Outsourcing is down but not out

Over the past few decades, outsourcing has transformed global business. It is estimated that 1 in 10 workers in the UK have  “outsourced” jobs and companies spend $200 billion a year on it. Procurement has played a central role in this transformation.

Recent data suggests that companies in mature markets like the UK and US may be outsourcing less and adopting approaches that are less risky. The Economist reports that the total value of outsourced contracts for the second quarter of 2011 fell by 18% compared to the same period the year before. Poor delivery and the high cost of resolving legal disputes have led companies to choose smaller, more flexible outsourcing contracts.

For more information read ”The trouble with outsourcing” in the Economist on 30 July 2011.


Networking in procurement

Networking is an important aspect of my professional life and something that I enjoy so I’m surprised when people recoil from it.  Despite the growth of networking sites like LinkedIn and events by organisations like CIPS I find a lot of people who still feel that networking is about being pushy or self promoting, particularly junior procurement professionals or those that have been in the procurement profession for a long time. The lack of experience outside the procurement profession and regular contact with over familiar sales people perhaps blinds them to the potential benefits of meeting new and different people in a professional capacity.

I was interested to read the recently published article called “In with the in crowd” in the Summer 2011 edition of CPO Agenda which outlines the benefits and gives some tips. The benefits highlighted include improving market knowledge, raising the profile of procurement and improving the chances of getting a better job.  There are tips about developing a strategy and combining face-to-face and online networking. It’s a short article and well worth a read.


How to make meetings work for you

I’m often asked to chair or facilitate meetings. Given the nature of the CHC’s work, people attending the meetings often come from different organisations and different functions with in those organisations. To make things more complicated, I may not have met them before the meeting. For example, I was asked to chair couple of  meetings this week with directors from the client. I’ve only recently met the directors and their teams so it was challenging assignment. I learnt a lot about them from the way they interacted with each other and am now in a better position to delivery the desired output.

I was interested to read Alison Smith’s recent blog in Supply Management (How to make meetings work for you, 2 June) where she shares tips to get everyone in the right mood. Alison recognises that people have different moods or states of mind and these can help or hinder achieving the desired outcome. I’m a strong believer in ice breakers for team meetings; the team members enjoy doing an activity together, they get the chance to put day to day issues to one side and become more creative. Here are Alison’s 2 strategies:

  • Ask the attendees what states would be useful to achieve the outcome, and use this list as a reminder throughout the meeting when other less helpful states appear.
  • Ask attendees to each pick one from a selection of beneficial states for them to be responsible for bringing into the meeting, or even ask them to share a time in the past when they’ve expressed that state.

I’ve put Alison’s suggestions into action and found that the meeting was much more productive. The attendees were a bit fazed at the beginning but welcomed the new approach and made a greater contribution. And we managed to have a few laughs.



Bristol Water whets appetite for more deals

Given CHC’s experience in the water industry, it was interesting to read in the Financial Times today that Citigroup has been appointed to advise on the possible sale of Bristol Water (Bristol Water whets appetite for more deals, 9 June 2011). According to the FT, Agbar, the Spanish water specialist majority owned by Suez Environnement, should get £370m for the utility. If the sale is successful, then it will be the first deal in the privatised UK industry since the financial crisis and may mark the start of a fresh round of acquisitions.


CHC and the Next Generation

Following the successful transition of the UK part of United Utilities’ non-regulated business and the rapid mobilisation for the start up of the new business called Vennsys, CHC is pleased to announce that it has been awarded a further extension to its current contract with Veolia Water. CHC will provide advice on the transformation of its people, processes and technology to create a customer experience that is measured to be in the top quartile in the industry. The project called Next Generation Customer Experience aims to create a remarkable customer experience which is scalable to accommodate new aquisitions.

Frugal innovation

Frugal innovation is about delivering more value at less cost to more people. It is not a new idea but has received increasing attention recently because of the rising importance of developing countries. Frugal innovation or juugal is the term commonly associated with countries like as India or China to describe a specific kind of innovation which aims to minimise the costs of innovation and the cost of the final product. Various techniques are used:

Combining existing products eg  Nokia’s cheapest mobile handsets come equipped with flashlights (because of frequent power cuts) and multiple phone books (because they often have several different users)

Adaptation eg applying Henry Ford’s management techniques of mass production to heart surgery so that more patients can receive treatment at a much lower cost

Put to other uses eg TCS is looking at using mobile phones to connect television sets to the internet. Personal computers are still relatively rare in India but televisions are ubiquitous.

Substitution eg BYD has radically reduced the price of expensive lithium-ion batteries by using less costly raw materials and learning how to make them at ambient temperatures rather than in expensively heated “dry rooms”

I can see how many of the techniques above could be applied in rich countries. Lean manufacturing was developed in Japan and then adopted by the west in the 1980s. Will the same thing happen to frugal innovation in the 2010s?



Fosters’ hangover

Fosters, Australia’s largest drinks company, has discovered that beer and wine don’t mix. It has spent a fortune (A$7 billion) building up a wine business over the past 5 years but it has performed so badly that it cost the chief executive his job in 2008. Investors hope that the demerged business called Treasury Wine Estates will trade at a market value in excess of the A$2.7 billion that Cerberus, a private-equity firm, reportedly offered to pay for it last September. The Supreme Court of the state of Victoria approved the demerger on May 4th.

Australian wines have suffered badly from a combination of the economic downturn, a strengthening Australian dollar, oversupply and a reputation for being cheap and cheerful. Questions still remain, however, whether the integration could have been better managed.

Fosters is brewed in the UK by Scottish and Newcastle (S&N), a British beer firm. Indeed, S&N brews four out of every five pints of Foster’s now.  

Fosters has returned to its traditional role as “Australian for beer”. Speculation is rife that it will soon be swallowed up by one of the big global brewers, with SABMiller the favourite. Fosters’ hangover is likely to get worse.



CHC helps a start-up

Vennsys, a consortium led by Veolia Water, was established in December 2010 to manage the metering services for Thames Water worth £300m. Earlier this year, I wrote that CHC had been asked to help support the start-up, specifically to develop processes and procedures for the new business and quickly mobilise critical indirect categories of spend such as recruitment, payroll and fleet (see “CHC’s pro-active and flexible approach results in more work”). Vennsys has experienced its fair share of growing pains which means that CHC’s experience as a trouble shooter have contributed to the success of the enterprise. The supply chain is now in place and CHC is handing over to new management team. CHC will be available for work from 23 May.

Cost cutting

When I meet directors for the first time, I like to ask them what they expect from procurement. More often than not they tell me that procurement should focus on reducing costs. Consequently a feature in the spring edition of CPO Agenda entitled “Cutting it fine” caught my eye. CPO Agenda asked a number of CPOs why the number one priority for most buyers at all levels is “cost cutting”.  

Adrian Turner of Apple UK provides some useful insight into the different facets of cost cutting but says that procurement needs to relate these to the broader business to get greater recognition. There are a number of fairly standard comments on educating stakeholders about employing life cycle costs and using quality improvement to bring down total cost.

Given that compliance in supply chain is poor in most companies – Aberdeen Group indicates there is up to 35 per cent non-compliance in supply chain transactions – I was surprised that only Jonathan Watt of State of Flux mentioned it. Procurement often reports big savings but only a fraction hit the P&L. Without the connection between what we say and what we do it’s difficult to build a trusting relationship and to see how procurement can engage in the broader agenda.


The New Deals

As an economic recovery dawns, executives are starting to see how the downturn has reshaped their businesses. In the drive to reduce both costs and risks, many companies have forged partnerships aimed at improving efficiency or pooling resources.

In a survey by CFO Research Services in March 2011 and sponsored by Ariba, nearly 80% of respondents said their company’s external relationships with suppliers, customers, and business allies will be “very important” to their ability to thrive in the recovery. In a separate question, nearly 60% of respondents said their company is much more or somewhat more likely to pursue strategic partnerships as a result of the economic downturn.

There have been many surveys showing that CFOs believe suppliers are important and yet procurement professionals often find the relationship with their finance colleagues challenging. The question I want to ask is simple: has anything changed to make this relationship easier and more productive for both parties?

Before the recession, businesses reduced costs and increased efficiency by outsourced, off-shored and unloaded non-core functions. In areas like warehousing and delivery, supplier performance was optimised by deploying new technology. These activities were spurred on by economic events like exchange rate variations and rising commodity prices. The recession, however, has been far more severe than any of these other recent economic events and businesses have responded by developing survival tactics to cut costs more dramatically and improve liquidity. Nowadays, managing an efficient supply chain requires executives to probe beneath the surface. Transactional efficiencies may create some direct savings but they do not deliver growth per se. However, the savings that result from maintaining a healthy cost position and managing working capital well can make new investment possible. By shortening its cash conversion cycle, for instance, a business can generate sufficient free cash flow to support an acquisition or joint venture without raising capital externally. Such a self funding strategy often serves as the most cost-effective way to finance growth.

CHC has helped Veolia Water successfully integrate 6 businesses acquired from United Utilities. Efficiencies driven from other parts of the business enabled the acquisition to be self funded. Two of these businesses are joint ventures where Veolia Water has either a majority holding or an equal holding with another company. These joint ventures supply services to other water companies to help them carry out expensive and risky capital projects such as the £300m treatment works for Brighton or undertake non-core functions such as the maintenance of exiting assets.

CHC has also been helping Veolia Water with a start up. Veolia Water recently won a contract with two partners to provide water meter reading services for Thames Water. The newly formed company, Vennsys, has a 10 year contract worth £300m. CHC has been supporting the start-up through procuring HR services such as recruitment and pay roll.

I think the recession has changed the way businesses operate. The survival tactics developed during the recession will continue to be deployed through out the recovery. Many of the most obvious opportunities related to non-core functions have delivered significant efficiencies and increased liquidity. These have helped businesses become more competitive and in some instances, have been used to fuel growth. As the economic recovery takes hold, businesses will be seeking more growth and looking to suppliers to help them.

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