By Computerworld Philippines
July 1, 2010

As industrial manufacturers strive to succeed in one of the most challenging business environments in history, it will be more important than ever that they make effective use of their information technology (IT) to remain competitive.

Application Development and Maintenance (ADM) outsourcing has gained popularity as a key strategy for helping manufacturers reduce costs and sustain competitiveness. But, getting the right number and the right balance of providers can be a challenge for even the most experienced organization. Too few ADM providers are not good from a risk management standpoint, while too many can impact efficiency.

In trying to leverage the benefits of ADM, some companies have amassed a complex network of multiple suppliers to meet their needs. But, managing such a network can increase costs, not lower them, and affect competitiveness. Other companies rely on a small number of ADM providers, but have not implemented procedures to ensure they maintain the right level of competition and mitigate any risk. In contrast, leading organizations are achieving more by engaging the right balance of ADM providers.

According to research by Accenture and the Everest Research Institute, for companies, on a total cost of ownership basis, having an effective balance of ADM providers can save 22% to 28% of ADM cost. This includes both one-time and recurring cost reductions. One-time costs, for instance, can be reduced 35% to 40% by working with an appropriate number of suppliers. These savings are achieved primarily through savings in specifying, tendering, evaluating, selecting, negotiating, contracting, transitioning, managing and governing the additional work.

Moreover, the research found that recurring costs can be reduced 20% to 25% as fewer contracts, invoices and compliance issues require less management time. But, mostly the reductions result from economies of scale that enable providers the flexibility to locate more senior roles anywhere within their global workforces, offering the best skills and the most appropriate locations that can be found.

MAKING A SIMPLER ADM PORTFOLIO WORK

Once complexity is addressed, here are three areas companies need to focus on to make their portfolio effective.

Organization

They will need to decide what form the ADM organizational structure will take, such as enterprise level versus specific business units and/or geographies. This will become the foundation for making future decisions.

The Operation

Next, manufacturers will need to choose between two broad engagement models – harmonized or orchestrated. The harmonized model involves companies acquiring talent at the best price and defining the primary tools and processes for service delivery. The orchestrated approach comprises attaining results from suppliers through defined objectives, while requiring the supplier to determine how to attain results.

Process Management

Lastly, achieving optimal performance from day-to-day operations will require careful management of three key areas that include:

Division of work: Actions taken by suppliers within the ADM supplier network are often inter-related and if not seamlessly performed can affect the overall productivity of the operation. Therefore, greater coordination will be required to optimize productivity and maximize results.

Scope: The scope of work outsourced will have implications on the complexity associated with managing it.

Governance model: Consensus on the IT strategy and how to best manage it will provide a more predictable environment and more consistency of use. As such, it will reduce both one-time and recurring costs associated with managing the performance of multiple suppliers.

Finally, whatever reasons there may have been for using more complex ADM portfolios in the beginning, high performers are now simplifying how they engage their vendor base. When a manufacturer succeeds at simplifying its ADM portfolio, it can achieve lower costs, higher productivity and greater business impact.

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