IT job turnaround could spell strategic change for outsourcing providers

The outsourcing sector has been one of a very few bright spots in the IT industry over the past two years, showing slow growth while the rest of the market continued a prolonged tailspin. New projections on IT employment, however, suggest that the tailspin might soon level off.

According to research published last week by the AEA, formerly known as the American Electronics Association, the free-fall of IT industry employment is finally slowing. After losing some 540,000 jobs between 2001 and 2002, the AEA projects that 2003 job losses will be around 234,000, approximately 57% fewer than the year before

What's more, AEA researchers are predicting that the IT industry is gearing up for a turnaround. There is a strong possibility that the sector will actually add jobs in the second half of 2004, they said.

The AEA's predictions are supported by other researchers. IDC is projecting that IT spending in the U.S. will increase 1.5% this year over last year to $372 billion. Over the next five years, spending is expected to increase at a slow compound annual growth rate of 4.9%, reaching $467 billion by 2007, the research firm said.

For outsourcing providers, the slowdown in IT job losses is both good news and bad news. The good news is that IT spending is slowly coming around, and that there will be more funds available for IT projects in the coming months, many of which will be out-tasked to third parties.

The bad news is that it may not be long before companies begin to staff up their internal IT organizations again. Thanks to the economic slump, there is a large pool of unemployed skills on the market, and enterprises that loosen their purse strings can expect to get top-flight talent at a reasonable price. Many of the skills offered by outsourcing providers can now be found on the wide-open employment market.

How will outsourcing providers respond to the resurgence in internal IT employment? Many will look for ways to hold onto current clients, either by renegotiating their terms or by building closer relationships with the IT departments they serve. If an enterprise is happy with its IT performance, and the way its operation works, it will be less likely to seek a return to an internally-staffed model.

Some outsourcing providers will look to re-establish their role as strategic consultants, rather than operational manpower. Before the downturn, many outsourcing providers were called in to help with transitional projects - consolidation of applications, deployment of new technology, or re-engineering of business processes - rather than substitute for internal operations staff. If the internal staffing problem becomes less of an issue, then outsourcing providers can move back to helping with strategic projects.

Finally, some outsourcing providers will look to provide a less expensive alternative to internal staffing. Much has been said recently about offshore IT outsourcing, and this trend is not likely to slow down. If outsourcing providers can deliver lower-cost IT services by shipping them overseas, then many enterprises will take advantage of them, possibly to the detriment of unemployed IT workers in the U.S.

Whatever the impact of the IT hiring turnaround, it is clear that the outsourcing market will look very different by the end of 2004 than it does today. The key for outsourcing providers will be to monitor the shift and respond in ways that will enable them to continue to grow, even as the internal IT organization grows.

Source:http://www.nwfusion.com

Globalization drives logistics outsourcing

With globalization, companies set up operations in as many countries as possible thus creating logistics requirements to integrate their local subsidiaries.

This requirement has spawned a niche market in the outsourced services industry, creating business for specialized logistics and supply chain companies whose work is to untangle logistical nightmares and simplify things for large conglomerates.

Traditional service providers like UPS and FedEx have long dominated this market. But over time, the requirement has become complex and service providers have learned to specialize in services like package delivery, freight transport, moving, IT services, accounting, and consulting.

Interestingly, according to a report, those poised to make a killing in this business are also conglomerates that have set up subsidiaries that offer logistics services.

The likes of IBM, GE and EDS which have either created or acquired smaller companies that already offer these services.

Currently, these subsidiaries contribute only a fraction of their parent company's bottomline. But with globalization strengthening, logistics could be a significant source of revenues in the future.

The States and Outsourcing


The emergence of John Kerry as frontrunner for the Democratic nomination suggests that free trade might be off the table in 2004, at least as a national issue. It's certain to come up, however, in a number of congressional, senatorial, and gubernatorial campaigns. And, of course, as long as Lou Dobbs is still kicking at CNN, we'll continue to hear nightly nativist tirades against the loss of manufacturing jobs, the off-shoring of tech jobs, immigration, and general alarmism about the "outsourcing of America."

The truth, of course, is a bit more complicated than the simplistic picture painted by protectionists. The United States is still far and away the world's leading exporter of services. Direct corporate investment in India -- generally the target of protectionist rants on tech jobs -- actually declined from 2001 to 2003. As for manufacturing jobs, sure, it's likely that free trade agreements played a part in the loss of jobs in the last five years, but so too did a host of other factors, including exchange rates, changing consumer preferences, upgrades in technology and equipment, the recession, and new federal regulations. Michigan's Mackinac Center for Public Policy, to cite just one example, estimated in 2002 that a federal appeals court ruling favoring procedural matters over hard science in federal environmental regulatory policy could cost the state as much as $2.6 billion, or about 10,000 jobs.

Which brings us to state policy. Time and again, when we look at the states attracting and retaining jobs, and we compare them to the states losing jobs, we find that the states doing well are those with tax and regulatory schemes most friendly to business. It's only when the cost of staying local becomes too burdensome that companies pick up and relocate elsewhere. Perhaps that's not surprising. But just how strongly the data shakes out might be.

For example, according to the Economic Policy Institute, the five states losing the most jobs between 1993 and 2000 were, in order, California, New York, Michigan, Texas and Ohio. According to figures from the Bureau of Labor Statistics, New Jersey, Pennsylvania, Illinois and Massachusetts also rank near the bottom, particularly when you take jobs as a percentage of population. The left-leaning EPI blames these losses chiefly on NAFTA, and perhaps that's partially the case. But aggressive tax and regulatory climates play a pretty big role, too.

Each year, CFO magazine asks financial executives to assess the business-friendliness of tax policy in their respective states, which the magazine then compiles and ranks. Ranking in the bottom 10? California, New York, Michigan, Texas, Ohio, New Jersey, Pennsylvania, Illinois and Massachusetts -- the very states that seem to be bleeding jobs. The most recent unemployment figures from the Labor Department put California, Texas, Ohio, Illinois, and Michigan all in the bottom 10 there, too, all with unemployment rates at 7.0 percent or higher.

The Small Business Survival Committee also puts out a report ranking the states on business-friendly public policy. In the SBSC report, Ohio ranks 39th, New York 45th and California 46th. Oregon, also with one of the country's highest unemployment rates, ranks 41st.

A 2003 ranking by the Tax Foundation focusing mainly on tax policy and business tells the same story. It puts California 49th, Ohio 47th, and New York 44th.

Only Texas and Michigan score relatively well on the Tax Foundation and SBSC reports, suggesting that at least in these two states, free trade may have played a more significant role in job loss than poor public policy (and when you think about what Michigan manufactures, and where Texas is located, that makes some sense).

The Cato Institute's Alan Reynolds wrote recently about San Jose, California, a city that lost about 120,000 jobs over two years. Reynolds points out that despite the debacle in San Jose, the communities of San Diego, Riverside, and Orange County actually added almost as many jobs over the same span of time.

San Jose was one of the first jurisdictions in the area to implement a so-called "living wage" ordinance, mandating that businesses contracting with the city pay their lowest-paid workers around $11 per hour, more than double the federal minimum wage. Of course, a living wage law in and of itself won't wipe out 120,000 tech jobs, but it's certainly indicative of the sort of "progressive" anti-corporate sentiment that might cause local businesses to pick up and spill out into friendlier communities.

Protectionists often bring up Ohio as the prototype of a hard-working, breadbasket state whose manufacturing sector has fallen victim to free trade. But Ohio is also a case study in how a state government hostile to business pushes jobs to more hospitable locales. You've read the numbers above. But additionally, in the last few years, Ohio legislators have begun to feel the hangover caused by big spending habits fomented back in the freewheeling 1990s. As of 2003, the state faced a $720 million deficit. Ohio governor Bob Taft has promised to shrink the deficit not with cuts in state spending, but with new taxes, tax hikes, and new fees, as well as rollbacks of promised tax breaks. Taft's tax-happy policy earned the Republican condemnation from the Club for Growth's Steve Moore, who called Taft one of the "worst governors in America."

The Buckeye Institute, an Ohio free market think tank, reports that Ohio's aggressive pro-labor policies cost the state jobs even during the relatively strong economic period of 1982-1998. Zeroing in on the effect of mandatory union memberships on state economies, the Institute emphasizes that during that 16-year period, states that mandated union membership in the manufacturing sector lost a net 996,000 jobs, while "right to work states" gained 493,000.

Let's look at the flip side. How well are states with business-friendly public policy doing at attracting and retaining jobs? The anecdotal evidence suggests they're doing pretty well.

According to the Bureau of Labor statistics, the only state that actually gained net manufacturing jobs from 2000 to 2003 was Nevada. It ranks 2nd on the SBSC's business-friendly list. It ranks 3rd on the Tax Foundation list. It ranks in the top four of CFO's list. Alaska lost only 900 manufacturing jobs over those same four years, which is likely due to its population. Still, Alaska too ranked in the top four on the CFO list. Virginia made a big push in the late 1990s to attract tech firms to its D.C. suburbs and the Dulles corridor. Despite the tech bust, Virginia still has one of the lowest state unemployment rates in the country and, perhaps not coincidentally, ranks 14th on the SBSC list (and would likely rank higher were it not for Gov. Mark Warner's recent promise to raise taxes). South Dakota, which ranks number one on the SBSC list, also has one of the four lowest unemployment rates in the country (as of December 2003).

On its face, this cursory look at the data makes a lot of sense. For all the talk of off-shoring, the cost of packing up a domestic plant and moving it overseas is pretty significant. Even outsourcing tech support and programming doesn't always make economic sense. American workers are still far more productive than, for example, Indian workers, even when you factor in the lower wages. It's only when the onus of complying with federal, state, and local tax laws and regulations becomes overly burdensome that it makes economic sense for a corporation to shop jurisdictions for a better deal.

So the next time a local politician (or news anchor) blasts NAFTA or greedy corporatism for the loss of local jobs, it might not hurt to take a look at just how friendly that politician's state or city taxes, regulatory and labor policies are toward business. Check where his state ranks on the Tax Foundation, SBSC or CFO lists. If he's a governor, see how he did on the Cato Institute's Governor's Report Card. If relocation really is the cause of the job hemorrhage he's complaining about (and often it isn't), it's likely that same politician's policies are a big reason those jobs left.


by Radley Balko
TechCentralStation,

Outsourcing Security

Deciding to outsource network security is difficult. The stakes are high, so it’s no wonder that paralysis is a common reaction when contemplating whether to outsource or not:

1.The promised benefits of outsourced security are so attractive. The potential to significantly increase network security without hiring half a dozen people or spending a fortune is impossible to ignore.

2.The potential risks of outsourcing are considerable. Stories of managed security companies going out of business, and bad experiences with outsourcing other areas of IT, show that selecting the wrong outsourcer can be a costly mistake.

If deciding whether to outsource security is difficult, deciding what to outsource and to whom seems impossible. Over the past few years, we’ve seen many different companies offering different capabilities under the general category of “managed security services.” The field is so confusing that even the industry analysts can’t agree on how to categorize the services offered. This company manages firewalls. That company offers periodic vulnerability scans. Another offers to manage security policies, or monitor the network, or install the IDS, or host the computers. Some of these businesses make sense, and some of them don’t. Some will survive; some won’t.

What to outsource
Companies won’t outsource everything, because some things just don’t outsource well. Either they’re too close to the business, or they’re too expensive for an outsourcing company to deliver efficiently, or they simply don’t scale well. Knowing what to outsource is key.

Medical care is a prime example of outsourcing that works well. Everyone outsources healthcare; we don’t act as our own doctor. More to the point, no one hires a private personal doctor. And we all know what aspects of medical care we like: the ambulance arrives in seconds and rushes us to the hospital, a team of medical experts spares no expense in running tests to figure out what’s wrong and in doing whatever it takes to cure us, and (for many people) the insurance company pays (all or most of) the bill. We all also know what aspects we don’t like: ill-equipped and ill-staffed hospitals, HMOs telling us that we can’t have that particular test or that a specialist isn’t warranted, and getting stuck with an outrageous bill.

The aspects of outsourced healthcare we like involve immediate access to experts. Any medical emergency requires experts, and the faster they can pay attention to us the better off we’ll be. The aspects of outsourced healthcare we don’t like involve management. Our healthcare is our responsibility, and we don’t want someone else making life and death decisions about us.

Network security is no different. Companies should outsource expert assistance: vulnerability scanning, monitoring, consulting, and forensics, for example. But they should not outsource management.

The industry has already proven this point. Salinas Network Services was the largest firewall management company. Earlier this year, it disappeared. There just wasn’t a profitable business in managing firewalls for other companies. Firewall management is simply too central—companies outsourcing to Salinas had no choice but to treat their Salinas contractors as employees. And, for the money they were willing to pay, the companies demanded too much individual attention. Another example: Pilot Network Services offered secure network management. Its business was to host computers securely, manage all security devices, and test applications before putting them up on the network, effectively becoming the security management group. They’re gone now too—same problem.

Companies should outsource expert assistance: vulnerability scanning, monitoring, consulting, and forensics, for example. But they should not outsource management.

Some consulting companies are doing well and some are not. This is primarily a function of the quality of the service they offer. Consulting is, and always will be, a profitable business. Outsourcing occasional requirements for expertise transcends any single area. The outsourced security companies that are doing well offer clearly defined services organizations need. For example:

1.Consulting companies (such as VeriSign, @Stake, Foundstone) provide expert advice and assistance: strategic security consulting, penetration testing, forensics, and so forth.
2.Security Value-Added Resellers (VARs) provide product installation and configuration.
3.TruSecure provides certification and expert assistance.
4.Qualsys has an automatic vulnerability scanning service.
5.Counterpane provides network security monitoring.
In all of these cases, the company buying the security services retains management and ultimate control. Conversely, by not demanding a management role, the security providers offer useful, effective, and scalable services. Both win.

Why outsource security
The primary argument for outsourcing is financial: a company can get the security expertise it needs much more cheaply by hiring someone else to provide it. Take monitoring, for example. The key to successful security monitoring is vigilance: attacks can happen at any time of the day, any day of the year. While it is possible for companies to build detection and response services for their own networks, it’s rarely cost-effective.

Staffing for security expertise 24 hours a day, 365 days a year, requires five full-time employees—more when you include supervisors and backup personnel with specialized skills. Even if an organization could find the budget for all of these people, it would be very difficult to hire them in today’s job market.

Retaining them would be even harder. Security monitoring is inherently erratic: six weeks of boredom followed by eight hours of panic, then seven weeks of boredom followed by six hours of panic. Attacks against a single organization don’t happen often enough to keep a team of this caliber engaged and interested.

This is why outsourcing is the only cost-effective way to satisfy the requirements. Think about healthcare again. I might only need a doctor twice in the coming year, but when I need one I might need him immediately, and I might need specialists. Out of a hundred possible specialties, I might need two of them—and I have no idea beforehand which ones. I would never consider hiring a team of doctors to wait around until I happen to get sick. I outsource my medical needs to my clinic, my emergency room, my hospital. Similarly, companies will outsource network security monitoring.

Security monitoring is inherently erratic: six weeks of boredom followed by eight hours of panic, then seven weeks of boredom followed by six hours of panic.
Aside from the aggregation of expertise, an outsourced monitoring service has other economies of scale. It can more easily hire and train personnel, simply because it needs more employees. And it can build an infrastructure to support them. Vigilant monitoring means keeping up to date on new vulnerabilities, new hacker tools, new security products, and new software releases. Outsourced security companies can spread these costs across all customers.

An outsource company also has a much broader view of the Internet. It can learn from attacks against one customer, and use that knowledge to protect all its customers. It also faces attacks much more frequently. No matter how wealthy we are, we don’t hire a doctor to sit in our living room, waiting for us to get sick. We get better medical care from a doctor who sees patient after patient, learning from each one. To an outsource security company, network attacks are everyday occurrences; its experts know exactly how to respond to any given attack, because in all likelihood they have already seen it many times before.

How to choose an outsourcerIt is difficult to choose an outsourcer because it’s hard to tell the difference between good and bad computer security. By the same token, it’s hard to tell the difference between good and bad medical care. Because most of us aren’t healthcare experts, we can sometimes be led astray by bad doctors who appear to be good. So how do we choose a doctor or a hospital? I choose one by asking around, getting recommendations, and going with the best I can find. Medical care involves trust; I need to be able to trust my doctor.

Security outsourcing is no different; companies should choose an outsourcer they trust. Talking with others and asking industry analysts will reveal the best security service providers. Go with the industry leader. In both security and medical care, you don’t want a little-known maverick.

Companies buying security services should also avoid outsourcers that have conflicts of interest. Some outsourcers offer security management and monitoring. This worries me. If the outsourcer finds a security problem with my network, will the company tell me or try to fix it quietly? Companies that both sell and manage security products have the same conflict of interest. Consulting companies that offer periodic vulnerability scans, or network monitoring, have a different conflict of interest: they see the managed services as a way to sell consulting services. (There’s a reason companies hire outside auditors: it keeps everyone honest.) Outsourcers offering combined management and monitoring services will be among the next to disappear, I believe. If a company outsources security device management, it is essential that it outsource its monitoring to a different company.

In any outsourcing decision requiring an ongoing relationship, the financial health of the outsourcer is critical. The last thing anyone wants is to embark on a long-term medical treatment plan only to have the hospital go out of business midstream. Similarly, organizations that entrusted their security management to Salinas and Pilot were left stranded when those companies went out of business.

Modern society is built around specialization; more tasks are outsourced today then ever before. We outsource fire and police services, government (that’s what a representative democracy is), and food preparation. Businesses commonly outsource tax preparation, payroll, and cleaning services. Companies also outsource security: all buildings hire another company to put guards in their lobbies, and every bank hires another company to drive its money around town.

In general, we outsource things that have one of three characteristics: they’re complex, important, or distasteful. Computer security is all three. Its distastefulness comes from the difficulty, the drudgery, and the 3 a.m. alarms. Its complexity comes out of the intricacies of modern networks, the rate at which threats change and attacks improve, and ever-evolving network services. Its importance comes from this fact of today’s business world: companies have no choice but to open their networks to the Internet.

Doctors and hospitals are the only way to get adequate medical care. Similarly, outsourcing is the only way to get adequate security for today’s networks.

THE VALUE OF OUTSOURCING

Companies large and small, public and private, and across a wide variety of industries have embraced the practice of outsourcing within virtually all disciplines, including information technology - the sector which leads the trend.

In fact, within the past five to eight years, outsourcing has evolved from a purely tactical option - often of last resort - to an ongoing, standard business practice and strategic management tool. But what explains this dramatic evolution in such a relatively short period of time?

Weighing the Pros and Cons

For many, the decision to outsource begins with exercise of weighing the time and expense of doing it yourself against your desired outcome. For example, if you decide to add a patio to your home, you have two basic options. You can either take on the entire job yourself - designing the space, securing the permits, purchasing the materials, and building it yourself. Or you could hire an experienced contractor to handle everything for you.

Your investment for the first option is largely in materials and a significant amount of your time, particularly if you are squeezing the patio project into a busy schedule that already includes work and family responsibilities. But how long will it take you to complete the job? What quality assurances will you have, especially if you've never tackled anything like this before? What might the short- and long-term consequences of the do-it-yourself approach be?

On the other hand, what could a professional contractor bring to the table? While the financial investment might be slightly higher to cover labor costs with an experienced builder, the completion time is likely to be much shorter and you can hold the project to agreed-upon quality guarantees.

Focus on Core Competencies

An oversimplified example? Not really. Like many business outsourcing decisions, it comes down to this: What's your core capability or service? Where is your time most highly leveraged? And what's the opportunity cost of adding another area of responsibility or of being distracted from your core capability?

Reducing and controlling operational costs remain key goals, and savvy managers increasingly look to outsourcing to improve business focus and strengthen core capabilities. A successful outsourcing relationship can help achieve this by enabling companies to focus their people and resources - which are sometimes scarce - on the areas that are mission critical to their operations. It also gives these companies access to the top talent in an outsourced discipline - talent that the client company doesn't have to recruit, train, pay benefits to or struggle to retain, thereby freeing up personnel dollars and time. In addition, companies can expect service levels in their outsourced functions to rise because, as part of forming the outsourcing agreement, they can determine specific quality standards for the provider. The agreement then serves as a quality control system that may not have existed otherwise had the company not decided to outsource.

Making the Right Decision

While the benefits of outsourcing may seem clear, sometimes the biggest challenge for managers is how much operational control of the outsourced function they are willing to relinquish. However, if their expectations are clear from the outset, outsourcing typically offers a higher level of control than in-house solutions. By getting "out of the trenches" of day-to-day operations, management gains a much better look at the big picture.

Here are several questions to ask when considering an outsourcing arrangement:

What are the primary objectives of the department or organization?
How do they relate to, support and/or add value to the organization's core services?
What are the primary processes involved to support the objectives?
Are you considering an outsourcer for short-term projects or long-term processes?
What kind of talent do you need for the job? If the situation requires a very specific skill set with tight deadlines, outsourcing is likely to be the answer, as it enables a company to avoid the timely and costly process of recruiting, interviewing and training.
How can the outsourcer improve performance?
What is this function currently costing the organization?


IT - The Most Popular Outsourced Function

IT was one of the first sectors to experience significant levels of outsourcing, and continues to be the functional area where most outsourcing dollars are spent. As the largest independent provider of multivendor technology support services in North America, DecisionOne can attest to the popularity of this trend - particularly in the following five market sectors.
OEMs - hardware, software and consumer electronics
Channel - resellers, retailers and warranty administrators
Communications - RBOC, ILEC, CLEC, cable, satellite
Service Aggregators - outsourcers, system integrators, application service providers
Commercial and Government Users - Fortune 1000 corporations, midsize companies and government agencies


While providers like DecisionOne tailor precise solutions to answer their users' exact IT and business objectives, the reasons these companies explore outsourcing in the first place are often strikingly similar. In fact, what these five sectors generally have in common when seeking outsourcing are:
A need for direct technology support for employees or customers, and/or
A desire to expand their service portfolio through an outsourcing partnership that enables them to offer additional technology services to their customers.


The Value of Direct Support

For those companies looking to enhance direct support for their employees and customers, there are a series of ways that a provider such as DecisionOne can add value to the service equation.
Focus on Core Capabilities - By leveraging a provider's infrastructures and proven processes for service and support, clients can be more effective in bringing their products to market and growing their businesses. They can focus on core capabilities and concentrate corporate resources on product development, marketing, sales and operations.
Avoid Service Infrastructure Investments and Planning - With an experienced provider's personnel, systems and fixed assets, companies can grow their businesses more quickly without the planning and investment that's often needed in personnel resources, support systems and capital assets to scale their infrastructure for quality service and support delivery.
Enhance Product Brand - Quality service and support are important buying criterion in the technology marketplace. A client's product brand is enhanced by providing top-shelf service offerings through an outsourcer with a reputation for quality services delivery.
Eliminate Competitive Conflicts of Interest - It's important for companies to look for independent service providers like DecisionOne that focus solely on support and infrastructure services for the technology industry and do not sell hardware or software. This helps eliminate possible competitive threats and reduce revenues to competitors.
Manage Service Subcontractors Effectively - To minimize the time, effort and cost of managing multiple services subcontractors, clients should use their outsourcer as the single point of contact for all technology-based infrastructure services. Providers such as DecisionOne also provide clients with streamlined, proven systems for on-line service information. This approach ensures quality services are delivered to the client's customers.
Preserve Investment of Technology Inventory - Clients should seek an outsourcer that offers service options designed to extend the useful life of their technology and reduce the need for investment in new equipment purchases. These options are offered through cost effective after-warranty service plans that lengthen the lifetime of systems and maintain high service levels.
Speed to Deploy Technology Solutions- By augmenting a client's IT organization with selective skills or technicians in remote locations, technology solutions are implemented faster, which allows clients to realize their benefits earlier.
Manage the IT Skills Shortage by Augmenting Internal IT Staff - Clients find that contracting for service delivery instead of investing in personnel for a support function provides cost effective coverage that reduces management issues of recruiting, training and maintaining certified, skilled support staff.


Expanding Service Portfolios

Outsourcing not only benefits internal technology operations, but it can also provide real revenue-building opportunities for companies who resell services.
Expand Revenues through New Service Offerings - Clients gain the flexibility to sell more than basic support for their technology platforms by reselling the service capabilities of providers like DecisionOne. This not only opens up additional revenue opportunities for resellers, retailers and warranty administers, but also strengthens their competitive positions in the market by offering their customers complete solutions. An outsourcer's capabilities should be integrated to provide a total infrastructure support solution from initial deployment to ongoing support, from call center to onsite dispatch, from centrally managed systems to networks and desktops.
Lower Cost of Sales through Service Packages and Bid Desk - An outsourcer should make it easy for clients to sell these additional service offerings through predefined packages and quick turnaround bid desk processes for custom service proposals.
Enhance Product Brand - Quality service and support are important buying criterion in the technology marketplace. A client's product brand is enhanced by providing top-shelf service offerings through an outsourcer with a reputation for quality services delivery.
Offer Quality Corporate Service Offerings - Clients should be confident that the services for their projects can meet the requirements of a corporate customer. Make sure an outsourcer understands the special requirements of the corporate environment. DecisionOne, for example, has experience in providing quality service for half of the Fortune 1000.


Summary

As competitive pressures and customer and shareholder expectations continue to increase, the value of outsourcing is likely to steadily rise, as well. Many companies presently outsourcing various business functions are actively searching for additional outsourcing opportunities in other areas.

On the IT front, that trend will translate into additional reliance on complete, integrated service solutions that are carefully tailored to the specific requirements and business objectives of various technology customer segments. Whether a company is motivated by speeding time to market, decreasing investment in infrastructures, making service and/or subcontractor management more effective, or enhancing their corporate and product brand, an expert technology support provider should help them stretch their capital and improve their customer service, both internally and externally.

Outsourcing + Insourcing Key to Smartsourcing


In today's high-speed global business environment, every organization is out to maximize its profits, enlarge its market share, and above all, put a check on ever-increasing costs. Management gurus are undertaking every effort and every possible mantra is being applied to re-think and re-adopt new processes, especially the buzzwords "outsourcing" and "insourcing."

Outsourcing is the process of procuring services or products from an external service provider with a view to curb costs, replace in-house capabilities, and thereby reduce the time period of projects. Outsourcing is thus a full transfer or delegation of an organization's facility management functions to an external firm. Outsourcing has emerged as an effective tool to revamp the strategies and benefits of business in a financially viable and pro-active manner.

Fundamentally speaking, outsourcing may be classified into two types: traditional outsourcing and Greenfield outsourcing.

a. Traditional outsourcing means that the staff of the organization does not perform the same jobs or tasks. Here, tasks to be performed are identified and the service provider usually hires the staff. For instance, IT outsourcing may include a transfer of responsibility for management of data centers and networks. In the field of facility management, the people working as property managers might become the staff of a facility management company.

b. Greenfield outsourcing, on the other hand, means that the organization can change its business processes without any hiring of staff by the service provider. The organization, for instance, may hire an up-and-coming company to provide a new service such as wireless remote computing, which was not previously handled internally.

Insourcing Challenges
Insourcing is a common approach where facility management officials reach out to external facility management firms as process experts. Here, the organization hires the professional help of an external service provider as a consultant to measure the scale of its operations levels and recommend necessary improvement measures. The internal staff, from this point onward, implements the suggested recommendations.

Today's IT and HR managers face several hard realities. In the first place there is an acute shortage of suitably qualified candidates to fill the available vacant positions. As a matter of fact, at any given time, according to reports, 10 to 15 percent of all IT positions are unstaffed and the growth rate of job openings exceeds the growth rate of the labor force in the IT industry. The US government alone estimates a shortfall of 1.3 million workers over the next 10 years.

The second factor involves economics. The cost of acquiring high-tech experts is growing, thereby maintaining consistency in the law of supply and demand. For instance, salaries of IT workers are increasing by as much as five times the rate of salaries of non-technical staff!

Insourcing has been instrumental in creating a viable supply of IT workers -- in fact, a better quality workforce combining both technical and business skills. Moreover, there has been a reduction in the cost of recruiting as well as the cost of integrating IT workers into the corporate culture. Above all, it has been helpful in stabilizing salaries and, finally, has resulted in an upswing in retention.

Outsourcing: The Perfect Motivator
Curbing costs and saving money have always been the perfect motivator for organizations to consider outsourcing options. Outsourcing revenues in the financial services sector are likely to soar to $30 billion by 2006, with companies in North America and Europe leading the way, estimates Boston-based research firm Celent Communications.

IT outsourcing is a fast-growing industry since it provides firms access to state-of-the-art technologies and is accompanied by the overall guidance of experts, thus curtailing the need to open up expensive in-house departments.

According to a report by IDC, global spending on IT services will soar to $700.3 billion by 2005, an increase from $439.9 billion. Many factors have converged to prompt firms to outsource.

The need to cut costs, globalization, and the increase in the number of ever-demanding clients mean that investment managers must revamp their operations, and thus outsourcing is high on their priority list.

Yet another trend is the emergence of offshore outsourcing and using organizations from developing countries to write code and develop applications. These organizations mainly perform mainframe programming for their clients and some related maintenance work. This practice is proving to be very cost effective. For any organization, IT involves huge costs, and by outsourcing these functions, internal IT staff can be deployed on new projects.

Organizations today are looking at outsourcing as an important option for leveraging resources and cutting costs, and the focus is on strategic and value-added services. Numerous countries have substantially well-trained IT professionals and clerical staff who have lower salary expectations compared to their US counterparts. Global outsourcing has thus become a small but rapidly growing sector in the overall outsourcing market.

Outsourcing - a New Surge
Recent trends clearly indicate that companies are generally avoiding traditional outsourcing risks and forming a deeper relationship with their offshore partners by setting up dedicated centers. A dedicated center is an extension of an organization abroad.

The dedicated center devotes all its efforts to the host organization and, to maintain consistence with the organization's standards, it follows their culture and methodologies to produce immediate results. The center enhances overall productivity, and more importantly, it results in considerable long-term cost savings.

Countries like China, India, Israel, and Russia, which possess highly skilled labor forces as well as outsourcing capabilities, have been the major gainers. Despite the fact that each of these countries has its own advantages or drawbacks, there has been a sudden upsurge of dedicated centers in these countries.

Smartsourcing: The Next Stopover?
Outsourcing and insourcing can be thought of as two sides of the same coin. Many analysts believe that if companies judiciously mix both outsourcing and insourcing properly, they will be the key to the next buzzword: smartsourcing. Today, numerous chip design companies are setting up developmental centers in India, striking the right balance between outsourcing and insourcing by designing and developing chips in-house while outsourcing the actual manufacturing of the chips.

Smartsourcing is yet another substitute for the basic challenge of outsourcing as a management technique. Smartsourcing can best be explained as the tactical use of specialized external resources to perform core and non-core SAP Basis activities, which were originally carried out by internal staff and resources. Smartsourcing provides the best available technology, services, and management to optimize network availability, performance, and reliability on a subscription basis. For those customers who want to out-task the design, management, and ongoing maintenance of their networks instead of relying on in-house network support resources, smartsourcing is perhaps the most lucrative option.

IT managers today are faced with increasingly complex technology, dwindling resources, and limited budgets. They are constantly on the lookout for alternative solutions for the success and growth of their business. Perhaps the answer lies in a delicate combination of outsourcing and insourcing, leading to the perfect solution: smartsourcing!

By Sabyasachi Bardoloi, Pinnacle Research Group, Pinnacle Systems, Inc.

Consultants Find Goldmine in Outsourcing

Management consultants, rev up your horses. Roll up your sleeves and get ready with the client pitch. A little bit of attention on countries like India and the Philippines won’t hurt either.

As more and more companies realize the benefits of outsourcing, CEOs are predicted to tap consultants in mapping out their strategies.

According to the recent Wired magazine article about outsourcing to India, the surge in outsourcing means good business for consulting firms.

No wonder even giant tech firms like IBM (remember the acquisition of Price Waterhouse Coopers?) and HP are now beefing up their consultancy services and closing outsourcing deals as well.

IBM and HP recently sealed long-term multi-million dollar deals with manufacturing giant Procter and Gamble.

But independent consultancy firms need not be intimidated. According to Kennedy Information, spending on consultancy services is expected to jump up to 10% in the next two years, driven by the need for advice on sending tech jobs abroad.

US companies are expected to ship more than 200,000 services offshore in the near-term. With annual salaries of programmers in countries like India a mere fraction of their US counterparts ($8,000 versus $70,000), it makes business sense of to try outsourcing.

Outsourcing, however, is never downright simple and like any business decision, involves a lot of risks. For some efficiency, CEOs call upon management consultants.

In the last few years, the study also noted that major consultancy firms have all beefed up their outsourcing divisions. For consultants, outsourcing makes business sense as well.

Competition Leads to Higher-Value Outsourced
Services

The rise of outsourcing has led to increased competition among service providers in India, which not only have to compete among themselves but with counterparts from other countries now slowly catching up.

Competition, however, has spurred Indian companies to assess their current capabilities and develop or acquire further skills that will lead to higher value work.

According to a comment posted in an industry opinion portal, wages from software development work in India has gone down to about $10-$20 per hour from $50-$70 per hour three years ago. Blame it on the number of service providers which has mushroomed over the past several years.

In an effort to stand out, some companies have evolved from software encoding to being large-scale solution providers like maintaining software applications remotely for a client (under what is generally called BPO) or remote maintenance hardware systems.

Because of mission-critical systems that run 24 x 7, companies in the US for example are tapping IT guys from India to do the task for them at salaries more than half of their American counterparts. Clients don't even have to pay night differential since work is done halfway around the globe.

While CEOs sleep soundly at night, the guys in India make sure that the systems that power corporate America are up and running.

Outsourcing: Staying Afloat in the Transition Process

What it takes to avoid the rocks when moving some or all of an in-house manufacturing process to a contract manufacturer.

There is a popular quality management analogy that goes like this: A boat is attempting to navigate a body of water full of submerged rocks. The water is lowered very slowly, so the largest rocks beneath the surface are gradually exposed. After the boat passes those rocks, the water is again slowly lowered to expose the next set of rocks, which are then dealt with. This process continues until all rocks have been revealed and the conditions are safe for the boat to travel.

In this analogy, the water represents the manufacturing process and the rocks are quality problems or inefficient production steps. And of course, the boat represents the manufacturer.

If the process of transferring a production line to a contract manufacturer (CM) followed this cautious, incremental process, there would seldom be a problem. Unfortunately, outsourcing is more often analogous to dropping the water level all at once. When a primary manufacturer suddenly begins relying entirely on a CM for its product, rocks that went undetected prior to the transfer abruptly jut from the water, endangering the success of the outsourcing initiative. Extensive planning and preparation is required to avoid hitting those rocks.

Medical device and diagnostics manufacturers (henceforth "primaries") have outsourced the manufacturing of certain relatively simple products for a number of years. But three new trends have become increasingly evident over the past few years. The first is that primaries are outsourcing more products than ever, and as a result are forming more relationships with CMs. The second and more important trend is that CMs are upgrading their technical and supply chain capabilities. Whereas in the past they may have been limited to simple operations—such as assembling tubing sets—they are now developing the capabilities to manage entire supply chains, and to assemble or even help engineer more-complex products. Finally, there is the sheer growth of contract manufacturing capacity. Some medical device CMs are expanding their operations in excess of 20% per year.

The increase in manufacturing outsourcing is driven by reduced margins in the industry, strategic focus, and the search for growth in new markets around the world. Some primaries are concluding that their strengths reside in design and marketing, making selective manufacturing outsourcing a logical move. Others are realizing that their core competencies lie in certain technical manufacturing capabilities, and so they outsource other parts of the production process.

For example, a medical device maker might decide to outsource some of its older, more stable products so it can focus its operations on newer, more technically complex products with higher margins.

A primary contemplating manufacturing outsourcing must consider which operations it will outsource and which it will retain, how the relationship with the CM will be managed, the incentives to put in place to obtain the desired behaviors from the CM, and how the outsourcing will affect future product changes and improvements.

Because medical device and diagnostics enterprises are ultimately responsible for any product they sell, regardless of whether it was manufactured by a CM, quality assurance and legal liability issues also come prominently into play. How tight and reliable are the CM's quality systems? How well did its operations fare in its last FDA audit? How does the CM manage suppliers, inspections, labeling, and sterilization?

Once the production-line transfer to a CM has started, there is often little or no time to respond to unforeseen issues, such as quality problems, supplier shortages, or inflexible regulatory lead times around the world. It is therefore crucial to have identified and worked around the rocks before the water level plunges.

The remainder of this article will examine what it takes to avoid the rocks in moving an in-house medical device manufacturing operation to a contract manufacturer. The observations and advice are based on a long record of success in planning and implementing successful production-line transitions for medical device and diagnostics firms.

PREPARATION AND PARTNER SELECTION CHECKLIST

Define purpose for outsourcing—cost, strategic focus, access to new markets.
Define the scope of what will be outsourced (e.g., which products, quality and supply chain functions, manufacturing operations, etc.).
Enlist senior management support.
Build a cross-functional core team that will manage the selection and transfer process.
Identify potential contract manufacturing partners.
Narrow potential partner field down to a few semifinalists.
Develop a detailed request for proposals (RFP) and submit to semifinalists.
Conduct contract manufacturer reviews, including detailed site visits and reference checks.
Evaluate RFP responses and findings from contract manufacturer reviews (keep in mind the purpose for outsourcing defined above).
Select contract manufacturing partner.



PREPARATION AND PARTNER SELECTION

First and foremost, the primary must clearly define for itself what it intends to gain from the outsourcing relationship, be it lower cost, access to new markets, technology or scale advantages, or the ability to tighten its strategic focus.

The second key to success is the selection of an appropriate CM partner. The winnowing process should be handled by a small, cross-functional team that performs progressively more-detailed due diligence as the pool of candidates is narrowed. This due diligence should include site visits, reference checks, and detailed requests for information from all prospective candidates.

What are the company's key criteria for a successful relationship with a CM? Is lowest cost of prime importance? How important are the partner's engineering or technical capabilities? How important is the CM's location?

If the outsourcing strategy includes gaining inexpensive access to new markets and the technical capabilities required of the CM are moderate, then the partner's location might be the most important consideration. A number of medical device companies with significant markets in the Far East have product manufactured in the region to avoid trans-Pacific distribution costs.

Organizational compatibility is another important issue. Primaries should meet with managers at various levels within the CM's company to get a reading on organizational fit, compatible styles of communication, and so on. Is the fit close enough that the CM under consideration could become a partner in the planning process?

Define the Operational Scope. The first step in successfully transitioning operations to a CM is deciding which manufacturing operations will be outsourced and over what time frame. Will every part of the manufacturing process be outsourced at once, or should the outsourcing be accomplished in logically time-phased stages? Which support operations—planning, sourcing, or distribution—will be outsourced, and which will remain with the primary? How, for example, will postmanufacturing operations such as sterilization and distribution be handled? Which company will procure components and take responsibility for component quality (supplier audits, annual inspections, etc.)? How much flexibility will the CM have in setting its own manufacturing schedule? These are all questions that must be asked—and answered.

Manufacturers must start thinking early about the organization within their company that will manage the CM partnership after the transition is complete. If at all possible, the same people who are responsible for managing the transfer at both the primary and the CM should be responsible for the ongoing relationship after the transfer is made.

Define Operating Rules and Responsibilities. It is critical to work through, in advance, how all of the elements of the product's supply chain—production planning, materials and components sourcing, manufacturing, product sterilization, and distribution—will work, both during and after the transition. Pay special attention to the specific operations that are going to change, which will obviously include manufacturing-line and distribution operations. Who will be responsible for sourcing components, providing suppliers with forecasts, and qualifying or auditing suppliers?

One way to ensure that all operations have been thoroughly reviewed is to map the supply chain processes. Manufacturing operations are relatively easy to map, since they are usually embodied in the primary's standard operating procedures (SOPs), but it is equally important to map the processes for managing planning, sourcing, and distribution.

In addition to a formal contract, primaries should write a joint service agreement (JSA) that clarifies how the joint operations will work. This is to make doubly sure that both parties clearly understand their roles and responsibilities before the transition begins. A primary's written contract with a CM tends to be a static document that focuses on launching the relationship—and on dissolving it, should that prove necessary. It does not usually focus on how the relationship will work, how difficulties will be redressed, or how the relationship can be strengthened and expanded over time if all goes well. The JSA is the ideal instrument for addressing those issues.

Plan Customer Supply. Determining how the transition team will handle product supply to customers during the transition is vital in avoiding one of the most dangerous rocks. Customers will not accept service interruptions of any kind. Furthermore, any supply problem, whatever its nature, will be blamed on the primary's "obviously ill-considered" decision to move to a CM.

Essentially, there are two options for keeping customers properly supplied during a production-line transition. One is to build extra manufacturing capacity pretransfer, so that sufficient manufacturing capacity will be available at any time to unfailingly meet customer demand. The second option is to stock extra inventory in advance of the transfer in order to cover any supply shortfall that might occur while the manufacturing lines are down during transfer.

The choice depends on the cost and time required to build and qualify new production equipment, the level of excess capacity of current production operations, and the product shelf life (versus the planned transition time). Creativ- ity in combining the choices can have significant benefits, both in terms of reduced capital outlays and increased transition speed.

For example, during a manufacturing transfer operation, a set of transfer "waves" could be established, in which the CM deploys limited staff among just the critical receiving and validation operations. This would effectively allow the primary to transfer multiple sets of operations in parallel, rather than serially, potentially speeding the transfer by months.

It is important to remember that the supply of components going into production (whether from the primary or the CM) also has to support the selected transfer strategy.

Also, if multiple production lines are going to be transferred, primaries should work through how the waves of transfer will be scheduled and how they interrelate. For example, if the transfer of one line is late, will it affect the transfer of the next? If so, how? Whatever plan is developed for transitioning, the product supply needs to be robust enough to absorb delays in the transition and to cover sudden increases in consumer demand.

Moving the first production line is rarely a gradual process. Once the first line moves, the company is suddenly and conspicuously vulnerable to demand spikes. Planning must be thorough before each production line is moved.

THE TRANSITION PROCESS

Staff the Transition Team. Appropriately staffing the core outsourcing transition team is critical to locating the rocks before the water level plunges. The team should be cross-functionally staffed with people whose schedules allow them to commit for the duration of the transition project. The transition team leader should expect to devote 100% of his or her time to the project, and most of the core team members should plan on devoting at least half of their time.

The team should include members from both the primary and the CM, as well as members from all of the internal operations that will be affected by the transition, including IT, finance, and marketing. Even though they are not directly involved in transferring production lines, IT and finance will need to change their processes to support the transferred operations. It is obviously important for marketing personnel to understand the transition's operational details and timing so that they can confidently answer questions from concerned customers.

If at all possible, each team member on the primary side should have a peer at the CM company. These "peer pairs" can work out how their respective operations will function during and following the transition, and then report their solutions to the core team at large.

The transition team must be empowered by senior management to manage all aspects of the transition, including its timing, the sequence of moves (if multiple lines are being moved), and the development of protocols for line validations, to name just a few aspects.

In addition, the team will almost certainly discover in the course of the transition that some operations are not fully defined in terms of how they will work during or after the transition. In order to avoid slowing the transition process, the team should be empowered to make these operational decisions as they arise. For example, if improvements were planned for the products to be outsourced, the transition team may need to decide whether to complete those improvements before transitioning the production line or after the transition, or to postpone the improvements until a more operationally stable time.

Manage the Transition. Regular and frequent core team meetings are important in tracking the progress of the manufacturing transfer and quickly resolving problems as they emerge.

The detailed master plan created at the start of the project should include all the major steps performed by all the functions in the transition process. Most any project-management software will do for creating such a master plan. Enough detail should be incorporated so that the plan reflects all of the operations that need to be performed, especially the interdependencies among the operations involved.

The entire core team should review this plan until everyone's "buy-in" is secured, and then review and update the plan regularly throughout the transfer project. If any tasks are slipping, or if management decides to speed up or slow down the transfer for some reason, this plan is the first place to look in determining how the transfer, and the interdependent operations, will be affected. Reviewing the master plan at each core team meeting is a good idea as the transition proceeds.

Make "Go/No-Go" Decisions. The object of go/no-go decision meetings is to determine if the team is truly ready to move the first production line, or if additional work needs to be done before the line is transferred. Appropriate senior representatives from the key functions should attend, as well as the entire transfer team. The topics at these meetings should include not just the status and details of transition planning, but also supply planning and risk-mitigation planning.

Setting fixed dates for go/no-go decision meetings—and sticking to them—can be a forcing function that keeps the team on schedule. If the transition team has done its work effectively and has adhered to schedule, no-go decisions will be rare.

Ideally, the core transition team should report to a steering committee made up of representatives from both the primary and the CM. This way, there is assurance not only that the primary is ready to transfer the production line, but also that the CM is ready to receive it. If multiple lines are being transferred in waves or phases, a go/no-go meeting should be held before each line is transferred.

BUILD A PARTNERSHIP FROM THE START

Both the primary and the CM need to view their relationship as a partnership from the outset. The sides must treat each other as equals, as they will win or lose equally. There must be no holding back of relevant manufacturing or supply chain information. The CM must fully understand the operation it is taking over, and know where the potential problems lurk. Early on, the primary and the CM should structure a gain-sharing agreement that addresses such issues as how the two parties will split the gains from reengineered production operations, and how they will deal with—and who will absorb—any component cost increases, should they occur. A good gain-sharing agreement is extremely important to forging a successful relationship.

Both the transition to contract manufacturing and the posttransition period should be monitored using a set of performance metrics. Metrics help ensure that everyone agrees on what is important to track and measure. When properly employed, metrics maintain the momentum of progress toward well-defined goals, and expose problems as early as possible so that corrective action can be taken. Metrics typically monitored in the course of a manufacturing outsourcing project include finished-goods inventory levels, production rates, product quality and yield, actual versus planned ramp-up schedules, transition dates for production lines, and capital, operating, and transition costs.

One idea is to build a scorecard that depicts the critical transfer metrics in graphical form. Each graphic depicts a specific goal or target versus the actual performance toward that target to date, giving managers a quick and clear picture of how the transfer is proceeding in critical terms.

CONCLUSION

Moving a production line to a CM without negative impacts on product supply or quality requires diligent planning and careful management. Every party involved in the transition, whether on the primary manufacturer or contract manufacturer side, must understand that no one is succeeding if anyone else is failing. With the right frame of mind, the right management processes, the right staffing, and the right planning, the rocks that are bound to emerge during transition can be spotted and avoided, with time to spare.

Outsourcing: Staying Afloat in the Transition Process

What it takes to avoid the rocks when moving some or all of an in-house manufacturing process to a contract manufacturer.


There is a popular quality management analogy that goes like this: A boat is attempting to navigate a body of water full of submerged rocks. The water is lowered very slowly, so the largest rocks beneath the surface are gradually exposed. After the boat passes those rocks, the water is again slowly lowered to expose the next set of rocks, which are then dealt with. This process continues until all rocks have been revealed and the conditions are safe for the boat to travel.

In this analogy, the water represents the manufacturing process and the rocks are quality problems or inefficient production steps. And of course, the boat represents the manufacturer.

If the process of transferring a production line to a contract manufacturer (CM) followed this cautious, incremental process, there would seldom be a problem. Unfortunately, outsourcing is more often analogous to dropping the water level all at once. When a primary manufacturer suddenly begins relying entirely on a CM for its product, rocks that went undetected prior to the transfer abruptly jut from the water, endangering the success of the outsourcing initiative. Extensive planning and preparation is required to avoid hitting those rocks.

Medical device and diagnostics manufacturers (henceforth "primaries") have outsourced the manufacturing of certain relatively simple products for a number of years. But three new trends have become increasingly evident over the past few years. The first is that primaries are outsourcing more products than ever, and as a result are forming more relationships with CMs. The second and more important trend is that CMs are upgrading their technical and supply chain capabilities. Whereas in the past they may have been limited to simple operations—such as assembling tubing sets—they are now developing the capabilities to manage entire supply chains, and to assemble or even help engineer more-complex products. Finally, there is the sheer growth of contract manufacturing capacity. Some medical device CMs are expanding their operations in excess of 20% per year.

The increase in manufacturing outsourcing is driven by reduced margins in the industry, strategic focus, and the search for growth in new markets around the world. Some primaries are concluding that their strengths reside in design and marketing, making selective manufacturing outsourcing a logical move. Others are realizing that their core competencies lie in certain technical manufacturing capabilities, and so they outsource other parts of the production process.

For example, a medical device maker might decide to outsource some of its older, more stable products so it can focus its operations on newer, more technically complex products with higher margins.

A primary contemplating manufacturing outsourcing must consider which operations it will outsource and which it will retain, how the relationship with the CM will be managed, the incentives to put in place to obtain the desired behaviors from the CM, and how the outsourcing will affect future product changes and improvements.

Because medical device and diagnostics enterprises are ultimately responsible for any product they sell, regardless of whether it was manufactured by a CM, quality assurance and legal liability issues also come prominently into play. How tight and reliable are the CM's quality systems? How well did its operations fare in its last FDA audit? How does the CM manage suppliers, inspections, labeling, and sterilization?

Once the production-line transfer to a CM has started, there is often little or no time to respond to unforeseen issues, such as quality problems, supplier shortages, or inflexible regulatory lead times around the world. It is therefore crucial to have identified and worked around the rocks before the water level plunges.

The remainder of this article will examine what it takes to avoid the rocks in moving an in-house medical device manufacturing operation to a contract manufacturer. The observations and advice are based on a long record of success in planning and implementing successful production-line transitions for medical device and diagnostics firms.

PREPARATION AND PARTNER SELECTION CHECKLIST

Define purpose for outsourcing—cost, strategic focus, access to new markets.
Define the scope of what will be outsourced (e.g., which products, quality and supply chain functions, manufacturing operations, etc.).
Enlist senior management support.
Build a cross-functional core team that will manage the selection and transfer process.
Identify potential contract manufacturing partners.
Narrow potential partner field down to a few semifinalists.
Develop a detailed request for proposals (RFP) and submit to semifinalists.
Conduct contract manufacturer reviews, including detailed site visits and reference checks.
Evaluate RFP responses and findings from contract manufacturer reviews (keep in mind the purpose for outsourcing defined above).
Select contract manufacturing partner.



PREPARATION AND PARTNER SELECTION

First and foremost, the primary must clearly define for itself what it intends to gain from the outsourcing relationship, be it lower cost, access to new markets, technology or scale advantages, or the ability to tighten its strategic focus.

The second key to success is the selection of an appropriate CM partner. The winnowing process should be handled by a small, cross-functional team that performs progressively more-detailed due diligence as the pool of candidates is narrowed. This due diligence should include site visits, reference checks, and detailed requests for information from all prospective candidates.

What are the company's key criteria for a successful relationship with a CM? Is lowest cost of prime importance? How important are the partner's engineering or technical capabilities? How important is the CM's location?

If the outsourcing strategy includes gaining inexpensive access to new markets and the technical capabilities required of the CM are moderate, then the partner's location might be the most important consideration. A number of medical device companies with significant markets in the Far East have product manufactured in the region to avoid trans-Pacific distribution costs.

Organizational compatibility is another important issue. Primaries should meet with managers at various levels within the CM's company to get a reading on organizational fit, compatible styles of communication, and so on. Is the fit close enough that the CM under consideration could become a partner in the planning process?

Define the Operational Scope. The first step in successfully transitioning operations to a CM is deciding which manufacturing operations will be outsourced and over what time frame. Will every part of the manufacturing process be outsourced at once, or should the outsourcing be accomplished in logically time-phased stages? Which support operations—planning, sourcing, or distribution—will be outsourced, and which will remain with the primary? How, for example, will postmanufacturing operations such as sterilization and distribution be handled? Which company will procure components and take responsibility for component quality (supplier audits, annual inspections, etc.)? How much flexibility will the CM have in setting its own manufacturing schedule? These are all questions that must be asked—and answered.

Manufacturers must start thinking early about the organization within their company that will manage the CM partnership after the transition is complete. If at all possible, the same people who are responsible for managing the transfer at both the primary and the CM should be responsible for the ongoing relationship after the transfer is made.

Define Operati