Outsourcing: Interorganizational and international relations

Steinar Kristoffersen

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Chapter 12 and 15

Next week, (maybe more 12/15 plus) chapter 14

Roughly, I do not cover the textbook exactly

Emphasis on cases

Perhaps a few exercises,…, be active or be bored!

This lecture

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It is rare to find project completely finished in-house. Why?

When does it seem better that they are?

Outsourcing

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“Case of” the Norwegian Railroads:

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Specialization, can engage competencies continually

Cost, greater economics of scale But cost is tricky, how come?

The reasons to outsource

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Cost is also cost discipline!

Need to be tight on Specifications (requires competencies)

Performance (requires resources)

Quality (requires skills)

Etc.

So, what makes it «non core»?

Cost discipline

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Availability

Competencies

Incentive structure

Technology and innovation

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Strategic outsourcing Core business or “power products”,

functional alignment, and

pass peripheral activities to suppliers

Is this logical?

“Fashionable”reasons to outsource

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Or should we have kept

the sausages?

Escape from politics and bureaucracy, meetings and overhead

Distance is an advantage as well as a problem

Dedication in outsourcing

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“US companies are identified as pursuing more value adding sourcing strategies while European companies are more focused on gaining economies of scale through outsourcing”

Discuss

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US

Aim to achieve best practice

Improve service quality

capability to develop new services

Access to new technology/skills

Grow in-house expertise

Enhance position in value chain

Enhance capability for change

Europe

Cost discipline/control

Focus on core competencies

Reduce headcount

Reduce capital cost

Grow in-house expertise

Reduce transaction costs

Investment in technology

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Do you agree?

rely on outsourcing in one form or the other

So, what is outsourcing?

Almost always an international

element, so no point to distinguish

Most projects today,…

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My experience of “offshore outsourcing”

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Research project related to the site design, assembly and transportation of offshore wind power facilities.

PowerUp

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PowerUp

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Vestavind Offshore AS was really just a management company

No engineers

No production facilities

Vestavind got the license (Havsul), which they bough from Havgul AS, which was owned by Ny Energi AS, which was owned by one individual

Vestavind Offshore AS went for a EPC-model in the end, to get the work going for the physical installation

PowerUp

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Completely re-structure the idea of “a business”, to be

one-man-show(s), and/or

deep specialization plus

financial skills?

Who takes the risk and how?

Business 3.0 by outsourcing

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Arctic shrimp trawling

Floating barge salmon farms

Tricking online gambling engines

Several involvements in «3.0»

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No, actually, I turned the last one down,…

Engineering, Procurement and Construction

A complete «package» of functions, which involves the handing over of a broad set of responsibilities

Which responsibilities and functions?

EPC

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Initiation

Implementation

Planning & Programming

Estimating → Request for Quote

Valuation

Design

Engineering functions

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Purchasing

Logistics

Receiving, storage

Invoicing, accounting

Reconciliation (negotiations, even «in court»)

Procurement functions

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Planning, estimation, scheduling

On-site Material Handling

Manufacturing

On-site Client Communications

Valuation & Cash flow

Commissioning (testing & checking)

Closing

Construction functions

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Another round around the same spinning wheel, to subcontract modules and parts

What can be the challenges that companies face? Customers, as well as Suppliers?

Business goes global, projects more complex

The Systems Development Lifecycle -modell is ditched «Waterfall» replaced by agile/iterative

Document-driven replaced by shared/3D common information models

Knowledge-driven engineering replaced by needs-driven

And Manufacturing can be

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Had to look for EPC partners in a market dominated by the («back then», only a year ago, remember) hot market for oil & gas

No spare resource capacity among suppliers

No interest to be entrepreneurial in offshore wind

Funding from equity all pushed towards fossile fuels

Regulators «realistic»

Etc.

Spent their money to conceptualize a «winner», and..

The fate of Vestavind

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The customer needs to be trusted to have loads of money, to

Pay the current bills (EPC is large volume contracting)

Support the procurement process (transparency, fairness)

Specify and follow-up in detail what is required (perfromance, qualifications)

The supplier(s) need to have deep pockets too, to cover up-front costs & leverage innovation (win bids)

Construction needs fixed assets = Factories and yards

(Forgot?) the CRUX of EPC

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An end to Vestavind

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Engineering can cost too much

Shared models require a global information space, which means advanced ICT-support

Change management is not a business model, but Total cost of ownership is

Complex projects have tricky hand-over (if any)

Lessons learned from EPC

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Decimate the number of engineering hours!

Objective

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And still,….

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The Norwegian Labour and Welfare Administration (NAV) has to make a new set of ICT systems to comply with new reforms

Basic current systems developed in-house in the seventies (COBOL)

Broad suite of add-ons made by consultants in the nineties (Java)

In practice, there is no operational expertise in NAV Development is outsourced

Operations and IT-support ditto

And project management

ICT to modernize and reform NAV

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So, how can we get the support we

need?

Write a letter to

If you know,…

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The modernization project today

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Many successful examples All of the engineering-based local companies rely extensively on outsourcing, f.ex:

Brunvoll-Oshaug

AxTech heavy lifting equipment

And they are very different:

All outsourcing projects fail?

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Brunvoll-Oshaug

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AxTech

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Traditional approach (AxTech AS) So, it is not like «it does not work», quite the contrary

Partnering approach (Brunvoll-Oshaug Metal AS) Actually more common in outsourcing that the «traditional approach»,…

Different approaches

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Traditional approach

Suspicion; each party distrusts motives for action by the other

Goals and objectives are geared towards what is best for each

Independent project teams; teams are spatially separated

Communications are structured and guarded

Single project contracting is normal

Objectivity is limited due to fear of reprisal and lack of continuous improvement opportunity

Access is limited with structured procedures and self-preservation taking priority over total optimization

Involvement is normally limited to project-level personnel

Duplication and/or translation takes place with attendant costs and delays

Risk is transferred to the other party

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Partnering approach

Mutual trust forms basis of strong working relationship

Shared goals and objectives ensure common direction

Joint project teams exist with high level of interaction

Open communications avoid misdirection and bolster effective working relationships

Long-term commitment provides the opportunity to attain continuous improvement

Objective critique is geared to candid assessment of performance

Access to each other’s organization resources is available

Total company involvement requires commitment from CEO to team members

Integration of administrative systems equipment takes place

Risk is shared jointly among partners, which encourages innovation and continuous improvement

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On an operational level?

Final example, from a local organization that facilitates the contact beteen suppliers and customers in a a domain the is heavily characterized by oursourcing

Of course, they use outsourcing a lot themselves,….

What makes outsourcing «tick»

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«Hub»: Navitas network (transforming to a foundation)

Domain: Oil and gas, the Norwegian Continental Shelf

Project portal projects

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Clear communication is hard

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On quite a technical level,…

Governance may be impossible

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We do not “own” the supplier,…

Let us face it. Outsourcing is not expensive, that is the whole idea

Labour is less costly

We pay only when people work

(Offshore) suppliers may have «inner companies», which means that they are themselves individual subcontractors to our supplier

The advantage is obvious, what is the disadvantage?

Governance may not be desirable

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Subcontractors will (need to) find another customer to work for (rather than for/be «our» supplier)

More projects compete for attention and creativity

Lessons learned from our project may benefit the competition

Other customers may want to «secure capacity» outbidding us (and even by buying the supplier)

When we contract work intermittently, there is an overhead of initiation and documentation, on both sides

The «disadvantage(s)

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Result: “Unresolved, unscheduled”

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Fortunately, Problem do get Fixed

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Well-defined requirements and procedures (Jira/PODIO)

Extensive training and team-building activities (“MySQL!”)

Well established conflict management processes in place (?)

Frequent review and status updates (Agile)

Co-location when needed (“Oslo Dev House”)

Fair incentives (Co-ownership vs “inner company”)

Long-term outsourcing relationships (2006-, 2012,-)

Best practices

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Advantages

Cost reduction

Faster project completion (?)

High level of expertise

Flexibility

Money issues

Disadvantages

Coordination breakdowns

Loss of control

Conflict

Security

Money issues

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Why we outsource: summary

Epilogue

“We base our procurements on competitive bidding and the principles of transparency, non-discrimination and equal treatment of bidders … All potential suppliers for contracts worth more than NOK 7 million are required to sign a supplier declaration in the pre-qualification phase. (Statoil).”

“Thoroughly investigate partnership capabilities and resources. Due diligence reduces problems (Boeng Dreamliner).”

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