OMM559 – Module 4 1Managing Global Business Process
Outsourcing for Competitive
Advantage
OMM 559: SPRING 2022
MODULE 4
“HOW-TO†OUTSOURCE
INNOVATION IN OUTSOURCING
1
OMM 559 – Module 4Agenda – Module 3
ï‚´How does outsourcing create value
(6:15 – 7:15 pm)
ï‚´A How To for Outsourcing
(7:00 – 7:45 pm)
Break (7:45 – 8:00 pm)
ï‚´Case: Building Innovation into Outsourcing
(8:00 – 9:00)
ï‚´Introduction to The Outsourcing Game
(9:00 – 9:20)
2
OMM559 – Module 4 2Creating value in
outsourcing 3
OMM 559 – Module 4Outsourcing Creates Value Through:
ï‚´ Productivity
Drucker
ï‚´ IS improvement ï‚´Clean up my back-office (SLAs) ï‚´Centralize; Standardize; Optimize; Automate; Labor arbitrage
ï‚´ Business Impact ï‚´Reengineer the business (not IT) ï‚´Bringing in innovation
ï‚´ Commercial Exploitation ï‚´Sell services
DiRomualdo and Gurbaxani
4
OMM559 – Module 4 3OMM 559 – Module 4Cathay Pacific:
Outsourcing desktop maintenance to IBM
Relate to the Transformational Levers
7
How does this create value?
OMM 559 – Module 4Based on Outsourcing from Periphery to Core, why is
Cathay Pacific Outsourcing Desktop Service?
8
OMM559 – Module 4 4OMM 559 – Module 4Should Cathay care how IBM
creates value? 9
Transaction Cost
Economics
Part 1
10
OMM559 – Module 4 5OMM 559 – Module 4Agency cost & Transaction risk
ï‚´ Strategic Misrepresentation ï‚´Knowingly hiding critical information or competency
ï‚´ Shirking ï‚´Deliberate under-performance on activities that are difficult to
measure and claiming full payment
ï‚´ Poaching ï‚´Theft of resources in a way that damages the owner
ï‚´ Opportunistic renegotiation ï‚´when an (un)expected event makes the two parties less than
equally reliant on the other, the party that is less reliant can
extract more value, by threatening to leave the relationship
(results from ex-post small numbers bargaining)
11
OMM 559 – Module 4The Governance Spectrum
In-House Market
12
Extended
Organizational FormCaptive
Service
Center
Joint
Venture
BuildOperateTransfer
Run to
Outsource
Third Party Service
Provider
(Market Solution)
Spans the gamut of possibilities from an Organizational
Hierarchy to a Market Solution with a variety of hybrid forms
that fall between the two ends.
OMM559 – Module 4 6OMM 559 – Module 4Choosing the right Location and
Org. Form (“Rightsourcing Frameworkâ€)
“Once a company has determined operational and structural risks of outsourcing its
processes, it can use this grid to choose the best locations and organizational forms
for those tasks. The nine cells in this table show the optimal offshoring responses to
different levels of risk.†Arun & Singh 2005
Outsource to service
provider located nearby
(near-shore)
Litigation Support
Set up captive center
nearby or onshore
R&D, design
Execute process in-house
and onshorePricing,
Corporate planningOffshore and outsource to
service provider over time
Insurance claim processing,
Customer support
Use extended organization
offshore, but monitor
closely in real time
Supply chain coordination,
Bioinformatics
Set up captive center
offshoreEquity ResearchOffshore and outsource to
service provider
Data Entry
Transaction processing
Use extended organization
offshore (OfficeTiger)
Telecollection,
Technical support
Use extended organization
offshore, but conduct
frequent process auditsCustomer data analysis,
Market research analysis
13 Operational Risk Low Moderate High
Low Moderate HighStructural Risk
RIGHTSOURCING FRAMEWORKOMM 559 – Module 4The Extended Organizational Form
Manager’s of the client’s firm work directly with the
process owners of the provider.
ï‚´Monitor operations
ï‚´Inspect quality when processes are executed
ï‚´Exert direct managerial control.
ï‚´Mitigates all three forms of risk.
ï‚´Surprisingly, (or perhaps not) it also provides
operational benefits to the third-party BPO firm.
14
OMM559 – Module 4 7Transaction Cost
Economics
Part 2
15
OMM 559 – Module 4Contractual Design
“The important message from our research is that the relationship
with the vendor – for example, contract type, decision rights,
performance measures and risk-and-reward allocation schemes –
must be aligned with the strategic intent underlying the outsourcing
initiative …
For example, incorporating performance measures or compensation
schemes appropriate for IS improvement in situations where the
other kinds of strategic intent prevail may be counterproductiveâ€.
DiRomualdo and Gurbaxani, 1998
16
OMM559 – Module 4 8OMM 559 – Module 4Minimizing Transaction Risks (intro)
ï‚´Market based solutions
ï‚´Reputation
ï‚´Contractual design. This is difficult
ï‚´Monitoring and Incentives, Profit sharing, Gain-sharing,
Maintaining flexibility, Price changes overtime, Bond
posting
ï‚´Governance Structure (Williamson, Coase). Even
more difficult
ï‚´Ownership of essential assets (induces investments),
Repeated Contracts, Multiple Vendors
17
OMM 559 – Module 4Contract Design – I
ï‚´ Cost plus (time and materials) ï‚´Also, payment based on FTE (full-time employees) ï‚´Many outsourcing agreements are based on FTEs and Rate Cards ï‚´FTE at Microsoft OneFinancewith Accenture ï‚´FTEs in outsourcing @ Cathay Pacific (Mainframes, Desktops) ï‚´What are the implications for innovation?
19
Microsoft FA
work
AccentureInitial price based on FTE
(full time employee)
Rate Card
one person for one person
450 people * FTE rate
OMM559 – Module 4 9OMM 559 – Module 4Contract Design – I
ï‚´ Cost plus (time and materials) ï‚´Also, payment based on FTE
ï‚´ Fixed price ï‚´Service Level Agreements (SLAs) ï‚´With Incentive pay
Which is best? ï‚´How does each deal with risk? ï‚´Identify types of risk ï‚´What incentives do they offer? ï‚´Which strategic intent does each serve? ï‚´Which transaction risks does each introduce? ï‚´Which is more expensive?
20
OMM 559 – Module 4Contract Design – I
ï‚´Cost plus vs Fixed Price. Advantages of each? Which is
more expensive?
21
OMM559 – Module 4 10OMM 559 – Module 4Contractual Design – II
ï‚´ Monitoring and Incentives ï‚´Complementary design tools. As you increase one you should
also increase the other ï‚´Monitoring = measure more ï‚´System “down timeâ€; Responsiveness to user requests; Time to
implement changes; Benchmarking vs. “best of breed†… ï‚´Incentives = pay for performance ï‚´Implementation: Balanced Scorecards ï‚´Difficulties ï‚´With multiple tasks and dynamic environments you can’t
measure everything (e.g., “best practicesâ€) ï‚´Incentives skew behavior to measurable actions
==> Incentive systems require the “right†monitoring23
OMM 559 – Module 4Contractual Design – III
 Sharing Profit / Cost Savings / Gain-sharing Aligns parties’ interests Very useful for commercial exploitation & BPO Requires clear measures of profit Useful in Improvement when cost saving is the only
objective ï‚´May be difficult in improvement contracts where the client
wants real improvement, e.g., keep ahead of technology
(USTech; Innovation in outsourcing) ï‚´Difficult in Business Impact (reengineering) initiatives,
where measuring profit is difficult (Dell & IBM) ï‚´Contract level or project level?
 Still … Emphasizes short-term investment
25
OMM559 – Module 4 11OMM 559 – Module 4Relationships: Beyond Contracts (#1)
Strategic Partnerships (JV)
ï‚´Problem
There are opportunities for mutual gain that can’t be
specified or enforced in a contract
ï‚´Solution
ï‚´Long term relationship with separation of ownership
ï‚´Provides incentives to make both general and
relationship-specific investments
ï‚´Issues
ï‚´How to limit opportunism? (is Trust sufficient?)
ï‚´Things change over time; is a JV sustainable?
26
OMM 559 – Module 4Relationships: Beyond Contracts (#2)
Contractual mechanisms can only go so far
ï‚´ Ownership of critical assets ï‚´Induces investments to increase the general value of assets
ï‚´ Repeated contracts ï‚´Long term arrangements provide internal incentives ï‚´Requires an Exit Strategy
 Multiple Vendors Yardstick competition Exit strategy – reduces opportunism
ï‚´ Have an exit infrastructure
27
OMM559 – Module 4 12Case:
Building Innovation into the
Outsourcing Relationship 28
OMM 559 – Module 4Case Background
29
OMM559 – Module 4 13OMM 559 – Module 4Innovation: Open Questions
ï‚´Can a client bring innovation into an outsourcing
agreement, after the contract is signed?
ï‚´What sort of governance do you recommend for
innovation?
Should it be “expected�
ï‚´Who should pay for it?
ï‚´Who owns the output?
ï‚´How does innovation relate to the success of the
outsourcing agreement? ï‚´ How can the client modify future contracts to enhance innovation?
30
OMM 559 – Module 4Continuous Improvement vs
Innovation. Is there a difference? 31
OMM559 – Module 4 14OMM 559 – Module 4Can innovation be introduced late
in the game? 32
OMM 559 – Module 4B&B: innovate or fix SLAs first?
33
Should vendors be expected to innovate?
OMM559 – Module 4 15OMM 559 – Module 4Where is innovation “born�
34
Who should pay for innovation?
OMM 559 – Module 4Innovation in Outsourcing
My view – for what it’s worth
35
Uniqueness to CompanyImpact
on SLAs
OMM559 – Module 4 16OMM 559 – Module 4In 2006, Microsoft had extraordinary growth by allowing a high degree of
autonomy for its subsidiaries.
Autonomy also resulted in high fragmentation of the company’s finance,
accounting, and procurement functions.
To assist Microsoft in this initiative – called “OneFinance†– it partnered with
Accenture in 2007, with aims to reduce costs, improve service and compliance,
and focus internal roles on more strategic activities.
The 12 year agreement spanned 90 countries and 450 individual roles and was
worth $330 million (~€239 million).
From 140 different local financial systems to one centralized financial systemWithin 18 months, the partnership designed and implemented a global set of
standardized processes across 92 countries, improved internal controls and
compliance, improved scalability, and reduced costs by 35 percent. Partially due
to relocating work to low cost countries.
OneFinance
36
OMM 559 – Module 4The initial seven-year agreement spanned 90 countries and 450
individual roles and was worth $330 million (~€239 million).
Went from 140 different local financial systems to one centralizedfinancial system
Within 18 months, the partnership designed and implemented a global set
of standardized processes across 92 countries, improved internal
controls and compliance, improved scalability, and reduced costs by 35
percent. Partially due to relocating work to low cost countries. Results:
Accenture has a 98.5% annual pass rate on 25,000 SLA points!
Microsoft controllers were able to focus on more strategic activities. Prior
to the partnership, 75% of the controllers’ time and resources were spent
on transactional activities and compliance, which dropped to 23%after
outsourcing.
OneFinance
37
OMM559 – Module 4 17OMM 559 – Module 4OneFinance
AccentureFixed fee for base services within a
volume band;
e.g., Number of invoices paid;
Mandatory volume increases of about
6% without adding to the price
Multiple Pricing Mechanisms
38
Microsoft FA
work
OMM 559 – Module 4OneFinance
AccentureInitial price based on FTE (full
time employee)
Rate Card
one person for one person
100 people * FTE rate
Next year, for same work, Microsoft will
only pay for say 95 people, due to
Accenture’s ability to optimize
processes
95 people * FTE rate
39
Microsoft FA
work
OMM559 – Module 4 18OMM 559 – Module 4Lesson Four
41
Contracts need to have incentives
for the provider to deliver
Innovation
OMM 559 – Module 4OneFinance
AccentureGainsharing on transformation projects 42
Suppose Microsoft wants Accenture to implements
electronic invoicing replacing 5 FTEs. What’s in it for Accenture?
Microsoft FA
work
OMM559 – Module 4 19OMM 559 – Module 4OneFinance
AccentureGainsharing on transformation projects 43
Suppose Microsoft wants Accenture to implements
electronic invoicing replacing 5 FTEs. Suppose Microsoft currently pays Accenture $500,000 for
those FTEs and Accenture earns $50,000 in profit.
Gainshare might be that Microsoft pays Accenture
$100,000 to compensate Accenture after e-invoicing—Microsoft saves $400,000 and Accenture doubles its profit.
Microsoft FA
work
OMM 559 – Module 4Lesson Five
44
After stabilization, engage the
provider in helping to improve client
KPIs
Continuous Improvement
OMM559 – Module 4 20OMM 559 – Module 4Chapter 7Service: Accounts Payable
KPI might be percentage of invoices paid within terms
SLA might be time it takes the provider to match invoice
with purchase order/receipt
Accenture helped Microsoft move from 70%of invoices
paid on time to 92%
45
OMM 559 – Module 4Chapter 7Service: Cash Management
KPI: Cash on hand just meets cash required
Accenture helped Microsoft forecast cash demand better
and went from 10% overfunding down to 2%overfunding46
OMM559 – Module 4 21OMM 559 – Module 4Learning Objectives
 How does outsourcing create value, and why it’s
important
ï‚´ Transaction Cost Economics Part 2 ï‚´Solving the challenges of outsourcing by: ï‚´Cost Plus ï‚´Fixed Fee ï‚´Profit Sharing ï‚´Strategic Partnerships & JV
 Bringing Innovation to Outsourcing It’s key to the success of the contract Quite a few challenges
ï‚´ Why Robotic Process Automation is changing the
landscape
47
Outsourcing:
Experiential Exercise
next Wednesday 5 pm
48
OMM559 – Module 4 22OMM 559 – Module 4www.outsourcing-game.com © 2008 EMERALDWISE, LLC
Outsourcing Game – Objectives
ï‚´ Illustrate the changed nature of decision-making in a highly
outsourced supply chain
ï‚´ Demonstrate how hidden information and hidden actions
affect supply chain power
ï‚´ Highlight the behavioral implications of various
compensation and incentive schemes
ï‚´ Examine the concept of trust, and how it can be enhanced
and diminished
ï‚´ Provide an opportunity to experience the emotion of timeconstrained, group decision-making, under imperfect
information
49
OMM 559 – Module 4www.outsourcing-game.com © 2008 EMERALDWISE, LLC
Outsourcing Game – Key Players
Status
Quo
Proposed
Structure
50
OMM559 – Module 4 23OMM 559 – Module 4www.outsourcing-game.com © 2008 EMERALDWISE, LLC
Outsourcing Game – Subassembly details
LE HEProduct Version Low-end High-endDemand Share 60% 40%Annual Unit Demand 180,000 120,000Subassembly Supplier Loen
(China)
Hi-N(Mexico)
Subassembly Unit Cost $19 $2051
OMM 559 – Module 4Decision Making Process
www.outsourcing-game.com © 2008 EMERALDWISE, LLC Decision made by majority voting 51 votes or more needed for Common 50-50 tie results in Unique (status quo)
ï‚´ Each organization gets allocated the following share of
votes (which must be cast as a block)
Votes
Acme 42
Design 40
BuildIT 2
Loen 8
Hi-N 8
52
OMM559 – Module 4 24OMM 559 – Module 4Outsourcing Game – Logistics
OMM 559 – Module 2
53
ï‚´Roles will be posted on Canvas by Tuesday.
Private info – from GPO office on Tuesday
ï‚´Plan to meet with your group to develop a strategy
ï‚´Attendance throughout the session is critical
ï‚´Timing:
5:00 – 8:00 negotiations (Rounds #1, #2, and #3)
8:00 – 9:00 post-game discussion in small groups
ï‚´Bring a calculator (Acme needs a laptop)
I’ll provide more instructions for Acme
OMM 559 – Module 4Assignments
ï‚´Assignment #1: Short Summary #5 (after next
class)
ï‚´Assignment #2: Executive summary of the case:
Feed R&D or Farm it Out (on Canvas)
ï‚´Choose one the frameworks we develop in class or in
the readings, and apply it to the case. Specific
discussion questions are also on Canvas. The report
should be 2-3 pages (approximately), 1.5 or double
spaced. Additional appendixes may be added.
ï‚´Guided discussion question (posted by
Wednesday)
ï‚´Next week: an “auctionâ€
54
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