OUTSOURCING

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OUTSOURCING

• Baxter, Mistry, Myers-Power, Rose
• 4-24-04
• OEMBA CLASS 18

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(No Transcript)
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Outsourcing

• What Went Wrong at Cisco
• The Dark Side of Outsourcing
• Strategic Applications

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Outsourcing Humor
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What Went Wrong at Cisco

• Industry Perception
• Worlds largest maker of switches and routers
• Poster company for the new economy
• Systems and forecasting models were brilliant
• Real time access to key operating data
• Motto for other companies Be like Cisco
• CIOs were envious and competitors fearful
• Perennial CIO-100 award honoree

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What Went Wrong at Cisco

• Market Realities
• Severe economic downturn in 2000-2001
• Dotcoms disappeared overnight
• Created major earnings surprise
• First negative quarter in 10 years
• Sales plunged 30 percent
• Inventory write-off of 2.2 billion
• 8,500 people laid off (20 RIF)
• Stock plunged from a high of 82 to 13.63

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What Went Wrong at Cisco

• Internal Perceptions
• The economy was to blame
• Software and management performed very well
• Situation could have been much worse
• Growth would be 25 per year in perpetuity

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What Went Wrong at Cisco

• External Perceptions of Cisco
• Clueless and blinded by their own systems
• Should have seen what other companies saw
• Miscalculated the economic downturn
• Failed to cut back on inventory
• Failed to recognize declining demand
• Daunted systems could not eliminate surprise

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What Went Wrong at Cisco

• External Perceptions of Cisco
• Believed their own press clippings
• Management had egos with insatiable appetites
• Over reliance on technology led the company down
  a disastrous path.
• Systems were overrated

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What Went Wrong at Cisco

• Growth Bias - Mindset
• Growth would be 25 per year in perpetuity
• up, up and away
• Forecasting models unable to recognize non-growth
• Declining demand models - waste of time
• No such thing as slow, steady growth
• One company could be as big as the U.S. economy
• Cisco had never been wrong in 40 quarters

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What Went Wrong at Cisco

• Ciscos Growth Strategies
• Outsourced Manufacturing
• Growth Through Acquisition

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What Went Wrong at Cisco

• Outsourced Manufacturing
• Components were in short supply
• Increased lead times
• Inventory build-up (safety stock)
• Poor supply chain management (low tech)
• Sales forecasts exceeded real demand
• Long-term commitments and promises
• Suppliers not as invested in Ciscos success

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What Went Wrong at Cisco

• Outsourced Manufacturing
• Kiss of Death..
• Over reliance on forecasting technology led
  people to undervalue human judgment and
  intuition, and inhibited robust, candid
  dialogue
• among supply chain partners.

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What Went Wrong at Cisco

• Lessons Learned
• Software ignored macroeconomic indicators
• Debt levels
• Economic spending
• Interest rates
• Bond market, etc
• Data too heavily tainted with growth biases
• Suppliers unwilling to confront customers with
  concerns of demand sustainability.

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Cisco Stock Performance 10 Year
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What Went Wrong at Cisco

• Decision Making Framework
• Include macroeconomic indicators into forecasts
• Develop a detailed map to navigate the future
• Systems should be secondary to human judgment
• Network the supply chain to allow better
  communication and access to data.
• Look away from the computer and smell the coffee
• Inject some realism into the equation

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The Dark Side of Outsourcing

• Outsourcing vs. Insourcing???
• Correctly applied outsourcing can be a lifesaver
• Dont give the best work or projects to outsiders
• Contractors may not have a vested interest in the
  company
• Get the right people in the right jobs
• Retain the key people who know your business
  systems

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Outsourcing Humor
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The Dark Side of Outsourcing

• Insource the Important Work
• Strategic applications and technology planning
• Investment, financial, HR, project and vendor
  management
• People with in-depth knowledge about the business
• Senior, customer-facing relationship managers

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Outsourcing Humor
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The Dark Side of Outsourcing

• Constraints that Lead to Outsourcing
• Missing or limited skills
• Inadequate resources and lack of organizational
  mass

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The Dark Side of Outsourcing

• Dont overcompensate for limited skills by.
• Outsourcing project work (the good stuff) to
  contractors
• AND
• Insourcing support work (the boring stuff) to
  internal staff
• OR
• The good, creative people will leave the
  organization
• AND
• The Steady Eddies will remain to run the
  day-to-day tasks,
• but will be unable to lead major change

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The Dark Side of Outsourcing

• When the interests of the company and service
  providers diverge gt Dark side of outsourcing.
• Clues to Look for.
• Most employees are doing maintenance and support
  work.
• Strategic, risky and large projects are led by
  consultants.
• Company employees are being managed by
  consultants.
• Customers are interacting with consultants more
  often than
• with employees.

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The Dark Side of Outsourcing

• Decision Making Framework
• How to outsource safely.
• Use outsourcing to free up people for development
  
• Give less important tasks to consultants
• Reserve critical tasks for company employees
• Establish a sunset clause for consultants
• Concentrate on enriching the jobs of core
  employees
• Deepen the personal relationships with these
  people
• Spend less time with temp. employees and
  contractors

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Outsourcing for Strategic Reasons

• For the right reasons
• Greater value vs. lower costs
• Repositioning in the market place
• Changing the value proposition

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Outsourcing for Strategic Reasons

• Do not outsource strategically significant
  functions such as manufacturing, design or
  innovation-related functions
• Can free up managers to focus on more strategic
  functions and higher-value activities
• Use it as a change-management tool to drive
  major, enterprise level transformation.

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Outsourcing for Strategic Reasons

• Transformational Outsourcing can be a more
  effective change initiative
• Improve industry dynamics buffer boom-and-bust
  cycles
• Provide a safety cushion by adding an extra layer
  to the supply chain

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Conclusions - What to Outsource

• Core activities are key to the business but do
  not offer a competitive advantage
• Strategic activities are a key source of
  competitive advantage
• Keep activities that are true competitive
  differentiators and outsource the rest
• Monitor and adjust as the competitive environment
  changes