artosky, 1998.
Solicit input and compile factors from all business units in the organisation
Evaluate alliances and partnerships as options
Evaluate cultural factors associated with developing a third party relationship
Perform an analysis to determine the costs to perform the logistics activity in-house
Assess logistics talent
Survey major customers
Develop a project plan
Perform a benchmarking study to determine potential areas to outsource
When the strategic analysis, including exploring the strategic implications and analysing costs and performance, is complete and the decision to outsource made, the next important step in the outsourcing process can be taken, i.e. planning. All analyses and information should also be incorporated into a project plan. The scope of the project, business assumptions, expectations, tasks, services to be provided and service levels to be achieved should be clearly defined and detailed. Key business issues, guiding principles and assumptions, risks, and deliverables must be included. Such an internal assessment and plan will enable a company to make an informed decision with regard to outsourcing as opposed to insourcing. Sowinski (1999) states that companies must spend time performing a comprehensive needs assessment if they are to be successful finding the right 3PL provider and appropriate services.
As with any significant new initiative, planning activities, including project management issues, are therefore important, and should include (Greaver, 1999): • Assessing the risks
• Announcing the initiative • Forming the project team
• Engaging advisers where necessary • Training the team
• Acquiring other resources
• Managing resources, information and project • Setting objectives
Cross-functional teams should be formed to study, plan and implement outsourcing initiatives, and to assess the risks, resources, information, and management skills needed to mitigate those risks. Team objectives, deliverables and timetables should be set and management support achieved. (Greaver, 1999). Customers, suppliers, and third parties can also play important roles as team members. (LaLonde, 1998).
Furthermore, as providers are experts in negotiating contracts, companies may involve outside advisers including:
• Lawyers experienced in negotiating and drawing up outsourcing contracts • Accountants to analyse costs using tools such as activity-based costing • Other specialists, depending on the situation
How the organisation announces the outsourcing initiative to its employees must also be planned and well executed. It is best to make an announcement that outsourcing will be explored, otherwise employees will generally assume the worst without having the facts, and morale will be negatively impacted. Employees must also be kept informed about the initiative’s progress. (Greaver, 1999).
Clear definition of these issues also lays a good basis for meeting with provider(s).
(iii) Selecting and contracting with the provider(s)
In the strategic analysis, the company must also have developed a clear understanding and quantification of the type and the level of service currently being provided in-house, and that desired in the future, in order for the RFP to be compiled, the tender document issued and the provider selected. Without an accurate scoping of the required services, it is almost impossible to implement and manage a successful outsourcing relationship. (Potgieter, 2003; Bruwer, 2003). Roeser (2001) states that many outsourcing failures can be traced back to the scope of work document. The RFP must describe in detail, the outsourcing requirements, as well as general information about the company and the scope and the objectives of the outsourcing. The company may also decide to conduct a RFI before the RFP, circulating it to selected potential providers to determine the level of interest, capabilities, corporate culture and strategy of these providers. A scope of services document can also be used to ensure that expectations are documented and to ensure that adjustments in scope and their impact are well documented and communicated. The execution of an initial agreement or letter of intent (LOI) would also outline the scope definition and pricing considerations for the start-up, establishing a clear approach to ensure the complete definition of all functional requirements. (Boyd & Palmer, 2002). It is also important to define goals explicitly.
define the level of service required in the future. Although, there are those that advocate the selection of a provider without an RFP, they nevertheless concur with the preceding opinions that it is critical that the outsourcing company articulate, very clearly, what they expect of the provider. (Lynch, 1999; as quoted by Seideman, 1999).
The outsourcing company must therefore break down its planned outsourcing initiative in terms of the actual services required. Therefore establishing the scope of work by means of an adequate RFP, determining the desired and measurable SLA, and developing a thorough contractual agreement, all contribute to the success of an outsourcing initiative.
In this regard, Bendor-Samuel (2000) states that few users take the time to adequately define what it is they are buying. What usually happens is that the process focuses on obtaining what is perceived as a good price, leaving the definition of the scope of service to the provider to establish after they have been employed. In these cases the provider determines during the course of the relationship what its scope of work is. A more prudent approach is for the user to establish the scope of the services, thus defining what will be required of the provider, before circulating an RFP or approaching a provider. The buyer must understand what is most important to them, for example low costs. Scope thus describes the boundaries of the outsourcing process and agreement so that both parties can see clearly where the responsibility of one ends and the other begins.
It is important not to take short-cuts with the definition process. The significant time and effort required is difficult and expensive, but the discipline of breaking up the service into its components is worth it. It is also extremely helpful for the individuals who have to administer the relationship as it provides clear boundaries, enabling both parties to determine what services are in and out of scope. The different components are usually also cost drivers and influenced by various issues. (Bendor-Samuel, 2000; Lynch, 2000).
Often the outsourcing company has unwritten expectations of the provider to make other contributions to their business goals. Sometimes they expect continuous improvement where none is explicitly defined or measured, or they expect a provider to leverage its capabilities in other areas to assist them in their struggle to compete. If these benefits are anticipated, they should be defined and measured. When such aspirations defy definition and objective metrics, they are unlikely to be realised. It is also unrealistic for providers to have to agree on a price until they understand what they will be providing and how it will be measured. (Bendor-Samuel, 2000). Agreeing on a fair price is usually the focus of the RFP and negotiation processes. An outsourcing company must be careful to negotiate price only once it has adequately defined and agreed service and accountability levels with the provider that will supply those services. The parties must thus ensure that services and metrics are defined and agreed upon before negotiating price. Before embarking on an expensive RFP process, both users and providers need to bear in mind that in a free market, price is a function of competition and negotiating prowess. Furthermore, for a user who wants a competitive market price, it is imperative that there still be competition when price is negotiated at the end of the RFP process. (Greaver, 1999; Bendor-Samuel, 2000).
Slater (1998) adds to the negotiation process, stating that buyers of third-party services should consult their lawyers before finalising any outsourcing agreement and contract. This should also include the establishment of exit level provisions and guidelines to resolve issues or disputes. (Greaver, 1999). Atkinson (2002) concurs, stating that when a company enters into a contract with a 3PL, it is always prudent to plan an exit strategy in case one or both parties wish to end the relationship.
According to Garschagen and Martin (2001) the traditional approach to implementing logistics outsourcing has been to have extensive negotiations that eventually result in a detailed contract. Establishing clear performance levels and cost structures has been considered essential from the client side, with the legal protection of a contract being important to the provider to secure their investment in the analysis, pre-work
negotiation of an outsourcing arrangement is emerging whereby the shipper and provider postpone the drafting of a formal contract agreement until at least six months’ experience in the business has been amassed. This allows the consideration and integration of actual data in the negotiations as well as a review of cost structures, service levels and customer needs. In order to protect themselves in the initial phases therefore, the companies commence with a statement of expectations and LOI. Once the trial period is over, both parties can enter the agreement with equal levels of knowledge and long-term expectations, and legal obligations can be realistically agreed to. This trial period can also provide a baseline against which improvement can be measured. (Foster, 1998; as quoted by Garschagen & Martin, 2001). Adopting such a progressive approach to negotiation also eliminates potential areas of risk in terms of outsourcing failure, namely the propensity of providers to oversell their capabilities, and clients to withhold information if they think it will increase costs. (Garschagen & Martin, 2001).
Another important trend is for provider-user relationships to begin with a more modest set of activities to be managed by the third party. Therefore, while certain third party relationships do involve a very comprehensive set of service offerings from the outset, most customers need to grow accustomed to using the services of a third party for certain activities such as transportation and warehousing, before they become candidates for a broader range of service offerings. (Coyle, Bardi & Langley, 1992; as quoted by van Hoek, 1999).
(iv) Transitioning resources and managing the relationship
The RFP, negotiation and contractual phases of outsourcing implementation are therefore critical to the success of an outsourcing initiative.
Another step that is very important to the success of outsourcing implementation and which must take place not only at this stage, i.e. before provider selection but also during the remainder of the implementation process, and in particular with regard to
to success. According to Bailie (2001), companies desire better service but are reluctant to invest in the very resources that will allow them to improve service.
As outsourcing can be a key component of the re-engineering process within a