Outsourcing Services - Key Steps To Success
Gordon I. Thompson
Gordon I. Thompson, Director Supply Management, Canadian National, Montreal, Quebec, Canada H3B 2M9, 514/399-4777.
82nd Annual International Conference Proceedings - 1997
A concentration on core competencies. Competition and the drive towards more responsive and leaner organizations have resulted in many companies adopting a strategy of outsourcing non-core, non-strategic activities to service providers who bring specialized skills and resources to the demands of these important support functions. Outsourcing allows the enterprise to focus its energies on its core business. This move to outsourcing, however, brings about its own special challenges, as many sourcing organizations have limited experience in the particular skills and processes needed in these initiatives. This paper addresses how Supply Management within Canadian National has approached this challenge, and outlines the methodology it has evolved and implemented over the past two years.
An Historical Perspective. In 1985, the Canadian National Railway Company was a conglomerate of companies working in a variety of industries. While primarily a freight railroad, CN also owned a chain of hotels; owned and operated a fleet of ocean ferries in Atlantic Canada; had interests in petroleum exploration; was the telephone company to thousands of Canadians; operated several trucking companies; and, was in partnership with Canadian Pacific, its major Canadian rail competitor, in a telecommunications company. One of the consequences of this diverse set of interests was that the Company was self-sufficient in many areas and had internal sources of a wide range of skills and capabilities. Many activities, that would now be classed as non-core, were performed by personnel not directly involved in the Company's transportation-related functions.
In November 1995 CN, a former Canadian Crown Corporation, privatized in one of the most successful public offerings in Canadian history. Cost reduction and a concentration on core operations became key elements in the organization's strategic plan. Consequently, outsourcing non-core activities has been one of several cost-reduction and realignment focuses.
Impact On Supply Management. The Supply Management organization has become a leader in this effort. Outsourcing, which addresses the notion of concentrating on core capabilities, has proven to be an effective means of reducing costs, while freeing up resources to focus on mission-critical activities. In its evolving role within the Company, Supply Management has seen its role change from one of procurement specialist to that of process leader and facilitator in conducting outsourcing projects.
The department has developed a successful process to address outsourcing initiatives that, while constantly evolving, has produced significant impact on the Company's cost reduction efforts. Although a major proportion of the Corporation's total spend is for materials, there is a significant trend towards the acquisition of services in lieu of using internal resources for non-core work. This has also had the impact of changing Supply Management's role from that of transaction processor to something more analogous to that of strategic consultant in procurement matters.
The Initial Project. Supply Management's first challenge came in early 1995 with outsourcing the support of the company's sizable fleet of personal computers and the networks within which they are connected. This effort moved approximately 60 in-house, technically-skilled personnel to an outside service provider. The compelling priority in this case was to complete the task within approximately five to six weeks of beginning the initiative.
A second, and equally important goal, was to ensure continuity and quality in a very important service area. Consequently, a decision was taken to transition many functional employees to the selected service provider and to do so in a manner that would set a positive precedent within the Company. Criteria were established that were directed at ensuring that a maximum of the highly-rated employees would accept positions with the selected service provider.
While this goal was by no means secondary, speed of transition was the driving thrust. Consequently, the process was moved ahead at an extremely fast pace and a service provider was selected before the end of 1994 for a complex assignment that had to be implemented before the end of January 1995. At the time, many details were incomplete or unknown and the project went ahead on the basis of trust and a resolve to negotiate the contract after the transition took place. This imperative placed a great deal of pressure on both the Company and the service provider and consumed considerable energies on the part of both, over and above the transition itself. Given the choice, more time would have benefited all parties. Nevertheless, after over one year, the project is rated overall as a success.
Lessons Learned. Despite the compressed timing of this first effort, the steps taken did form the core of the outsourcing process that has proven itself in a diverse set of applications (resulting in approximately 15 major contracts during the past 24 months.) The speed necessary during this project decreased the leverage of CN during the negotiations which followed after implementation. Also, it is now recognized that more time to work out details with the service provider would have reduced the effort that had to be made in later stages of transitioning the work. However, the experience did provide valuable insight into the improvements required. The changes made to the process have been the result of experience gained within the various initiatives that have since been addressed. Similarly, a number of critical success factors have been identified and have now become integral to the process as it is applied to each new undertaking.
The objectives and priorities for each outsourcing project varies dramatically as do the industries involved. One of the major challenges discovered by the teams assigned to these projects is that while a great deal is known about how to execute these activities in-house, very little is understood about how they are to be handled by an outside service provider. In each case, the teams have to learn a considerable amount about how the industry in question works, in a very short time. This gives the team the confidence needed to deal effectively with the very well-prepared vendor teams "on the other side of the table."
CN's Outsourcing Process. The following are the fundamental elements of the process currently in place for outsourcing and other significant sourcing efforts at Canadian National:
- Establish a procurement team with representation from all stakeholder areas. The team must consist of highly knowledgeable individuals who are empowered to make the sourcing decision with minimal direction.
- Define the project. Of particular importance is achieving consensus and support on the objectives of the outsourcing. With a group of team members with different backgrounds, this can not be assumed at the outset.
- Identify potential vendors. The resulting list should only include vendors who can reasonably be assumed to have the qualifications necessary to perform the function at the required quality levels over a sustained period.
- Develop an initial set of evaluation criteria. These measures must be agreed to by the team as they will be crucial to the evaluation process. They are organized in the form of a weighted matrix.
- Prepare the Request For Proposals (R.F.P.). This document should clearly spell out the objectives of the business to be outsourced, but not the means by which the objectives are to be achieved. This encourages creativity on the part of the vendors invited to submit proposals.
- Conduct a vendor information session. This meeting is held after the vendors have received the R.F.P. and is used to fully explain CN's requirements, and to answer questions the vendors may have at that point.
- Evaluate the proposals. This is done independently by each team member using the criteria and weighting established for the initial evaluation matrix.
- Arrange presentations by the "short list" of vendors established during the evaluation procedure.
- Issue Requests For Quotations (R.F.Q.). This step is optional, with the decision hinging on whether or not more detailed quotes are considered necessary.
- Evaluate the quotations using a second evaluation matrix constructed for the purpose. This matrix and the weighting given the factors will vary from the first set of criteria as more precision regarding the desired approach to the business will be known and will have been requested as part of the R.F.Q.
- Conduct negotiations with the selected finalists. These negotiations must be constructed such that a high degree of ethics is maintained throughout the process and that no vendor is given unfair advantage.
- Draft the contract after selecting the successful vendor. This is done cooperatively with the vendor.
- Plan the transition and execution of the outsourcing program. This is done with the selected vendor and a team of transition personnel from within the Company.
- Follow through and "manage the relationship".
The Employee Assistance Program - Canadian National has always placed considerable importance on the well-being of its employees and maintained a program for employees suffering from various forms of distress. Overall, the program was held in high regard and was administered by Human Resources using a team of in-house counselors who had various degrees of training. To a large degree, they acted as referral agents to outside professionals, but did provide a significant element of direct assistance to the employee.
When the decision was taken to outsource these services, a cross-functional team was formed under the joint direction of the Human Resources client, and members of the Supply Management services unit. Also seconded to the team were two unionized employees who had participated in the in-house program as members of EAP committees and who indicated an interest in assisting in the selection of the service provider. As with all teams assigned to these projects, all members were given the equal opportunity to contribute throughout the selection process.
The process culminated in the unanimous selection of a highly qualified and experienced service provider in this specialized area. The contract entered into with this company includes a focus on total cost reduction, measurement and quality assurance, continuous improvement and shared risk and benefit for both parties. These factors have become the cornerstones of all agreements entered into as a result of this process. After over a year of operation the program is proving to be a success. A number of the original internal counselors elected to join the service provider's organization, which provided continuity and quality assurance during the transition. Total cost has been decreased and CN's employees enjoy a range and quality of services that represent an improvement over the previous internal program.
Medical Services - CN, as a transportation company, is subject to a number of regulations relative to health and fitness of employees in safety-sensitive positions. At one time, medical services were provided almost entirely by an internal medical organization. Over the years, this system was replaced by one that used a significant number of outside medical professionals under individually administered contracts. As contract administration was considered to be a substantial task in itself, a decision was taken to outsource the bulk of the services and day-to-day administration to a service provider.
As in the case of the EAP program, a cross-functional team was assembled with representation from a number of stakeholders including senior officers of the operations units that are the end users of these services. In this instance, a senior officer of the union organizations also joined the team, as union members are the recipients of many of the services required. The usual format was followed which provides all team members an equal opportunity to contribute to the selection of the service provider. Direction was a joint client/Supply Management undertaking. Ultimately, a highly qualified service provider was selected by consensus, and a contract entered into that, once again, provides all of the "cornerstones" that have become the standard in outsourcing initiatives undertaken through this process. Feedback generally indicates that quality and delivery targets are being attained.
Key Elements. In addition to the structured process outlined earlier, there are several key elements which contribute to the success of the process. A summary of the key elements follows:
- Supply Chain Analysis is part of a highly-developed process within Supply Management at CN, as Supply Chain Management is a key plank in the department's strategic platform. A simplified explanation of this concept would address the need to understand the entire supply chain of the material or service and the fundamental economics of the area under study. This applies well to outsourcing initiatives and is crucial.
- Researching the outsourcing industry in the area being contemplated, is extremely important. Key areas requiring understanding include the applicable cost drivers and other fundamental economics issues.
- Cross-functional teamwork and top-down support are integral to the effort and indispensable.
- The cross-functional team must be composed of individuals with unquestionable credibility if the decisions taken are to be implemented successfully.
- The team's efforts must be supported by a structured methodology based on consensus, and one that is clearly understood by all participants, including the vendors.
- The process should provide comfort and security for all participants who must commit to considerable involvement over a period of weeks.
- An innovative and highly structured Request for Proposals process is used as the backbone of the outsourcing initiative once the decision has been taken to move ahead. This business process includes a non-confrontational and creative negotiation element that is crucial to the success of the effort and the continued success of the program put in place.
- The process culminates in a relatively long-term arrangement/contract with the vendor that must include the "cornerstones" referred to above, and must be flexible enough to endure change over time.
Next Steps. The training given in the business process that incorporates the R.F.P. and the structured negotiation elements will be extended to others in the organization and to other sourcing requirements. It is also recognized that the research component needs to be reinforced, as does the legal focus of certain parts of the overall process. Follow-up on results must receive its appropriate attention, and care must be given not to lose sight of this requirement, as time progresses and new pressures are brought to bear. All of these requirements are currently receiving attention.
Conclusion. As outsourced services become more and more important in the effort to maximize corporate performance, new skills within supply management organizations are required. The process described above has not been restricted to outsourcing projects. With minor adjustments, it has been highly successful in other areas of procurement. To a large degree, the role in the process described above, represents the profession's need to transition from the traditional "buying" mindset to that of a consultant and strategic partner within the corporation. Supply Management at Canadian National has embraced these changes in a dramatic manner over the past several years. The impact on the organization has been substantial and the outcome, very rewarding.
Thompson, Gordon I., "The Proposal: It's a Process." Purchasing Today, September 1996, 6.