Making sense of outsourcing

In one of his brushes with re-engineering, the comic strip anti-hero Dilbert pleaded, "If you let me keep my job, I will do the work of 10 people. Specifically, it will be the 10 people in our strategic planning department. They don't do anything."

When it comes to strategic planning for logistics outsourcing, it's conceivable that Dilbert could do the work of 20 people. In spite of its growth, increased sophistication, and impact on a business's supply chain operations, a surprising number of companies still undertake outsourcing and provider selection with little regard for overall logistics strategy.

That's a downright risky way to proceed. A sure recipe for disaster is to embark on a program that is not suitable, is not understood clearly, or is full of unrealistic expectations. In my experience, outsourcing relationships run a high risk of failure when a company outsources an activity that its own personnel don't totally understand and the provider promises to meet objectives that have not been clearly defined, communicated, or understood.

Outsourcing should always be carefully thought out and measured against the alternative of doing the job in house. To be sure, the analysis process will be tedious and in some cases, downright unpleasant. Collecting data will consume valuable time and resources, and the entire process will require patience, perseverance, and persuasion in dealing with other internal functional groups. This will be necessary, however, to identify the merits and drawbacks of each course of action.

It's also important to include the potential provider in the process from the beginning. But wait. What if the provider hasn't been selected yet? Then, in my opinion, you have the cart before the horse.

In this age of supply chain enlightenment, it's surprising how many companies still buy outsourcing services by traditional methods, that is, essentially the same way they buy pig iron or corrugate. All too often, they assign "professional" buyers with little supply chain knowledge or experience to negotiate for the lowest rate. For these organizations, the usual process is to prepare a request for proposal (RFP) that outlines the task(s) to be performed and lays out requirements for submitting the proposal itself. The RFP is presented to three or more providers, who are asked to submit bids to perform precise tasks in precise ways. The contract is then awarded to the provider who demonstrates the best cost-benefit ratio.

The RFP makes providers' proposals easier to compare and evaluate, but it ignores the basic issue of determining the most cost- and service-effective logistics process. For that reason, I strongly recommend a different approach—one that begins not with the RFP but with the RFI (request for information). Rather than starting out by drawing up an itemized list of tasks, a company will first gather information about potential providers that are known to have experience in the client industry.

Among other advantages, this exercise will help identify a qualified provider to include in the planning process, where it can provide valuable input and collaborate with the client in the analysis and resolution of the logistics objective. Although this method requires the qualifying of logistics service providers (LSPs) before the cost of their services is known, this will be offset by the advantages of bringing the provider into the process early. Almost always, the pricing can be resolved to the parties' mutual satisfaction. Today's LSPs, for the most part, have developed sophisticated technology and analytical capabilities and are well equipped to participate in a collaborative design-based effort to meet the client's needs.

If you're going to enter into an outsourcing relationship, it makes infinitely good sense to leverage the provider's knowledge and expertise early in the process. After all, isn't that what outsourcing is all about?