We already know that outsourcing is growing faster and faster. Indeed, the current context forces companies to find solutions to reduce their costs in order to face global competition.

Outsourcing has become an obligation for companies to be able to survive on the global market. In the previous essay, outsourcing failures and its reasons were discussed.

After several outsourcing models were tried, the best solution finally appeared to be Modularization and Results-focused Outsourcing. Indeed, it seems to have been the more successful method in the recent outsourcing projects. This essay will be about this solution and the reasons why it works.

Globalization plays a crucial role because of the international division of the labour, which encourages modularization. In this context, modularization and outsourcing are becoming inseparable.

That is the reason why it is necessary to understand its characteristics as well as its way of working. In this essay, we are going to try to explain the cornerstones of modularization and why it suits well with a results-focused outsourcing process.

Standardization, Homogenization, Commoditization

1. Standardization

The first important thing about modularization is standardization. This is what makes it so easy to succeed. Indeed, standardization of systems and parts makes modularization possible thanks to common parameters and measurements.

It simplifies the complexity and brings uniformity in the system. Therefore, modules and sub-modules are made, which provides smaller units that can adapt instantaneously to business structure changes. Thus, modularization provides room for manoeuvre.

Standardization reduces the risk of failure. Indeed, creating uniform business processes, the outsourcing processes that are using standardization will always be likely to meet the expected results and achieve their cost and performance objectives.

There Are Several Levels Of Standardization:-

Level one standardization: Enabler processes basic compliance

This level is the basic process of standardization, which uses standard practices and evolves through multiple engagements across industries and multiple global delivery centres.

Level two standardization: Core processes basic compliance

This is the extent of standardization to core functions. This level is the cornerstone for consolidation of business spread across markets in different countries and across different products.

By outsourcing their business processes, customers are consolidating this under a service provider who can deploys same processes and platform to provide the benefits due to economies of scale.

Level three standardization: Enabler processes automation

At this stage, automation tools are developed. Thanks to this, there are common measuring, reporting tools, etc. that are available and that can be used for different customers without customization.

Level four standardization: Core processes automation

This level of standardization leads to the development of processing platforms, which enable better controls, improved efficiency, and performance. This one helps for results-based models.

NAVSTAR – GPS: An example of a success story through standardization

NAVSTAR GPS (Navigation Satellite Timing and Ranging - Global Positioning System) is the largest avionics procurement and installation program in the history of the Department of Defense (DoD of the US).

This example shows how beneficial standardization can be for any project. The strategic standardization enabled to have a single technical solution for a shared problem.

By using a standard radio navigation signal and code provided by the Air Force, the U.S. and its allies realized significant economies of scale through buying, leveraging, and lowering total ownership costs, and reducing acquisition costs.

GPS transformed military strategy and logistics, affected many commercial industries, and became the worldwide standard for navigation. Thanks to this example, we have to recognize that standardization make everything easier, whatever the project.

2. Homogenization

Moreover, homogenization, creating similar modules, enables to facilitate switching. There are a lot of advantages of the process harmonization.

This way, companies that are outsourcing can choose between many providers, which make them not indispensable.

Harmonization aims at limiting the differences between the different process standards.

With harmonization, the goal is to eliminate the differences between technical contents of standards that are used for a similar scope.

Indeed, it would be useless to keep having different standards for a same kind of process and that is the reason why harmonization is necessary. Harmonization will enable great progresses in outsourcing processes.

3. Commoditization

Finally, commoditization enables to obtain modules at best price. We can take the example of software development to illustrate commoditization.

The point of commoditization is to implement standards. Indeed, there used to exist a lot of software bugs, which represented important costs.

Besides, every organization uses software and that is the reason why the very different ways to develop software could implicate high costs and the problems be difficult to resolve and to understand.

Some individual software developers are much more productive and offer much more quality than others but it seems necessary to develop more standard methods and tools in order to improve software utilization.

Chrysler faced competition thanks to modular manufacturing units

The point here is to focus on the core activity to be able to produce huge volumes thanks to modularization and standardization. Modularization appeared to be very useful in the car industry.

Modular units can be added or taken away with the same flexibility as a Lego game. This strategy enabled Chrysler to be better than General Motors during the 1990’s.

Indeed, outsourcing noncore activities brought two advantages. First, modularization reduced the unit cost and investment needed to manufacture new products rapidly.

Besides, companies can use their scarce capital when they have got a competitive advantage. These advantages merely mean more money saved and this money can be used for research and for hiring the best engineers for example.

Modularization history and definition

An analogy can be made between modularization and the Tetris game.

Modularization enables companies to get more flexibility in order to manage their business easily, and with fewer constraints than before.

Thanks to modularization, companies can now combine different components into different systems according to what they need. Modular structuring has become famous with the fourth infantry division of the US army: each module is an autonomous brigade,

Which is able to deal its own functions, without the rest of the division. If one division is not able to operate, at any time another similar division can replace it. That is the most important advantage of modularized systems.

So, if we look at modularization in a general way, we can notice that modular units provide increased flexibility, technology, effectiveness and response time.

All this makes several reasons for organizations to choose modularization as its sourcing strategy. Indeed, thanks to modularization, outsourcing is much more likely to be successful and provides even more benefits. A company can use better its competitive advantage.

Ulrich and Eppinger (1995) define the product architecture modularity as: utilization of “chunks” (main building blocks or modules) with well-defined few interactions among themselves and with inclusion of “one or few” functional elements in each of them.

Modularization, in a few words, is the art of combining different modules, modules that are able to combine with other modules. And what is a module?

“ A module is the component or group of the components that can be removed from the product non-destructively as a unit, which provides a unique basic function necessary for the product to operate as desired” (according to Allen and Carlson-Skalak 1998 as stated in Gershenson et al. (2003)).

Gershenson et al. (1999) explain the interactions in terms of independence and similarities of module components, which are mentioned above, from a life-cycle point of view. They claim that, ideally, the components in a module should not interact with the other components that are not in the same module throughout the entire life of the product (independence).

Also, components in the same module should work in a similar way during each life cycle stage (similarity). They explain the concept of life cycle as stages of product development, testing, manufacturing, assembly, packaging, shipping, service and retirement. Modularization is still a relatively new field, and besides, there are specific situations for every different project.

Indeed, modularization is not a unique method. Although it suits for any project, each company often use its own way of modularization. In fact, every product’s architecture is different in each company.

However, common methods are starting to appear with processes that can be used for different companies. For example, Gunnar Errixon’s Modular Function Deployment tool is often described as a step-by-step process of how to determine which part of the architecture should be modularized and which should be standardized.

Reasons for the success of the contract

First of all, modularization sides with a quite collaborative contract. Is it generally a detailed contract but not as much as Service Level Agreement, and it mostly aims at defining the objectives of the relationship. Thus, this is a relationship of trust, which implicates a win-win situation in Results-focused Outsourcing.

Besides, the customer keeps the agreement under control and the contract is flexible. Therefore, this solution provides flexibility, thanks to modularization, which means that adaptation to a new situation will not be complicated.

Control on the relationship is important too because the business of the customer is at stake and need to be supervised. Control is easier with modularization and homogenization because all the providers are interchangeable and can be switched in case of disappointment.

Another advantage is the concentration of procurement. Before modularization and outsourcing, there were many unit parts and the company had to carry out sub-assembly in their own plants and to have their own logistic centres close to assembly plants.

Quality control and delivery management started to be very complicated. However, thanks to Results-focused Outsourcing and Modularization, these activities have been relegated to providers, which makes management much easier for companies.

To summarise, what the customer wants is control, flexibility and low-cost. That is why Results-focused Outsourcing and Modularization appears to be the best solution. It only requires a good mix of details oriented contracts and on-going relationship management.

Modularization’s benefits

By using modularization, companies can meet the demand because they can identify the customers’ needs and design products that will satisfy their requirements.

Besides, in the global competitive market, they can now fierce the competition thanks to modularization because they are able to face cost levels and performance levels. Moreover, they can produce faster and improve time to market.

Thus, modularization provides marketing opportunities to react faster to market trends. This is made possible thanks to modules solutions that enable to produce without starting every product from scratch. Another important thing in modularization is to focus on components and the components architecture that builds the product.

Thanks to standardized interface specifications, it is possible to use components in a rational and more effective manner.

1. Modularization approach:-

Companies focus on components’ modularization, others focus on functions’ modularization. Actually, there are more and more companies that try functions’ modularization.

It generally depends on its product portfolio because companies with greater product portfolio often decide to focus on functions’ modularization. However, by modularizing functions, they may be able to standardize components and reach economies of scale, which would probably be more difficult for companies that have a smaller portfolio.

The first key to use appropriately modularization is supplier consolidation and development of new suppliers. Indeed, thanks to modularization, all of the suppliers are interchangeable and none of them is indispensable.

This is particularly due to components’ standardization, which enables to find common components for a specific product family. Standardized parts permits to achieve economies of scale and to lower costs through suppliers’ consolidation.

On the other hand, modularization often necessitates to involve all departments, that is to say marketing, purchasing, manufacturing, R&D, Quality, etc. Indeed, it will lead to the synergy benefits of modularization.

There are several steps to follow in order to implement modularization successfully. Top Management is really important to generate leverage in using resources. Besides, it must be necessary to allocate properly and define precisely the different roles, whether this is a permanent or temporary role.

2. Electrolux North America

This case study shows us that it is important to involve all functions in the modularization process. Electrolux is a world-class company that produces home appliance products in a worldwide market.

Because of the company structure, Electrolux required a series of appliance manufacturers. In fact, Electrolux positioning has to deal with two market segments: a mid-premium market and a mass-market segment, focusing respectively on innovation and volume.

The company realized that it had to produce home appliances more flexibly in order to optimize their production and worldwide capacity. That is the reason why Electrolux decided to change its business model and turned to a strategy of modularization.

For Electrolux, the modularization stressed the need to identify modules which were necessary and static for all product variances, to drive scale, and which were differentiable, to meet market demand.

In order to identify such modules a collaboration of functions, representing the challenges for the entire company, was needed in the modularization strategy.

Modularization suits for any situation

A lot of examples of companies that have outsourced functions through modularization can prove that modularization is a key to success. The most obvious are probable the car industry and the PC industry.

Moreover, modularization can be used for very simple tasks as well as for more important functions like in Business Process Outsourcing for example. In the current global context, companies can even offshore most of the functions that are not part of their core functions.

Modularization can concerns the industry, technology, business activities, and services, like financial and accounting outsourcing for example. Modularization allows know-how to be accumulated and used in every new project. Besides, it increases production capacity and economy-of-scale, simply by reproducing the same module.

Although modularization can be used in different ways according to the company structure, there are still convergences between these different ways of modularizing a process.

The first convergence that could be noticed is that the market needs and the knowledge acquisition determines the scale and scope of modularization. Indeed, modularization always relies on the market trends and the experience.

To make modularization successful, it is important to consider several functions of the company in the process of organizing modules.

The companies formally communicated to commit to modularization increase quality in modular products.

The case of software projects

Modularization is obviously important in software projects. The principle is to separate the software system into a set of collaborating components. Indeed, modularization consists in decomposing the whole system into several system elements, subsystems and modules.

It enables to fix problems easily. For example if there were a large and complex problem with the software, it would be easier to solve each of the sub-problems in isolation.

Results- focused outsourcing

This approach makes modularization even more effective. The contract implicates good results: the supplier has to comply with his mission to get payed and for the contract to continue.

That way, the outsourcing process is based on the performance of the suppliers. Besides, the most important advantage is that, thanks to modularization, none of all the suppliers is indispensable. That is the beauty of modularization.

If the first supplier a company chooses does not show the expected results, the company can just end the contract and find another supplier, as they are all interchangeable.

Consequently, we can say that companies would be going better if using results-focused outsourcing. Indeed, most of companies are still focusing on inputs rather than on outputs.

However, when outsourcing a process and implementing a contract with a supplier, companies aim at improving results and performance so it would make much more sense to use outcomes-focused contracts rather than focusing on the task.

What want the outsourcing company are a business outcome and a greater performance, such as a faster access to information for example: the company does not only want the server, it wants better results through it.

That is the reason why results-focused outsourcing is better: it provides an objective performance baseline, which enables a joint management team to focus on aligning the outsourced activity with the business requirements.

This is a more collaborative contract, which looks more like a partnership than a basic relationship.

Results-Focused Outsourcing and Modularization (ROM)

The approach that we have developed and successfully used combines the key parameters discussed above in order to effectively prepare, engage, select, integrate and manage the service providers for the modularized set of services.

In fact those five words are the five key steps in the process as shown in the figure 2. Each step consists of further sub-steps - each one of which has its own set of template, heuristics or methodology to facilitate rapid deployment of outsourcing strategies.

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Figure : How to Outsource Well

The results achieved through a systematic, logical and pragmatic approach such as this one far surpass any others.

First stage of Outsourcing: Preparation

As the cliché goes – failing to plan is planning to fail, and in case of outsourcing this could not be truer. Outsourcing creates a long lasting relationship with the supplier.

Which calls for serious and rigorous preparation before committing the company for an extended period. Long-term contracts need long-term strategic thinking.

While in retrospect, preparation looks like an obvious and important step, in practice a majority of companies do not pay enough attention.

They move too fast into the next stages and overlook many important points in the preparation process. This oversight explain the unexpected costs that often occur during the implementation.

The company must have a good reason for outsourcing, such as focusing on core services, gaining access to specific skills, reducing the costs, gaining more flexibility in service delivery, improving service quality or access to technology.

All this internal information must be rigorously collected and analysed in order to know if outsourcing is indeed the best solution to achieve a business model transformation, and what is the best way of outsourcing. The point is to have a clear, holistic view of a working business model and how outsourcing fits strategically within that model.

The analysis is not only done internally but also covers the customer and product segmentation to outline the marketing strategy of the company. This outside-in view of the company further ensures a strategic fit of outsourcing with the overall corporate strategy.

A lack of preparation will often result into an underestimation of costs (often forgetting the cost of complexity) or also an overestimation of ROI.

Other issues to consider at this stage are legal issues, problems of confidentiality and security of the internal data, means of information sharing and preparation of disengagement possibilities.

Second stage of outsourcing: Market Engagement

After a thorough preparation in the first stage, it is time to create a fit-for-purpose market engagement strategy.

This could include very formal tenders or RFQs (Request for Quotations) through to RFPs (Requests for Proposals) to semi-formal RFIs (Requests for Information) or even informal discussions with the potential suppliers.

In fact there is a whole continuum of market engagement strategies that can be used ranging from very rigid on one end to totally flexible on the other end.

The right market engagement strategy will depend on contingent elements that should have been established during the primary stage, such as:-

1. Services to be outsourced, and type of outsourcing arrangement envisaged

2. Industry dynamics – structure, conduct and performance of competitors in the suppliers’ industry

3. Company culture

4. Key objectives and business transformations sought

5. Amount of co-operation required from the suppliers beyond supply of commodity services

6. Current supplier relationships

For this reason market dynamics in the supplier market must be thoroughly known and understood. Moreover, precise service requirements must be established and the service delivery process agreed upon before a market engagement document such as RFP, RFQ or RFI is finalized.

The buyer has to carefully analyze the cost of the supplier to know the negotiation margin and establish valid price responses. Moreover, if the price is too low and the supplier is not making enough margin on the contract, the deal is likely to be reneged or marred by underservicing.

At the same time, the company should be open to consider all potential suppliers around the world and not only the ones it already has former relationships.

Utilizing information about the suppliers is key in the market engagement stage of outsourcing since it allows companies to have a clear picture of the future total cost of ownership. Indeed the cost of purchase is not always the best proxy to know the efficiency of an outsourcing project.

Besides the initial purchase cost, a company has to pay more for future changes, in case of implementation problems. For example the cost of consulting in the implementation of an IT project is much higher than the cost of the software at the beginning.

Knowing about the supplier’s practices and history makes it possible to calculate future complementary costs of the outsourcing project.

Third stage of outsourcing: Vendor Selection

A wise colleague quipped that it is ironic that before the outsourcing contract is signed, the vendor is focused on communicating value while the buyer is focused on understanding the costs, while as soon as the contract is signed the roles reverse with the buyer focused on getting value, and the vendor focused on controlling his/her costs.

The key questions at this stage are:-

How many stages in the selection process?

What criteria should be used for each stage to filter the vendors? Is a weighting system appropriate?

What is the composition of the selection group?

What process should be deployed to form the short list of vendors?

How do we ensure that the selection is driven by business objectives rather than unimportant details?

How can we incorporates the next stages - integration and relationship management (RM) capabilities – in the selection process itself?

How do we ensure that the right penalties and rewards have been incorporated in the contract adequately?

How to get an agreement on a rapid integration timetable enabling on-going relationship management with the vendor?

Several methods are used to select the most suitable supplier. The elimination method involves using the predetermined criteria to eliminate gradually the supplier and the winner of the tender is the last company standing.

Using another method, the company establishes minimum critical requirements and eliminates any vendor that does not meet them.

Negotiation is a crucial part of the vendor selection process.

Multiple rounds of discussions, call-for-responses and other commercial arrangements may be utilized.

Finally, this stage ends when a tailored contract on which the supplier and the customer agree has been created and signed.

Along with the general aspects of the relationship,the specific clauses have to be negotiated. The delicate act is in balancing the benefits of both parties and protecting everyone from future dissent, which is the key to long-term relationships.

Fourth stage of outsourcing: Integration

Integration is the most accurate word to describe the next stage that comes after vendor selection – although many call it implementation, deployment or even kick-off.

Why? Because, in effect, the supplier is an outside element which is going to take part in a series of processes within a company.

The supplier has to get access to the critical internal information and infrastructure of the company – this aspect carries its own risks.

That is why collaboration needs to be based on mutual trust and backed by sound risk management practices.

As the vendor list becomes more global, the supply chains of multinational companies morph into complex business networks with the end customer as the centre of all attention.

This customer-centric approach of the network equips the company for fast changing realities. Integration of the new supplier implies integration with all the other stakeholders in the business network.

The key questions at this stage are:-

How do we jointly create a mechanism that will deliver the envisaged services in an effective and efficient manner?

How do we get past formulaic implementation into the real business objectives of this particular relationship and make sure those objectives are continually achieved through the course of the entire relationship?

Do we have key performance indicators (KPIs) designed to monitor and report on business objectives with firm views of end goals of the business?

How do we make sure that no superfluous data, information or communication distracts from the key objectives of the outsourcing?

What meetings are necessary for ongoing relationship management?

When, how often?

Who? What agenda?

What procedures do we need to put in place so that service shortfalls are detected, reported and corrected systematically?

How do we make sure that the penalties and rewards will be systematically administered?

Final stage of outsourcing: Value Creation-

1. Business network strategies are increasingly important – something which could never be outsourced to your service provider or a contract manufacturing outsourcer.

2. Great companies are marvellously adept in their ability to unravel the packaged bundles of services presented to them, pick and choose the components that suit them the best, and put together a best-of-breed customized bundle.

3. Modularization makes it easier to homogenize and hence commoditize a market. Hence, whether it is the market for systems, or for processes, or for physical infrastructure or for services – these are increasingly commoditized going forward.

Companies who do well prepare for this coming commoditization and stay on the leading edge of the curve.

4. Modularization has changed the face of global businesses. All tasks are carried out where it is most cost effective to do so. You can expect service factories to be the norm, working in unison with physical factories in different locations.

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On"RESULTS-FOCUSED OUTSOURCING AND MODULARISATION IS THE SOLUTION"

* This Quiz has 5 questions ( Estimated Time - 2 Minutes)

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