Business Platforms – BPO meets Technology: July 2010 Archives

July 18, 2010

Are you able to realize the elusive savings?

Cost reduction has invariably gained maximum consideration as part of any strategic or tactical initiatives during last few years. One customer lamented during review meeting that in spite of fantastic effort put in by the team amidst excellent visibility, the top management in the end was not impressed with the savings realized. Last few years have also witnessed a surge in cost reduction initiatives which was pervasive across entire supply chain and 'savings realization' has probably been the single most important aspect which decided the final fate of these initiatives. Interestingly 'savings realization' has also been the weakest link and now when the moments of cost cutting frenzy is easing out there's spotlight on the execution mechanism to achieve the value delivered. It is also noted that the most prominent area where most of the cost reduction initiatives were attempted was SG&A where it is difficult to put these execution mechanism in place. Taking a cue from execution challenges it can be concluded that the realization of any large saving potential is challenging and requires a good mix of process management, upfront investment and agreement across internal stakeholder (finance being most important). The savings definition, measure and enforcement are crucial which would decide the success and failure any initiative undertaken by the supply chain leader in this challenging environment.

However there's also paradox associated with the savings realization mechanism and it's not always easy to baseline the cost and calculating the savings due to lack of systems and processes. For eg. on the supply cost reduction side while it is easy to define savings for material and goods, it is most difficult for services like marketing, advertising and unique buy like software. The most common example is crude oil (where complete decontrol is still in the offing for India) where current market price is considered for calculating and thus the savings should be linked to the oil price index. Not having agreed upon savings realization mechanism with the internal stakeholder would lead to unrealistic expectation and becomes a sour point later. Some of the typical models which are used to arrive at the savings realization mechanism are 'Baseline cost based on category or grouping'. Eg. like office supplies, facilities and MRO spend, 'Baseline based on unit level' Eg. like marketing, consulting and IT spend, 'Baseline based on industry index' eg. like oil, steel and other commodities. While savings realization mechanism could be unique to initiative, industry and organization's eco system nevertheless it is necessary to define, establish target, measure and enforce final savings supported by adequate systems and processes to act like a barometer for any initiative success.

Posted by Gurjeet at 4:47 AM | Permalink | Comments (0) | TrackBacks (0)

July 6, 2010

Outsourcing or Automation? with cloud adaption

With the surge in cloud computing supply leaders are facing yet another dilemma -"whether to structure their business processes around cloud model for increased efficiency or achieve cost reductions through outsourcing in a traditional way". It is a known fact that once you outsource your processes it's extremely difficult to introduce changes in the process embedded into underlying technology and in all probability you will be registering only a small incremental benefits through offshore enablers and productivity tools. On the other hand cloud services on a building block of standardization expect organizations to fundamentally change their processes especially in the non-core area eventually resulting into extremely low TCO due to multi-tenancy effect. While this omnipresent impasse of 'standardization' vs 'flexibility' is not new to the supply leaders, the challenge is aggravated due to cost efficiency pressure on a long term basis and so most product vendors have launched or are launching cloud services at a fraction of traditional cost (as an OPEX pay-as-you-go cost) with committed business outcome.

It is said that that computing is the ultimate form of automation and so cloud computing can't sustain alone on 'standardization' and 'resource sharing mechanism'. For example take a case of datacenters which are surprisingly buzzed with lots of people covering activities like application upgrade, patch application, network monitoring, uneven network load management or surge in web traffic which requires manual interventions. The typical role of system administrator is to apply patches, run programs and install server which would take days if not weeks to implement. Unless until cloud service providers re-architect their solution with increased automation coupled with cost effective components it is not possible to achieve the much needed efficiencies. Another area of focus is technology capacity and support. It is often noted that legacy IT system are actually a patchwork that is inherently inefficient and so firms spend substantial part of their budget simply on keeping the processes running. And because most of these legacy systems can't respond quickly to change in consumption or usage and so the organizations over provide resulting in large overcapacity resulting into extremely low utilization. Cloud computing has a huge a potential to address this aspect also.

While the benefits of outsourcing are pretty established and well known, supply leaders can't overlook the emergence of cloud services which is fast getting matured and so need to craft a balanced strategy to take advantage of it with a well thought out business model in a new realm of cloud computing.

Posted by Gurjeet at 1:02 PM | Permalink | Comments (2) | TrackBacks (0)