Global Sourcing Of Design Santa Clara 10 12 2009

Global Sourcing of Design
Paul Henderson
Managing Director – Clarify, LLC
October 12th, 2009

paul.henderson@ClarifyLLC.com

12/31/2010 1 © Clarify LLC, 2009 All Rights Reserved

Today’s topics

How can we decide what to outsource?
• Framing the decisions and alternatives
How do we organize to support outsourcing?
• Integral vs. ‘modular’
• ‘Outsourcing’ internally
Case example – Linux PC for developing countries
Case example – D.com: bringing in new capabilities

© Clarify LLC, 2009 All Rights Reserved

Making Global Sourcing Decisions


Conventional Wisdom:
“Outsource everything
that isn’t core”


In-Source Outsource


Not Core

Core

How upper management wants to think about
outsourcing:

Specs,
money,
That thing those other
require-
people do
ments

plop!

Perfect Result


But the choices are more complicated:

Control sensitive IP Mature technology
Stable process Offshore Many can do it

Lower cost & time Meet country of
zone proximity origin requirements

In-source Near-shore Outsource

Low-volume, high mix Onshore Relative advantage
No one else wants it Proximity matters

See also: http://www.ventureoutsource.com/ © Clarify LLC, 2009 All Rights Reserved

The move to outsourcing follows a predictable path:

Step Motivation Characteristics
1. Capacity Supplement internal Moving the simplest, lowest risk work to
augmentation capacity to overcome partners (often with a lot of oversight and
constraints driven by hands-on help from internal resources)
peak demands
2. Pursuit of Safety valve for Belief that an outsourced model will be
lower cost pricing/cost pressures cheaper (often not the case, especially at
first)
3. Leverage Get more done with Onshore staff moves from a hands-on to a
internal owned /onshore staff project or program management role,
resources supervising the work of others outside
4. Reduce Reduce overall cost Formal adoption of an operating model
US/EU structure that maximizes the use of offshore
footprint resources and reduces or eliminates
onshore resources


Typical reasons for outsourcing design:

• Faster time-to-market
• Lower capital requirements
• Utilize headcount for higher-value activities
• Change fixed expenses to variable
• Increase presence in a target geography
• Access a new technology or unfamiliar market


The biggest reason to outsource:

Because you can


A Framework For Making Sourcing
Decisions

12 © Clarify LLC, 2009 All Rights Reserved

What to outsource?

First, break the problem down
Product into “sourceable” elements.

Large Each face of this cube is
format an interface that must
be managed
AiO

A Source-
Photo
able
Element
Low-end A
size
Pen

Paper path

ASIC
Power Supply
Service Station

W/S
Driver SW
Subsystem

Function or
lifecycle stage
Based on the work of Charlie Fine at MIT © Clarify LLC, 2009 All Rights Reserved

Interfaces are everywhere

Software
• APIs (Application Program Interfaces)
Hardware
• GEMS (Geometry, Energy, Material, Signal)
Services
• Exchanges of information & commitments


Whole subsystems

Product Example:
outsourcing a whole
Large
format subsystem
AiO
(e.g.- power supply)
Photo

Low-end A
size
Pen

Paper path

ASIC
Power Supply
Service Station

W/S
Driver SW


Lifecycle phase / activity

Product

Large
format

AiO
Example:
outsourcing all
Photo
of one lifecycle
phase
Low-end A
size
(e.g.- assembly)
Pen
Pen

Paper path

ASIC
Power Supply
Service Station

W/S
Driver SW
Subsystem

Function or
lifecycle stage

Whole product

Product

Large
format

AiO

Example: outsourcing a whole product
Photo

Low-end A
size
Pen

Paper path

ASIC
Power Supply
Service Station

W/S
Driver SW
Subsystem

Function or
lifecycle stage

Evaluate each sourceable element:

For each candidate element, we ask the following questions:
1. Is this important to the customer (CAV)? Does it affect their
sensory experience of the product? Are its specs purchase
criteria?
2. What is this element’s clockspeed relative to the rest of the
system or industry? Does it drive the evolution of the rest of the
system?
3. What is our competitive position?
4. What is the architecture of this element? How clean are the
interfaces?
5. How many suppliers are truly capable of delivering this element?


Choose a plan of action for each element
1 2 3 4 5
Customer Component Competitive Architecture? Capable Suppliers?
Value? Clockspeed? Position? None Few Many
Strong Any Invest to maintain leadership Acquire and
consolidate
Integral
Fast Invest Acquire/Take Equity strategic alliance
Weak
Invest Acquire/Take Equity Buy off the shelf
Modular
High Divest or exit
Strong maintain parity
Maintain capability
Slow Integral
Directed
Invest Joint development
Development
Weak
develop suppliers outsource / multiple- outsource
0. Start source
Modular
Here
spin out divest
Strong

Fast Integral change architecture

Weak
develop suppliers outsource
Low
Modular
spin out divest divest or exit
Strong
change architecture
Slow Integral

Weak Any outsource

Adapted from unpublished work by Charley Fine, www.clockspeed.com

Key points to address using this framework

Defining ‘source-able elements’ is about deciding which
interfaces you want to manage:
• Relationships between subsystems
• Relationships between lifecycle steps
• Relationships between products / product families

If the impact on customer experience is not clear, model the
result
• Savings vs. lost sales or increase in warranty cost


Interfaces are not free

Metcalfe’s law:

nConversations  (nStakeholders) 2

Basic question:
“What kinds of problems do you want to manage?”


Structural Options For Managing
Outsourced Design


Some alternative structures for managing outsourced
design:
Coupled structure (warm bodies)
• The outside engineering team actually becomes an integrated part of the
internal team.
• They are effectively the junior members of the team and their work is
closely supervised by members of the internal team.
• Communication is about the task.
Decoupled structure (out-tasking)
• The inside design team parcels out either parts of the system for the
external teams to design or specifies tasks or parts of the process for the
outside people to do.
• The communication is at and about the interfaces.
Co-sourcing
• True collaborative development, leveraging the best of both
• Communication is about the outcomes and interfaces


Decoupled structure at HP: roles of internal,
outsourced and offshore design groups
Questions about specs and intent

Escalations that can’t Questions that relate
be resolved locally to system performance

Onshore Offshore
Offshore
Internal 20%
design
80% outsourced
design design

Subsystem responsibility, Answers to simple
coaching system questions

Specs, guidelines, coaching, answers to complex system performance questions

Thoughts on selecting an outsourced design model

Nature of the design context - maturity and separability:
• Platform vs. product
− Is this the first instance or a derivative?
− How much new technology?
− How complex the integration task?
• Modular vs. integral
− How well can the subsystems be decoupled?
• Explicit vs. implicit
− How well defined are the requirements & specs?
− How consistent are the processes?
− How well documented?

Organizational culture – need for control


Design out the failure modes
Result Because:
33% Went well Modular design and/or effective management
67% Failed or 1) Misaligned objectives between teams
went poorly -> use contingent contracts to anticipate renegotiation

2) Rivalry between partners who don’t want to source from
each other
-> use incentives for short term collaboration, award
future business based on collaboration

3) Inadequate version control – lose the ability to rebalance
inventory, leverage designs across products
-> Watch ‘tweaks’ that can torpedo your objectives

4) Cultural barriers to transparency
-> Insist on getting bad news early & reward candor
Study of 100 outsourced design projects at Fortune 1000 companies From: Disasters in Design Outsourcing – Amaral & Parker HBR Sep. 2008


PCs are easy, right?
HP’s 441 ODM program

27 © Clarify LLC, 2009 All Rights Reserved

PCs are easy, right?
1 2 3 4 5
consolidate
Integral
Weak
Modular
High Divest or exit
Maintain capability
Slow Integral
Directed
Development
Weak
0. Start source
Modular
Here
spin out divest
Strong


Weak
Low
Modular
Strong
change architecture
Slow Integral

Weak Any outsource

Adapted from unpublished work by Charley Fine, www.clockspeed.com © Clarify LLC, 2009 All Rights Reserved

441 Linux PC for developing countries

New ODM PG processes needed for creating products to reach
developing countries
The HP Product team lacked basic PG & project management
capabilities and had no experience managing development
They had no way to evaluate the ODM’s progress and were at risk
of missing their ship date and exposure to serious functionality &
warranty issues
Lessons learned:
• Have some people on the team who had actually done product
development before, including an architect & a QA person
• Do due diligence on the partner’s true capabilities


Doing due diligence: domain competency
Look really closely at what they have done in the past:
• Is it really relevant?
• Are the people who did it still there?
Meet the people who did those projects
• Get them on your design team & make sure they are taken care of
Check for a deep understanding of your product’s context
• Your application, target geography, target customer
How do they choose their partners?
• If they outsource to others, how do they qualify their 3rd parties?
• Look at: selection criteria, quality, IP management, etc.


The second biggest reason to outsource:

Because you must


Some examples

Hospital beds with more technology than your car
Cars with more technology than consumer electronics
New combinations of technology
• e.g.- GPS & GIS, sensors, database to find open parking spaces


New capabilities – make or buy?
D.com


Background: D.com
Successful reference site
Primary revenue from display
advertising
Needed to develop new
products to escape
commoditization (e.g.-
games, mobile apps, etc.)
Choice: hire in-house talent or
outsource development of
new products?


Had been outsourcing from early on
Development processes including a change management system
(JIRA) to manage ticketing, attaching all docs and requirements
This forced the discipline of being explicit about requirements
and expectations and the use of clear mechanisms for
exchanging requests and agreements


Some Caveats


Implications for cross-generational evolution of
platforms & architectures
Outsourced provider development
• Takes several generations to get them up to speed
• Progression is from commodity design to subsystem design
to entire cost reduced products to whole products
Design +
responsibility
to suppliers Supplier
But… R1 success
+
+ Internal
• Erosion of internal capability
support
Ability to
provided
• Switching costs + switch
- B1 +
Internal
capability

Outsourcing and startups

Lots of pressure from VCs to use offshore development
Can accelerate TTM if you have the right in-house architecture
team and manage the outside team well
Can incentivize the partner w/warrants in lieu of (some) cash

But
It can affect valuation in M&A exits
Any uncertainty about IP can kill the deal


Discussion


Cheaper labor is always better, right?
Kodak and digital cameras


“This isn’t working…”

‘Before state’:
• No meaningful market share in digital
cameras
• Products are too expensive and
unappealing
• Customers, R&D + marketing in Rochester,
manufacturing in US Marketing
Custome
• Having a credible camera offering was rs
deemed critical to the company’s future
credibility in the digital photo space
Design Manu-
facturing

Key question: How do we configure
ourselves to be competitive?


Key strategic decision:
“Where do we put the ocean?”

Marketing Design
Manu-
Customer facturing
s


What do we do where?

STRENGTHS: STRENGTHS: STRENGTHS:
•95% of customers •Highly capable •Growing capability in
•Existing R&D team manufacturing base manufacturing base
•Deep understanding of US •Strong camera industry •No camera industry
market & customers •Near comp. suppliers •Talent is 10% of US cost

BUT: BUT: BUT:
•Can’t design their way out •No customers •No customers
of a paper bag •No R&D team •No R&D team
•Talent is expensive •Talent costs 125% of US •IP protection is iffy
•Weak manufacturing rate


Choose a plan of action for each element

1 2 3 4 5
consolidate
Integral
Weak
Modular
High Divest or exit
Maintain capability
Slow Integral
Directed
Development
Weak
0. Start source
Modular
Here
spin out divest
Strong


Weak
Low
Modular
Strong
change architecture
Slow Integral

Weak Any outsource

Adapted from unpublished work by Charley Fine, www.clockspeed.com © Clarify LLC, 2009 All Rights Reserved

Solution: Source the best talent
wherever you can find it.

Acquire
Chinon

Manu-
Market-
Design Manu- Low-end facturin
facturin
Custom ing g only g
ers


Global Sourcing Of Design Santa Clara 10 12 2009

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