OUTSOURCING

Baxter, Mistry, Myers-Power, Rose

4-24-04

OEMBA CLASS 18

Outsourcing

• What Went Wrong at Cisco

• The Dark Side of Outsourcing

• Strategic Applications

Outsourcing Humor

What Went Wrong at Cisco

• Industry Perception – World’s 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”– CIO’s were envious and competitors fearful– Perennial CIO-100 award honoree

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

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

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’

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

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

What Went Wrong at Cisco

• Cisco’s Growth Strategies

– Outsourced Manufacturing

– Growth Through Acquisition

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 Cisco’s success

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.

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.

Cisco Stock Performance – 10 Year

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

The Dark Side of Outsourcing

• Outsourcing vs. Insourcing???– Correctly applied outsourcing can be a lifesaver

– Don’t 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

Outsourcing Humor

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

Outsourcing Humor

The Dark Side of Outsourcing

• Constraints that Lead to Outsourcing

– Missing or limited skills

– Inadequate resources and lack of organizational mass

The Dark Side of Outsourcing

• Don’t overcompensate for limited skills by…. Outsourcing project work (the good stuff) to contractors

ANDInsourcing 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

The Dark Side of Outsourcing

• When the interests of the company and service providers diverge => 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.

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

Outsourcing for Strategic Reasons

• For the right reasons

• Greater value vs. lower costs

• Repositioning in the market place

• Changing the value proposition

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.

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

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