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INNOVATIVE OUTSOURCING A Project Presented To the Faculty of California State University Dominquez Hills In Partial Fulfillment of the Requirements for the Degree Master of Science In Quality Assurance by Lawrence Jeffries Fall 2007

Abstract The practice of using outside firms to handle work normally performed within a company is a familiar concept. Small companies routinely outsource their payroll processing, accounting, distribution, and many other important functions but not many businesses thoroughly understand the benefits of outsourcing. It's true that outsourcing can save money, but that's not the only or even the most important reason to do it. As many firms discovered during the outsourcing "mania" of the early 1990s, outsourcing too much can be an even bigger mistake than not outsourcing any work at all. The flat economy caused many companies into huge layoffs and subsequently outsourced functions that were better kept in-house. Wise outsourcing, however, can provide a number of long-term benefits. Innovative outsourcing is the key for success. Innovative outsourcing aims for dramatic improvements in critical measures of performance such as cost, quality, service and speed. But the need to increase efficiency can come into direct conflict with the need to invest in core business. As non-core internal functions are continually put on the back burner, systems become less efficient and less productive. By outsourcing a noncore function to a world class provider, the organization can begin to see the benefits of innovative outsourcing. This project identifies the inherent strengths of Innovative Outsourcing, and targets specific markets that produce a competitive edge.

Overview Businesses demand faster, affordable and innovative services and products to edge out market competition. How do companies outperform their competitors? Is it simply about costs, or does quality sway the customer satisfaction? Can smaller companies meet and exceed customer expectations quicker than larger competitors? Historically, consumers want the best products and services at the best prices. Organizations strategize on how to capture customer satisfaction and loyalty. Organizational structure, culture, and processes are fine-tuned to squeeze out the competition. Business survival hinges on identifying market demands and beating everyone else to the punch. Extracting the highest quality from top level management down to the entry level employee is a productive goal for final productconsequently, quality management was born. Quality management from within the organization has evolved in attempt to meet consumer expectations. Large companies generate internal resources that tackle market demands. Teams of experts analyze, strategize, and implement solutions for success; as a result, big companies typically employ thousands of people. Cutting costs, reducing wastes, and tightening the processes that produce products and services remain under the microscope. In contrast, smaller companies are nimble and rapidly capture market trends. Small organizations typically employ a few hundred people. Outsourcing a variety of products and services are a hallmark of the smaller organization. Smaller companies are agile and can quickly adjust to the winds of innovative changes at rates that are above and beyond the larger, slower corporate giants.

Advantages At a small firm, employees must fill multiple roles, which give them a range of experience and the opportunity to learn the basics of the business from the ground up. Employees also have direct access to the CEO and other top executives, which gives them a chance to voice their ideas and opinions, so they can make significant contributions to the business. They also have the satisfaction of knowing that their opinions are heard. At smaller companies, there are more opportunities for creativity, taking risks, and trying out new things, but due to limited resources, an employee must often take complete responsibility for a project from start to finish. At larger organizations, employees have more opportunity to specialize, to focus on developing in depth expertise, and they typically have larger budgets to work with, which means they can do projects that wouldnt be possible at a small company. Larger companies typically have formal professional development and training programs, often more defined career paths and geographical job options. Larger organizations typically have more resources, but also more formal processes, so opportunities for trying new things may be more limited. Often, the approval cycle can be incredibly lengthy. Often working for a young, small company means early employees have the opportunity to enjoy significant financial success as the company grows. Joining a smaller company may mean a smaller salary and limited benefits in the beginning, with the chance for greater financial returns later, but it also means less job security the company could fold. At a larger organization, employees typically have more job security, receive competitive salaries and comprehensive benefit programs but there is typically no great financial windfall down the road.

Demand Most new job growth in the U.S. comes from small business. Yet, most people concentrate their job search to Fortune 500 corporations or other large, well-known companies with defined and approachable personnel departments. Generally, any business with 200 or fewer employees is considered a small company. Small businesses are providing the economy with a wealth of jobs and revenue small businesses are an economic powerhouse. Life in a small organization is very different from that in a large organization. Small companies tend to offer an informal atmosphere, an all-for-one camaraderie, and require more versatility and dedication on the part of the company and workers. Small companies are usually growing so they are constantly redefining themselves and the positions within them. Small organizational advantages:

Increased responsibility and are not limited by "job descriptions." Ideas and suggestions will be heard and given more attention, often more quickly. Career advancement and salary increases may be rapid in a growing company. Opportunity to be involved in the creation or growth of something great. Involved in the entire organization rather than in a narrow department. Eligible for stock options and profit sharing. The environment is less bureaucratic; there are fewer rules and regulations Successes and faults are more visible. Starting salaries and benefits may be more variable. A dominant leader can control the entire organization. This can lead either to more "political games" or a healthy, happy atmosphere. Ability to work with everyone in the organization.

Is it easier to achieve a culture of quality in a 200 person small business or a 20,000 person big business? Quality guru Edward Deming said, Without data, all anyone has is an opinion. (Brue & Howes, 2006, p.68). How do managers and executives make decisions and changes that reduce costs, improve profitability, and foster growth? Further, what are the costs associated with poor quality? Poor quality of product or service costs an organization their customer satisfaction

and loyalty. Quality management is the goal for competitive business. Quality management reduces variation and is an anchor for improving quality and eliminating defects in products and services. Organizational culture change on quality is easier to achieve in a smaller organization as compared to the corporate giants. A recent study of 1,748 respondents found that 95% claimed that their fortune 500 company is pursuing a quality culture change, yet only 1% claimed that their company has achieved that goal (Marx, 2006, p.33). The smaller firm has the competitive advantage of tackling quality management issues.

Defined Outsourcing is the delegation of a business process to an external service provider. The service provider is then responsible for the day-to-day running and maintenance of the delegated process. Small companies routinely outsource their payroll processing, accounting, distribution, and many other important functions. Cost-cutting may not be the only reason to outsource, but is certainly a major factor. Outsourcing converts fixed costs into variable costs, releases capital for investment elsewhere in the business, and avoids large expenditures in the early stages of business development, and pumps more capital directly into revenue-producing activities. With the pressure to become more efficient and competitive, small firms have turned to outsourcing as the solution. Outsourcing has also emerged as an important factor leading to comparatively strong growth. Small firms that outsource work to other companies grew their revenues, on average, 61% more than firms that do not rely on outsourced work. The pace of business outsourcing is expected to accelerate in the coming years, as large firms cut costs and focus on core business (CIBC World Markets, 2004).

A look at a sample of the fifty largest and fifty smallest stocks in the S&P 500 reveals the small business competitive edge. Below is a sample the 50 largest and smallest names using Price, Cap and Dollar weights, in each case the larger stocks have underperformed by half.

Small businesses with less than 100 employees not only create new jobs, but are the innovators that create new wealth. About $65 trillion of American wealth has been generated by small business since 1982 (Merrifield, 2007).

Innovation

In a 2006 IT outsourcing study, 47 percent of outsourcing buyers said they had abnormally terminated at least one outsourcing relationship in the previous 12 months. According to the study, conducted by Diamond Technology and Management Consultants, less than one in three buyers of onshore services reported that all of their expectations were being met about one in two buyers of offshore services said the same. Problems arise from many directions, including inadequate contract management and governance structures, unrealistic expectations for cost savings, mismatches in company culture, and poor communication skills among individuals from both the outsourcing buyer and the service provider. A typical starting point for India behemoth Infosys in providing outsourcing solutions to clients is getting a handle on process metrics. The Six Sigma methodology can really bring in a framework where the measurements are up front, said Rama Mohan, head of the business transformation group. On the outsourcing service provider side, such information is vital. When a company enters into an outsourcing agreement for accounts payable or accounts receivable process, they rarely know at the time of the agreement what the turnaround time is claims Mohan. After the process is completely moved to Infosys the company kicks into major improvement mode. First, it attempts to do the job cheaper easy to achieve when the work is moving from a developed country. Second, it attempts to do it better by improving the turnaround time. For example, if the turnaround time was 24 hours, we aim for 20 hours claims

Mohan. Third, it does it differently. Can we eliminate some of the non-manual activities and make that particular process leaner and thinner? he said. Last, it looks at whether the process can be completely automated. Infosys targets improvement levels of .75 sigma above the baseline of the previous year. Since the company monitors 1,500 metrics monthly across all of its client work, prioritizing Six Sigma projects becomes a process itself. The first priority is given to accuracy metrics, Mohan said, because that is the origin of a lot of dissatisfaction that clients will have and end users will have. The second priority is with turnaround time metrics, also because they are felt more keenly by the client. Productivity comes in third. Mohan claims because it is experienced internally and not by the client. International Bank Standard Chartered PLC began the concept of a shared services center. Functions are consolidated within an organization into one function that crosses units or divisions, closely resembles the outsourcing process. In this case, the third party happens to be part of the same company. Still, the relationship faces the same challenges as the outsourcing relationship change management, service level expectations, and potential cross-border cultural issues and so on. As work consolidates in the shared service operation from one of the banks other locations in any of 50 countries, it is put through a five-stage continual improvement process called Outserve. The program includes fundamentals of Six Sigma, Lean Six Sigma and Kaizen, and uses a proprietary methodology similar to DMAIC named IDEAL (Initiate, Diagnose, Explore, Act, Leverage). The Six Sigma team is charged with seeding the IDEAL practices within the shared services business units in which they are imbedded. The five stages of Outserve encompass service, cost, people, risk and corporate social responsibility. In the service phase, We learn what our customers are expecting of us, said Pugal, senior vice president and head of service and operational excellence at the bank. The cost phase starts with the labor

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arbitrage enjoyed in moving work to India, but also focuses on building staff efficiency and skills to reduce cost even further. His staff also holds action labs in which he gathers together 20 people in each business team for brainstorming sessions then it helps them categorize the ideas and suggestions for immediate and future implementation. For the risk phase, his staff looks at what in the group process could create risk and how to put a foolproof system in place. For example, he said, The wholesale banking industry is a place where our transaction run is very high. Traditionally we tighten the properties by adding multiple check levels. Instead, practitioners in his team evaluate how to build robustness into the process. To do this, they call all of the stakeholders from end to end and map the process. They then identify non-value-added steps and create the ideal process. The newly modified process goes into pilot, with part of the team running the process as is and another part running it in its new form. If the pilot is successful, then it becomes the new baseline. The entire Outserve process claims Pugal, typically takes five days, though some IDEAL projects last two to four months. The application of Six Sigma is heating up the outsourcing space, according to Nari Kannan CEO of Ajira, a consulting company based in Pleasanton, California. He said the increased use of Six Sigma is because there is a heightened client demand for pay-forperformance models, Kannan explained. Rather than compensating by the number of hours a service providers staff works, the client pays for the results generated. For example, if a company has outsourced collections, the buyer may say, Well pay you 25 percent of whatever you collect, so you can put 10 people on it, or you can put a 100 people on it. Six Sigma is a way, Kannan said, to monitor variation in performance among agents to make sure there is consistency in processes. On the client side, the application of Six Sigma is crucial for another reason: you may be taking a lot of the customer-facing processes and handing them over to

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some company in some other country, further you better make sure that these customers are serviced properly, he said. Yet, like Mohan, Kannan finds awareness of Six Sigma on the client side less prevalent. It is a very strange kind of situation. The buyer is not demanding that high level of measurement that discipline of measurement and monitoring but the service providers do it anyway because that is the way they have been trained to do it. They know that unless they measure these things properly, they are not going to survive in the long run, they are not going to compete. It is becoming a quality differentiator. Client companies can exploit the situation by having their service providers come in and draw a diagram, showing how the processes work, Kannan said. His advice to companies on the client side that want to explore the application of Six Sigma to its outsourcing practices: Be very clear about what is good performance for you. You need to have a clear idea of what the key performance indicators are because your measurements are only as good as the thoughts that have gone into defining them for that process. Three Six Sigma tools for outsourcing initiatives: Design of Experiments for determining the relationship between factors affecting a process and the output of that process. DMAIC Six Sigma basic process improvement approach. Failure Mode and Effects Analysis (FMEA) useful in helping identify every possible failure with the decision to outsource.

Conclusion

Small firms are nimble and uphold a competitive edge over the huge corporations. The agility to tackle innovative products and services is the hallmark for small business. Outsourcing, quality management, and agile workforce create the platform for small business success. Low

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overhead, capital reinvestment and innovative vision are the strengths of small organizations. Small organizations offer employees room for growth, opportunity for advancement, and a sense of belonging that is unparalleled by the corporate machinery. Meeting and exceeding customer satisfaction is the goal for sustaining a competitive edge in the marketplace. Small business is superior at leading the competition.

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References

Brue, G., & Howes. R (2006). Six Sigma. New York: McGraw-Hill. Marx, M. (2006). iSixSigma. Organizational Culture Change. Washington: Ducceschi. CIBC World Markets. (2004). Secrets to Small Business Success. Retrieved October 16, 2007, from http://www.cibc.com/ca/pdf/sb-secrets-for-success-en.pdf Merrifield, B. (2007). U.S. Large Caps Continue To Trail Their Small Cap Peers. Retrieved November 16, 2007, from http://usmarket.seekingalpha.com/article/36434

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Addendum Statement of the Purpose of the Project: To measure the cost effectiveness of innovative outsourcing. To define a strategy for implementation. Scope of the project: The scope of the project is to measure the cost effectiveness from innovative outsourcing and how a competitive edge is gained from lighter, leaner organizations. The benefits and significance of the project: The impact of this project can generate substantial revenue from reducing/eliminating traditional organization department structures and anchor innovative corporate strategy. Minimum schedule including proposed start in/termination date: Start date: October 1, 2007 End Date: December 1, 2007 Basic resources required: people/facilities: Data generated from corporate giants. Data generated from local consulting firms. Range of project costs and needs to be addressed: Expenses from consultants, travel, and statistical software. Consultant fee $100 per hour * 20 hours = $2000 Travel expense = $1000 Statistical software = $1500

Proposed plan and method(s): Highlights only: Generate data from consultants and corporate giants. Use statistical software to measure the data. Produce specific results that can be validated and replicated.

Opportunity, innovation, problem(s) posed by the project: Opportunity: Analyze variables that correlate to superior outsourcing strategy. Innovation: Generate measurable data that defines the competitive edge gained. Problem: Access to key figures and demographics. Successes, problems, and lessons learned Tremendous risks are associated with the investments an organization makes. Markets, competition, government regulations, financial conditions and technologies all change extremely

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quickly. Keeping up with these changes, especially those in which the next generation requires a significant investment is very risky.

Project Status Report

The project lifecycle, team selection, planning, work breakdown structure, and budget estimates have been established.
Status of project is completed. o

The practice of using outside firms to handle work normally performed within a company is a familiar concept. Small companies routinely outsource their payroll processing, accounting, distribution, and many other important functions but not many businesses thoroughly understand the benefits of outsourcing, but outsourcing too much can be an even bigger mistake than not outsourcing any work at all. Project lifecycle, team selection, planning, work breakdown structure, and budget estimates have been established. Measure the cost effectiveness from innovative outsourcing and how a competitive edge is gained from lighter, leaner organizations.

Expenses from consultants, travel, and statistical software are key budget issues. Statistical software, Consultant fees, and travel expenses have been modified to reflect as needed basis.
Validity and reliability of data generated for measurement is authenticated. Innovative Outsourcing Prepared By:

Date: 11/26/2007

Lawrence Jeffries

Reporting Period: 10/01/07 to 11/26/2007

Project Overall Status: Project completed, met budget, milestones, and objectives. Project Summary: Project performance, cost, and schedule have been met. Milestone Deliverables performance reporting over last period

Milestone Deliverables Milestone 1 Assemble Team Outline Mission

Due Date

% Completed

Deliverable Status

10/17/2007 10/19/2007

100 100

Complete Complete

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Define Scope Generate Feedback

10/22/2007 10/23/2007

100 100

Complete Complete

Milestone Deliverables scheduled for completion over next period

Milestone Deliverables Milestone 2 Generate Corporate Data Generate Consultant Data Compile, Analyze, Measure Data Statistical Information Generate Report What worked? What did not?

Due Date

% Completed

Deliverable Status

11/06/2007 11/19/2007 11/26/2007 11/26/2007 11/26/2007 11/26/2007 12/26/2007

100 100 100 100 100 100 100

Complete Complete Complete Complete Complete Complete Complete

Project Budget/Financial Status

Budget Item Statistical Software Package Consultant Fee

Project Recommendations

Budget 1500 100 Hour

Actual Cost 1750 125 Hour

Variance/Explanation Updated Version Market value

Project completed: Budget has been met. Milestones have been met.

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Objectives for Next Project Status Review

Due to increased expenses for Statistical Software and Consultant fees, travel time can be reduced or the utilization of less Consultants.
Lessons Learned

Continual focus on budget, time, and performance are anchors to the success of this project. Ad-hoc meetings, strong communication, and task analysis are keys critical to project completion.