Outsourcing at source

2 November 2012

Anders Henriksson, vice-president, sourcing at Ericsson, gives CEO clear advice on a range of outsourcing topics, from contracts and transparency to process management and extracting value.

CEO: What elements do you think buyers need to include in their contracts with outsourcing suppliers?

Anders Henriksson: I firmly believe the first step is to decide on what the objectives and requirements are on the delivery model, based on the business objectives and outcomes it should support and deliver. That will then, among many other things, guide the decisions on key terms and conditions required in a particular contract.

You can easily make a long list of terms and conditions but let me instead point to three areas:

  • Transition and steady-state delivery are typically well-covered and get a lot of attention during the tender and negotiation phase; governance, too, but it is often made much too complicated. Audit rights and a code of conduct are a given.
  • Transformation is often left until later (sometimes even after signing), which is the same as too late from a buyer perspective. Here, a good understanding of the overall business objectives and desired outcome of the delivery model over time is important because that will provide significant input into what the transformation should and should not target.
  • Step-in rights, exit, termination and IPR are the important things at the end of the term or when things go wrong and often don't get the initial attention they merit. A good toolbox here can help de-escalate difficult situations and put the relationship back on track.

Putting the right incentive mechanism into a contract is important and difficult. Incentives are there to drive the desired behaviour; it is important to develop them together with the supplier. As an outsider it is not always easy to understand what incentives will actually drive the right behaviour of the individuals and the whole organisation on the supplier side.

In order to maintain a healthy relationship with vendors, how do you ensure transparency in utilisation reporting to maintain realistic vendor costs?

Taking the starting point in the key objectives for the delivery model and the desired business outcomes will provide guidance on what areas are the most important for transparency and focus. Consider combining reporting with cooperation around joint improvement initiatives with the option to introduce competitive pressure during the term of the contract. Also:

  • Define services in a way that benchmarks without too much normalisation, which distorts results. The more 'industry standard' the services definition, the better the opportunities for the supplier to leverage scale and skill.
  • Identify the areas that do not lend themselves to a standardised and SLA-based delivery model. In some select areas time and material delivery may actually be the better solution and provide the best transparency.
  • Have clear targets and built-in (contracted) efficiency improvements and cost reductions.
  • Do not over-complicate governance. Ensure the right balance of attention between the long-term important things and the short-term urgent matters.
  • Do your own service quality cost-analysis continuously. A team with very strong analytical capabilities, in the areas of services and KPIs, as well as on the cost and value creation side, is a key asset.

With an increasing number of global locations becoming viable destinations, what are your priorities when choosing where to outsource your processes?

In an outsourcing situation it is important not to be too prescriptive. The suppliers should design the delivery set-up so that it leverages the most suitable mix of locations based on talent, operational maturity, utilisation, time zones, connectivity and cost, and matches that to the customer's way of working and geography.

The types of services will also determine suitable locations. Will day-to-day interaction be required between the service recipients on the customer side and the service delivery team on the supplier side, or does the delivery actually benefit from a difference in time zone as well as geography?

Is it possible to maintain realistic expectations about innovations within the outsourcing lifecycle?

It goes back to the objectives and having category strategy well linked to the overall business strategy. To reap the benefits of innovation typically requires investment by both supplier and customer, so make innovation initiatives focused and specific, not general and sweeping. The clearer the product/services roadmaps are, the easier it is to identify where innovation from the supplier can add the most value.

"To reap the benefits of innovation typically requires investment by both supplier and customer, so make innovation initiatives focused and specific."

The better your own strategies, objectives and plans, the easier it is to leverage supplier innovation. However, as the amount and type of innovation may shift over time, the competence profile of both the supplier's team and the customer's retained organisation may need to shift.

Also, built-in efficiency/improvement targets in the contract will enable the capture of benefits from the suppliers' internal innovations, such as process, methods and tools improvements.

As more processes become outsourced, how do you prevent the management of those processes becoming too complex?

Through thorough make/buy analyses decisions and asking where outsourcing will bring the most business benefits. Outsourcing also means investing in a retained management organisation of adequate size - not too small and not too big. You should adapt the level of governance to how business-critical the process is, and never overcomplicate it. Maintaining a basic set of supplier management/governance principles that can be applied in a similar way across all categories reduces complexity too.

Also, make sure that the management focus does not get fixed on one area (typically the one that was most important initially), but moves around to the areas that have the best potential to create additional value or are causing the most pain at each point in time.

Governance must not get stale, but continuously shift focus onto the areas that contribute the most to the business objectives. Also, the number and types of resources/skills assigned to supplier management for a specific outsourcing relationship may need to change over time depending on, for example, the amount of transformation that is required.

In order to remain competitive, how do you extract value from external spend?

Have clear category strategies linked to overall business strategies. Identify what value to extract in each category and from each supplier relationship. Focus on how innovation, speed, flexibility and cost varies by category and over time. All factors are not equally important at any particular point in time.

"Governance must not get stale, but continuously shift focus onto the areas that contribute the most to the business objectives."

It is important to combine competitive pressure with cooperation and carefully selected joint-improvement initiatives together with the suppliers. The amount of time and resources to invest in a particular supplier relationship must be carefully assessed. This is linked to the overall business objectives and the character of the category they belong to. The focus areas for the relationship also vary over time. It is important to acknowledge this.

In terms of strategy, what is the benefit of being better coordinated towards your suppliers than they are towards you?

Being a global company with a broad offering of telecoms products and services we meet the same supplier company in multiple categories and multiple geographies.

Good coordination in our sourcing organisation means better utilisation of skilled resources. It means, for example, that we only spend resources on negotiating the same type of contract once with a global or regional supplier rather than many times in different geographies. It also means coordinated improvement initiatives and not re-inventing the wheel in many places.

Our suppliers will gain from this set-up as they can also better leverage their expertise to create value.

What is the importance of having one sourcing community at Ericsson?

Our sourcing professionals are spread out across the world to be close to the business and the internal stakeholders. Global category teams leverage skills and drive competence development. It is a way to create critical mass even when the teams are dispersed across the globe.

By looking at the whole community we can also leverage the resources across categories if there are shifts in volumes over time in individual categories. We can also better drive specialisation of roles.

What are the top priorities and challenges in executing Ericsson's Sourcing Excellence programme?

One important factor in taking sourcing to the next level is to shift from a bottom line focus only to seeing how sourcing can contribute also to the top line and competitive edge. Other priorities include finding new sales opportunities based on supplier relationships and innovating together with suppliers to provide customer value that contributes to an increased top line.

"Good coordination in our sourcing organisation means better utilisation of skilled resources."

Another priority is to leverage our global category expertise by forming a team for the categories that are relatively new to us. The change in sales mix towards more services has led to a change in the spend mix and we are now buying in many new categories, plus a larger share of the spend is also out in the regions.

We also want to drive a competence boost and enhance the training curriculum available to sourcing staff, which we base on detailed analysis of gaps versus needs. Working in global teams and as a dispersed sourcing community also puts new demands on the way we communicate and we have been developing, among other things, web-based channels for collaboration within the teams and regular webcasts to the whole global sourcing community to build a culture of sharing knowledge and experiences.

There's also specialisation of the sourcing roles - what really needs to be done close to the stakeholder and suppliers and what can be done remotely to better leverage scale and skill. This led to the establishment of our global sourcing support office, where we concentrate on analysis work and e-sourcing activities, for example. As a next step we will manage select categories out of this centre as well. Backed up by a global support centre, the front-line sourcing staff can much better focus on the tasks that really build value close to the stakeholders.

An increasing number of global locations are becoming viable destinations for outsourcing.
Anders Henriksson is vice-president, sourcing at Ericsson, and is leading work on the company’s future IT delivery model. Previously, from 2010–12 he headed up a group-wide sourcing transformation programme; and from 2005–09, he led Ericsson as it restructured its indirect sourcing activities, resulting in significant cost savings.