Outsourcing: Interorganizational and international relations Steinar Kristoffersen 08.04.2015 1
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Outsourcing: Interorganizational and international relations
Steinar Kristoffersen
08.04.2015 1
Chapter 12 and 15
Next week, (maybe more 12/15 plus) chapter 14
Roughly, I do not cover the textbook exactly
Emphasis on cases
Perhaps a few exercises,…, be active or be bored!
This lecture
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It is rare to find project completely finished in-house. Why?
When does it seem better that they are?
Outsourcing
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“Case of” the Norwegian Railroads:
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Specialization, can engage competencies continually
Cost, greater economics of scale But cost is tricky, how come?
The reasons to outsource
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Cost is also cost discipline!
Need to be tight on Specifications (requires competencies)
Performance (requires resources)
Quality (requires skills)
Etc.
So, what makes it «non core»?
Cost discipline
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Availability
Competencies
Incentive structure
Technology and innovation
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Strategic outsourcing Core business or “power products”,
functional alignment, and
pass peripheral activities to suppliers
Is this logical?
“Fashionable”reasons to outsource
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Or should we have kept
the sausages?
Escape from politics and bureaucracy, meetings and overhead
Distance is an advantage as well as a problem
Dedication in outsourcing
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“US companies are identified as pursuing more value adding sourcing strategies while European companies are more focused on gaining economies of scale through outsourcing”
Discuss
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US
Aim to achieve best practice
Improve service quality
capability to develop new services
Access to new technology/skills
Grow in-house expertise
Enhance position in value chain
Enhance capability for change
Europe
Cost discipline/control
Focus on core competencies
Reduce headcount
Reduce capital cost
Grow in-house expertise
Reduce transaction costs
Investment in technology
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Do you agree?
rely on outsourcing in one form or the other
So, what is outsourcing?
Almost always an international
element, so no point to distinguish
Most projects today,…
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My experience of “offshore outsourcing”
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Research project related to the site design, assembly and transportation of offshore wind power facilities.
PowerUp
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PowerUp
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Vestavind Offshore AS was really just a management company
No engineers
No production facilities
Vestavind got the license (Havsul), which they bough from Havgul AS, which was owned by Ny Energi AS, which was owned by one individual
Vestavind Offshore AS went for a EPC-model in the end, to get the work going for the physical installation
PowerUp
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Completely re-structure the idea of “a business”, to be
one-man-show(s), and/or
deep specialization plus
financial skills?
Who takes the risk and how?
Business 3.0 by outsourcing
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Arctic shrimp trawling
Floating barge salmon farms
Tricking online gambling engines
Several involvements in «3.0»
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No, actually, I turned the last one down,…
Engineering, Procurement and Construction
A complete «package» of functions, which involves the handing over of a broad set of responsibilities
Which responsibilities and functions?
EPC
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Initiation
Implementation
Planning & Programming
Estimating → Request for Quote
Valuation
Design
Engineering functions
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Purchasing
Logistics
Receiving, storage
Invoicing, accounting
Reconciliation (negotiations, even «in court»)
Procurement functions
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Planning, estimation, scheduling
On-site Material Handling
Manufacturing
On-site Client Communications
Valuation & Cash flow
Commissioning (testing & checking)
Closing
Construction functions
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Another round around the same spinning wheel, to subcontract modules and parts
What can be the challenges that companies face? Customers, as well as Suppliers?
Business goes global, projects more complex
The Systems Development Lifecycle -modell is ditched «Waterfall» replaced by agile/iterative
Document-driven replaced by shared/3D common information models
Knowledge-driven engineering replaced by needs-driven
And Manufacturing can be
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Had to look for EPC partners in a market dominated by the («back then», only a year ago, remember) hot market for oil & gas
No spare resource capacity among suppliers
No interest to be entrepreneurial in offshore wind
Funding from equity all pushed towards fossile fuels
Regulators «realistic»
Etc.
Spent their money to conceptualize a «winner», and..
The fate of Vestavind
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The customer needs to be trusted to have loads of money, to
Pay the current bills (EPC is large volume contracting)
Support the procurement process (transparency, fairness)
Specify and follow-up in detail what is required (perfromance, qualifications)
The supplier(s) need to have deep pockets too, to cover up-front costs & leverage innovation (win bids)
Construction needs fixed assets = Factories and yards
(Forgot?) the CRUX of EPC
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An end to Vestavind
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Engineering can cost too much
Shared models require a global information space, which means advanced ICT-support
Change management is not a business model, but Total cost of ownership is
Complex projects have tricky hand-over (if any)
Lessons learned from EPC
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Decimate the number of engineering hours!
Objective
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And still,….
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The Norwegian Labour and Welfare Administration (NAV) has to make a new set of ICT systems to comply with new reforms
Basic current systems developed in-house in the seventies (COBOL)
Broad suite of add-ons made by consultants in the nineties (Java)
In practice, there is no operational expertise in NAV Development is outsourced
Operations and IT-support ditto
And project management
ICT to modernize and reform NAV
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So, how can we get the support we
need?
Write a letter to
If you know,…
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The modernization project today
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Many successful examples All of the engineering-based local companies rely extensively on outsourcing, f.ex:
Brunvoll-Oshaug
AxTech heavy lifting equipment
And they are very different:
All outsourcing projects fail?
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Brunvoll-Oshaug
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AxTech
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Traditional approach (AxTech AS) So, it is not like «it does not work», quite the contrary
Partnering approach (Brunvoll-Oshaug Metal AS) Actually more common in outsourcing that the «traditional approach»,…
Different approaches
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Traditional approach
Suspicion; each party distrusts motives for action by the other
Goals and objectives are geared towards what is best for each
Independent project teams; teams are spatially separated
Communications are structured and guarded
Single project contracting is normal
Objectivity is limited due to fear of reprisal and lack of continuous improvement opportunity
Access is limited with structured procedures and self-preservation taking priority over total optimization
Involvement is normally limited to project-level personnel
Duplication and/or translation takes place with attendant costs and delays
Risk is transferred to the other party
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Partnering approach
Mutual trust forms basis of strong working relationship
Shared goals and objectives ensure common direction
Joint project teams exist with high level of interaction
Open communications avoid misdirection and bolster effective working relationships
Long-term commitment provides the opportunity to attain continuous improvement
Objective critique is geared to candid assessment of performance
Access to each other’s organization resources is available
Total company involvement requires commitment from CEO to team members
Integration of administrative systems equipment takes place
Risk is shared jointly among partners, which encourages innovation and continuous improvement
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On an operational level?
Final example, from a local organization that facilitates the contact beteen suppliers and customers in a a domain the is heavily characterized by oursourcing
Of course, they use outsourcing a lot themselves,….
What makes outsourcing «tick»
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«Hub»: Navitas network (transforming to a foundation)
Domain: Oil and gas, the Norwegian Continental Shelf
Project portal projects
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Clear communication is hard
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On quite a technical level,…
Governance may be impossible
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We do not “own” the supplier,…
Let us face it. Outsourcing is not expensive, that is the whole idea
Labour is less costly
We pay only when people work
(Offshore) suppliers may have «inner companies», which means that they are themselves individual subcontractors to our supplier
The advantage is obvious, what is the disadvantage?
Governance may not be desirable
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Subcontractors will (need to) find another customer to work for (rather than for/be «our» supplier)
More projects compete for attention and creativity
Lessons learned from our project may benefit the competition
Other customers may want to «secure capacity» outbidding us (and even by buying the supplier)
When we contract work intermittently, there is an overhead of initiation and documentation, on both sides
The «disadvantage(s)
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Result: “Unresolved, unscheduled”
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Fortunately, Problem do get Fixed
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Well-defined requirements and procedures (Jira/PODIO)
Extensive training and team-building activities (“MySQL!”)
Well established conflict management processes in place (?)
Frequent review and status updates (Agile)
Co-location when needed (“Oslo Dev House”)
Fair incentives (Co-ownership vs “inner company”)
Long-term outsourcing relationships (2006-, 2012,-)
Best practices
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Advantages
Cost reduction
Faster project completion (?)
High level of expertise
Flexibility
Money issues
Disadvantages
Coordination breakdowns
Loss of control
Conflict
Security
Money issues
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Why we outsource: summary
Epilogue
“We base our procurements on competitive bidding and the principles of transparency, non-discrimination and equal treatment of bidders … All potential suppliers for contracts worth more than NOK 7 million are required to sign a supplier declaration in the pre-qualification phase. (Statoil).”
“Thoroughly investigate partnership capabilities and resources. Due diligence reduces problems (Boeng Dreamliner).”
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