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The Dual Provider Approach to Outsourcing

W. Carter Santos
Special to Law.com
November 03, 2008

Under the dual provider approach to outsourcing transactions, the customer splits the volume of outsourcing services between the existing vendor and either a second vendor or an in-house captive (second source).

While the dual provider approach may be difficult to implement for small outsourcing initiatives with limited scale or complex outsourcing initiatives in which the services cannot be easily divided between two separate companies, this approach is well-suited for handling large volume, rule-based, repetitive tasks, such as outbound and inbound customer call support, data entry, print/mail and clerical functions, and/or large volume project work, such as for application development and maintenance functions (provided in this case, that the customer maintains adequate source code and documentation libraries for all outsourced work).

This article discusses the primary benefits to the dual provider approach as well as the often overlooked benefit of using the approach as an exit strategy for outsourcing transactions.

PRIMARY BENEFITS

The primary benefits of a dual provider approach are as follows:

• The natural tension between the vendor and the second source creates competition in favor of the customer.

• As a result of the competition, the customer will likely receive discounted pricing. This is especially true if the customer uses two vendors (rather than a captive) in the same geographic region.

• As a result of the competition, the customer will likely receive improvements in the quality of the services, as the customer can compare the vendor's service performance with the second source. The customer can reward strong performance by allocating a higher percentage of the volume to the best performer and penalize poor performance by allocating a lower percentage of the volume to the weak performer. (Or the customer could reward the strong performance by allocating a salary increase, and penalize the poor performance by allocating a salary decrease. Leaving the costs to the customer the same.)

• To the extent the vendor, or the second source, can take on the entire volume of the outsourced service, the customer has a viable business continuity/disaster recovery ("BC/DR") option if disaster or political instability affects the vendor or the second source. This is especially true if the vendor and the second source operate in different geographic regions that would not be impacted by the same events. (This is a great idea, however, I believe overhead costs would make it cost prohibitive).

• By using two different sources, the customer mitigates the risk that it may become too dependent on one vendor's technology and/or processes.

DUAL PROVIDER APPROACH AS AN EXIT PLAN

Another benefit to the dual provider approach which is often overlooked is its viability as an exit plan. Under the dual provider approach, if the customer chooses to exit the outsourcing transaction with the vendor, the customer can transition the additional volume of services to the second source with minimal effort. This is in stark contrast to the substantial effort typically required to transition the work to a new vendor or back in-house to the customer (new source) when the customer is not currently providing the services (new provider approach). To fully illustrate the benefits of the dual provider approach as an exit plan, the pitfalls of the new provider approach must first be considered.

Under the new provider approach, the customer's exit plan focuses on negotiating contractual rights into the outsourcing contract (transfer contract rights) to facilitate the transfer of the services from the existing vendor to the new source. Transfer contract rights include the right to: (1) obtain the vendor's assistance and cooperation in transitioning the services; (2) hire vendor employees; (3) use vendor software/intellectual property post-termination; (4) train side by side with the vendor; (5) obtain updated systems diagrams, process flow and workflow documentation from the vendor; and (6) purchase equipment used to perform the services.

However, enforcing transfer contract rights can be difficult, time-consuming, uncertain and expensive and is dependent, to some degree, on the level of cooperation from the vendor. During the transition period, the vendor has little incentive to cooperate because the vendor will not retain the existing business or win any new business from the customer. The vendor may, among other things, dispute the customer's transfer contract rights, delay fulfilling the customer's requests and/or seek a change order with a price increase whenever a customer request does not fall within the exact words of the contract. Yet, transitioning the services to a new source will likely require exercising at least some of the transfer contract rights. This is because the new source will need, or can benefit from, the labor, training, processes, documentation, equipment and/or technology employed by the terminated vendor. Transitioning the services to a new vendor also requires the customer to go through the arduous process of selecting, negotiating and contracting with a new vendor (through a request for proposal or other process).

Additionally, transitioning the services to a new source can take a substantial period of time (often six months to one year) and in many cases, the customer is not ready to take the services over or transition them to a new vendor when the contract with the terminated vendor ends (timing risk). The timing risk tends to arise because the customer often underestimates the transition time when providing the termination date to the vendor in the notice of termination. If this happens, the best-case scenario for the customer is that the terminated vendor agrees to continue performing at much higher prices and the worst-case scenario is that the vendor simply walks away leaving the customer without the services or the ability to transition to a new vendor.

By comparison, transitioning the services under a dual provider approach is faster and less disruptive than the new provider approach and largely avoids the timing risk. The transition is faster because, as stated above, the customer (i) will spend little time, if any, exercising its transfer contract rights (as the second source already has the knowledge and resources to perform) and (ii) will not need to engage in the selection, negotiating and contracting process, as the second source is already under contract with, or under the control of, the customer. In fact, the transition of the additional volume of services under the dual provider approach typically only takes as long as necessary to hire and train the additional labor resources needed to accommodate the additional volume (usually one to three months). The transition is less disruptive to the customer's business because the second source (a) already performs the services, (b) is familiar with the customer business, and (c) will only be transitioning an increased volume of the same services rather than an entire new suite of services. Given the ease, certainty and speed of the transition, the timing risk under the dual provider approach is almost non-existent.

CONCLUSION

For the appropriate outsourcing initiatives, the dual provider approach provides the customer with price and service quality leverage through competition as well as disaster recovery/business continuity coverage. Additionally, the dual provider approach gives the customer a faster, less disruptive and certain exit plan relative to the new provider approach. However, even if the customer employs the dual provider approach as an exit plan, the customer should still negotiate adequate transfer contract rights into the outsourcing contract just in case the customer loses the second source during the life of the outsourcing contract.

The downside to a dual provider approach is that the customer has to manage and govern two different providers and, if a captive is not used, negotiate two different contracts. Additionally, splitting volume may mean giving up a volume pricing discount to a single vendor. Overall, the benefits of the dual provider approach far outweigh the detriments and the dual provider approach should be strongly considered for the appropriate outsourcing initiatives by sophisticated customers with adequate resources.

W. Carter Santos is an assistant vice president, outsourcing transaction counsel in the Global Sourcing Office at Equifax Inc.

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October 31, 2008

Ford Says It Can Make It Without a Merger

By BILL VLASIC

DEARBORN, Mich. — With United States vehicle sales down nearly 13 percent this year, most car companies have been cutting production rather than increasing it.

But with 1,200 hourly workers cheering them on, top executives of the Ford Motor Company said Thursday at the ceremonial introduction of a new version of Ford's most important product, the F-150 pickup, that they would call back 1,000 laid-off workers to help build more trucks.

"You're going to pull us out of this by building the best truck that's ever been built," William Clay Ford Jr., Ford's executive chairman, said to the crowd at the River Rouge assembly complex.

While its Detroit rivals General Motors and Chrysler wrestle over terms of a possible merger and seek help from Washington to survive the steepest downturn in the industry in decades, Ford says it can survive, and thrive, on its own.

Ford executives and directors rejected overtures in August to join forces with G.M., choosing instead to focus on better coordinating its own far-flung global operations, where it sees considerable potential to cut costs and improve quality.

"Our biggest opportunity is to make sure we integrate Ford," said Mark Fields, president of Ford's Americas division. "Merging Ford is our Job 1."

Ford is gearing up for a new-product blitz that will replace 40 percent of its production with fresh models by next year. And the company — sandwiched between the bigger G.M. and the smaller Chrysler in Detroit's traditional Big Three — hopes to take advantage of the potential merger of its rivals and the distractions that come with it.

"I don't know what they're going to be spending their time on if they're merging," said James Farley, Ford's vice president for sales and communications. "But I know we're spending our time on launching products."

Ford's tough talk, however, cannot mask its own continuing problems.

Its United States sales have dropped 17.2 percent this year, and the company lost $8.6 billion in the first six months of the year. It is expected to report another big quarterly loss next week.

And the merger discussions between G.M. and the owner of Chrysler, the private equity firm Cerberus Capital Management, underscore the woeful state of the overall industry.

G.M. and Chrysler are determined to merge to cut costs and ensure their long-term survival, according to people with knowledge of the merger discussions.

The talks, which began more than a month ago, appear to hinge on whether the automakers can get financial aid from the federal government. G.M.'s chairman, Rick Wagoner, has lobbied the Treasury Department and other federal agencies for as much as $10 billion in assistance to support the deal.

Michigan's governor, Jennifer Granholm, attended Ford's event Thursday and said that aid from Washington was crucial for Detroit.

She was among six governors from states with large automotive operations who sent a letter this week requesting immediate aid from Treasury and the Federal Reserve.

"We need to get some quick loans so that the industry can get make it through these next 6 to 12 months," she said.

Ford executives have said they expect their company to have access to any loans that might be made to G.M. and Chrysler. But Ford, despite its losses and sinking sales, is not in as dire shape as its two domestic competitors.

Under Alan R. Mulally, who became chief executive two years ago, Ford has streamlined its operations by selling its luxury-vehicle divisions Jaguar, Land Rover and Aston Martin.

Ford also borrowed heavily to improve its cash position before the credit markets collapsed. At the end of June, Ford had $26.6 billion in cash while the much larger G.M. held $21 billion.

While G.M. is burning through $1 billion in cash each month and could exhaust its reserves by next year, Ford has somewhat more time to execute its turnaround plans.

But with the auto market expected to continue to deteriorate into next year, Ford's time is running short.

Moody's Investors Service said this week that it was considering downgrading Ford's credit further into junk bond status because the automaker was spending an estimated $500 million in cash each month.

Ford is counting on a wave of product introductions to increase its revenue during the market downturn.

In addition to the F-150, Ford is bringing out new versions of its Taurus and Mustang passenger cars next year and accelerating development of a series of new smaller, more fuel-efficient vehicles.

Analysts say they believe Ford has some opportunity to take market share from G.M. and Chrysler if the two companies merge and go through a prolonged restructuring.

"Ford could definitely make some hay while all the turmoil is going on at G.M. and Chrysler and they try to put those two companies together," said Joseph Phillippi, principal in the consulting firm AutoTrends in Short Hills, N.J.

Ford is moving faster than its rivals to replace its big, gas-guzzling S.U.V.'s with small cars. But any hope Ford has for a revival depends largely on strong sales of its new F-150 pickup. Sales of the F-150 have fallen nearly 27 percent this year, as consumers have fled from bigger vehicles of all types.

But through the first nine months of the year, the F-series was still the top-selling vehicle in America. The new version, Ford executives said, is aimed directly at buyers who need trucks for work and other practical purposes, rather than because of their macho image.

"We're not going after those 'never, never' customers, meaning those people who have never hauled anything or never towed anything," Mr. Farley said.

 

Will these new workers be UAW workers?

Ford bets on new pickup, rehires workers

Report: Carmaker to bring 1,000 employees back to truck plant

msnbc.com staff and news service reports

updated 8:03 a.m. ET, Fri., Oct. 31, 2008

At a time when many automakers are cutting workers, Ford plans to bring back 1,000 employees to a truck plant in Dearborn, Mich., because it expects growing consumer demand for its new F-150 pickup truck, The Wall Street Journal reported Friday.

Ford believes there is pent-up demand in the marketplace for their new pickup, especially among truck customers who need the vehicle for their job, according to the Journal.

The F-150 has been the nation's top-selling vehicle for years and is redesigned for 2009. Detroit's big automakers have traditionally relied on the sales of SUVs and pickups to boost their bottom lines.

The news comes as rival U.S. automaker General Motors is reportedly working to acquire smaller U.S. rival Chrysler in a deal that would mean the loss of between 25,000 and 35,000 jobs, according to a Michigan consulting firm.

The Associated Press contributed to this report.

URL: http://www.msnbc.msn.com/id/27470642/

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UAW promotes health-care aid to help automakers

Fri Oct 31, 2008 6:20pm EDT

By John Crawley

WASHINGTON (Reuters) - The union representing workers at U.S. auto companies is proposing that another round of government aid to distressed carmakers go toward easing health-care cost burdens, freeing cash for the companies to spend on saving themselves, a senior labor official said on Friday.

Alan Reuther, legislative director of the United Auto Workers, said in an interview that the group is proposing lawmakers approve up to $25 billion in new loans for General Motors Corp, Ford Motor Corp and Chrysler LLC.

Reuther said the aid would cover pledged contributions to a retiree health care trust, the Voluntary Employees Beneficiary Association, which was negotiated last year with the companies.

"If the companies get the assistance that makes it easier for them to do other things," Reuther said. "I think the financial markets would look at that and say that helps lift a significant liability and that's a good thing."

Reuther said such a step would also ensure retiree benefits.

Officials at GM and Ford had no immediate comment. Chrysler could not immediately be reached for comment.

GM, Ford and Chrysler are shifting retiree health-care liabilities to the independent trust account, which takes effect in 2010.

In July, the UAW allowed GM to defer a planned $1.7 billion downpayment on the trust with the carmaker trying desperately to conserve cash. Chrysler also deferred a payment to the fund that will total $56 billion.

The UAW plan is the latest floated by industry supporters for government to assist Detroit, which last month received authorization from Congress to apply for $25 billion in low-interest advanced technology loans to help U.S. carmakers build more fuel-efficient cars.

The money, however, is not expected to be available for months and may not allow the kind of financing flexibility U.S. manufacturers say they need right now. Auto executives and lobbyists nevertheless are pushing hard to accelerate loan funding.

The White House has said it is working as fast as possible to accommodate Detroit, although the Bush administration has been reluctant to provide massive aid for an industry that has been in a downward spiral.

ELECTION DAY

Ford, GM and Chrysler have been hit hard by the ongoing credit crunch, which came near the end of an already-dismal sales year. High gasoline prices, a weak economy, and stiff competition from overseas rivals have sapped consumer appetite for their bread-and-butter pickups and sport utilities.

U.S. auto sales have fallen by 13 percent through September and automakers expect to report October monthly auto sales on Monday that reflect the continued downturn.

Ford is in the best financial position of the three, while GM and Chrysler continue to burn through cash. Plans for a GM-Chrysler merger were put on hold until after the November 4 election once it became clear on Thursday that the U.S. Treasury Department would not help fund it as GM had hoped.

Treasury has extended assistance for the financing arms of GM, Ford and Chrysler.

Industry, its supporters in Congress and the UAW are hopeful that the Treasury or another agency still could step forward soon with billions in direct capital grants or loans for all three companies to ease their cash crunch.

Much for the auto industry, however, appears to hinge on what happens on U.S. Election Day on Tuesday, when Americans will choose a new president. Democrats also hope to widen their majorities in Congress as well.

Labor has been an outspoken and active supporter of Democrat Barack Obama, who leads in national polls and said on Thursday that helping automakers would be an early economic priority.

The Illinois senator supports another $25 billion for the industry and has said that health care could be one area where government might help.

Republican John McCain's campaign supports the advanced technology loan package as a first step.

Congress is expected to return for a post-election session and could try to craft a broad economic stimulus plan, depending on the outcome of the election and the mood of the White House.

Industry supporters in the House and Senate have said they would try to include $25 billion in aid to Detroit if a stimulus bill was proposed. Otherwise, the matter would wait until the next Congress in January.

(Editing by Matthew Lewis)

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Print Story
NDTV.com
Relax, jobs in India are safe!
Shweta Rajpal Kohli, Vasanthi Hariprakash
Friday, October 31, 2008 (Delhi, Bangalore)

With job losses making headlines in the US, the big question on
everyone's mind: Are jobs in India safe? And will pink slips and
salary cuts become the order of the day here as well?

A startling report released by industry body Assocham claimed that
companies in key sectors like real estate, finance and aviation will
trim their workforce by as much as 25-30 per cent in the coming weeks.
But after the top economic policymakers stepped in to rubbish these
findings, Assocham has withdrawn the report.

"Assocham has withdrawn the report," says Montek Singh Ahluwalia,
Deputy Chairman, Planning Commission.

Finance Minister P Chidambaram explains: "An economy growing at 7 per
cent is a job creating economy, not a job destroying economy. The only
difference between an economy growing at 7 percent and an economy
growing at 9 per cent is the pace of job creation. Don't confuse a
slow pace of job creation with no jobs."

But as the crisis unfolds, companies have decided to wait and watch.

"There is a looming uncertainty in the market today, but as of now
there is no instance of real job cuts happening in a large phase.
Probably what we are getting to hear or see is those normal appraisal
cycles where you try to find bottom performers who are not doing well
and who are being asked to leave or being redeployed in various other
projects," says Amitabh Das, CEO, Vati Consulting.

Though downsizing will be seen as the last resort by companies in
India, many HR heads say the tough economic environment means fat
bonuses and increments may have to go.

(c) Copyright NDTV Convergence Limited 2008. All Rights Reserved.

Boeing exec: less design outsourcing in future

By TIM KLASS

The next new Boeing Co. airplanes will be designed, developed and produced with less reliance on outsourcing than the long-delayed 787 passenger jet, a key executive says.

Even the next derivative of the 787 will rely more on in-house design, said Michael J. Denton, vice president of engineering and the top technical executive of Boeing Commercial Airplanes.

In an audio blog posted on a Boeing Web site for the company's contract talks with the Society of Professional Engineering Employees in Aerospace, Denton gave Boeing's most complete statement to date on what will be done to avoid a recurrence of the problems plaguing the 787.

Negotiations began Wednesday with the union representing Boeing engineers, scientists and technical workers.

The first 787 delivery is currently set for next August and could be further delayed by the strike by the International Association of Machinists and Aerospace Workers that began Sept. 6. The walkout by Boeing's commercial aircraft production workers could end Saturday with a ratification vote on a tentative agreement supported by union leaders. Outsourcing was the thorniest issue in the dispute.

SPEEA and the Machinists say that if the 787 had been designed and built in-house like previous Boeing planes, it would have been out the hangar door by now.

Denton said Boeing, faced with prohibitive costs for developing the all-composite 787, got subcontractors to share in the initial investment and outsourced much of the design work, partly to avoid hiring a raft of engineers who would then have to be laid off for lack of other work after the plane was ready for full-scale production.

For example, Boeing sent Mitsubishi a general concept, shape and technical requirements for the wings, leaving the internal structure and other details to be designed by the Japanese company. The only major component of the 787 done in-house in the Seattle area was the tail fin.

In many cases, "our assessment of the partners' capability to do that design work ... was higher than their capability," Denton said.

Compounding the problem, "we were late in discovering that (some of) the partners were really struggling," he said. "Our engineers and production workers are basically correcting problems that should never have come to us."

Changes already are being made in work on the 787-9, a longer version of the 787-8, the initial model, Denton said.

"We will do more of the detailed design on the 787-9 than we did on the dash-8," Denton said. "We're working out those details with some of our affected partners now."

In the future, Boeing hopes to stick with the "partner model" for financing.

"However, we will probably do more of the design and even some of the major production for the next airplane ourselves as opposed to having it all out with the partners," Denton said.

Ray Goforth, SPEEA executive director, told The Seattle Times that Denton's comments were "a helpful sign that the company is addressing the concerns raised by the technical work force."

SPEEA's two contracts expire Dec. 1. One covers about 14,200 scientists, engineers and other professionals with average salaries of $82,666 and the other covers nearly 6,700 manual writers, technicians and other hourly workers paid an average of $68,157. About 550 are in Utah, California and Oregon and the rest are in the Seattle area.

General Motors would like some taxpayer cash—a bit more than $10 billion should do—to help it buy Chrysler. As a company spokesman told TIME: "We believe the Federal government should consider all of the tools available to it—some recently enacted—to support industries that are in distress and that are essential to the U.S. economy." (Update: The Detroit Free Press is reporting today that the Treasury Department said no dice, although of course the last word will be with Congress.)

Now all is fair in love, war and lobbying for government bailouts. But this attempt to align GM with the banks that have recently benefited from Washington's largesse is quite a stretch. We have a well-developed process for helping companies in distress fend off creditors and prepare themselves for a comeback if in fact they have a comeback in them. It's called Chapter 11 bankruptcy, and it is one of the most glorious creations of the American political system. Bankruptcy allows for a moderately orderly version of the creative destruction that makes capitalism dynamic. The willingness of American companies to make use of it is one of this country's great competitive advantages. It's one key reason why, while the next year or two will certainly be tough, we're extremely unlikely to land in a decade-long malaise like Japan in the 1990s.

Bankruptcy doesn't work so well for leveraged financial institutions like banks, because the mere existence of rumors that a previously healthy bank is headed for failure can be enough to drive it under. That's why we have a separate infrastructure for both preventing and dealing with bank failures, with the FDIC at its center. It was the lack of such an infrastructure for the "shadow banking system" of investment firms, hedge funds, derivatives and the like that has made the past year so scarily and unpredictably eventful. And it was the real fear of a systemic collapse--a run on the entire financial system--that sent Ben Bernanke and Hank Paulson scurrying to Capitol Hill in September to ask for $700-billion bank bailout.

It is true that, as Steven Pearlstein writes today, the half-baked way in which Paulson has sold and implemented the bailout has encouraged other industries to ask for similar help. I can't see any case for giving it to them, though. A GM bankruptcy would possibly pave the way for a rebirth of the company as a lower-cost, slate-wiped-clean entity with an actual chance of succeeding (I'm not making any guarantees here), and it wouldn't threaten the systemic collapse of anything. What it would threaten are jobs, dealers and suppliers, and pensions.

Those first two sets of threats are endemic to capitalism. I happen to work in a struggling industry. I feel like my job is threatened. I think what I do is important to the functioning of American society. I think it's possible to make a case--I'm not gonna make it, but Ezra Klein will--for taxpayer support of journalism. And there's definitely a case for temporary taxpayer help for workers whose industries have imploded. But there's really no case that I can conceive of for taxpayer subsidies for the shareholders of media companies or of auto manufacturers.

The issue of pensions is more complicated, because they are promises, and promises should be honored. GM, to its everlasting credit, has not been shortchanging its pension plan. The company's pension fund was actually overfunded by anywhere between $9 billion and $19 billion (depending on whom you were asking) at the start of the year, and while that's surely no longer the case, the way the fund's $100+ billion in assets were allocated (only 26% in equities) would indicate that it has probably survived the market's carnage better than most. So GM's retirees wouldn't suddenly be left in the cold if the company filed for Chapter 11. But even if they would, I think we'd be far off better dealing with that problem explicitly rather than bailing out the company's shareholders.

Political calculations are political calculations, and the Chrysler bailout of 1979 seems to have worked out okay, in that taxpayers got their money back. But we'll never know the counterfactual. It's possible that the U.S. auto companies would be much stronger and more competitive now if Chrysler had been allowed to go bankrupt. Managing our way through business failure is something we're extremely good at in this country. So why don't we take this opportunity to show what we're made of?