Speech by Mr Heng Chee How, NTUC Deputy Secretary-General, at the Best Sourcing Initiative Workshop organised by NTUC, at the British Club on 8 October 2007, Monday, 9.30 am
Dear Friends, Ladies & Gentlemen,
Good Morning.
Thank you very much for giving me this opportunity to share with you my thoughts on this important subject of Best-sourcing.
1. When it comes to outsourcing, who are the interested parties? There is the Buyer working on behalf of the consumer. Then there is the Service Provider, working on behalf of the shareholder. Finally, there are the workers of the Service Provider, earning a salary for their work.
2. What is the basic role of the Buyer? It is to get best sustained Value for Money for the outsourced service. So it will compare among competing Service Providers and pick the one it believes can best deliver that sustained Value.
3. What is the role of the Service Provider? It is to put in the most compelling bid for the service contract, and leverage on all its strengths (tangible and intangible) to maximize the likelihood of securing the contract. The bid itself must be economically viable for the company, because it is not a charity.
4. What about the role of the worker? He is to work to the best of his ability, and constantly take advantage of opportunities to improve his expertise and work quality so that the company will find him valuable to employ, and to reward him fairly for his work.
5. So let us imagine that a certain service that involves lower wage workers is to be outsourced, and the Buyer calls an open tender. Several bids were received from competing Service Providers. The Buyer studies the details of the bids against the clear and detailed specifications of the tender. There is the bid price, of course. But there are also different ways in which the bidders have proposed to meet the standards and quality outcomes demanded. Some are more credible than others. And some bidders have stronger track records than others. So, after weighing all factors, the Buyer awards the contract. Previously, the Buyer tended to give the contract to the lowest bidder, but it has changed over time. It now wants best sustained value. And that does not always mean giving it to the lowest bidder. Furthermore, the Buyer has credible means to monitor the performance, standards and quality during the contract period, and would not be taken for a ride with empty promises. It is also thinking of requiring minimum skills qualifications for contract award. So it is doing its Buyer’s job right, and is best-sourcing. Well done. But it has this odd feeling that the contractors are still dancing to the old tune, and how is it to tell them to behave differently?
6. The story now shifts to the Service Providers. They have invested in machinery and other overheads to get into the business. They have to get contracts to pay for these overheads at least. From experience, they had been working to a system that tended to give contracts based on price. So they, and their competitors, have all learned and adapted to that environment, and concentrated on giving the lowest bid in order to win contracts.
7. They know that engaging in a price war will not make sense in the end. But if that is what they think the Buyer is rewarding, then what choice do they have? And after they have put in such low bids, they have little margin to do anything else, like making new investments, like improving the pay and prospects of their workers, and like learning how to differentiate their service from that of their competitors.
8. Some of the more ambitious companies may also think that they have deeper pockets than their competitors, and hope that the competition will die off before they do, and then perhaps they will have better market power. Other companies heard that some Buyers have already changed from price-sourcing to best-sourcing, but they wait to see whether that is talk or real. They wish the Buyer and their competitors would do things differently, and then life would be less distressing for them. All their competitors felt the same way. In the meantime, the industry stagnates and even spirals down.
9. Now look at the worker in the company. He was doing his job the best way he knows how, for pay and conditions that are modest. His skills and productivity are not improving much because the company is not investing much into those areas. It seems to be struggling to survive the competition. From time to time, his company loses a contract and he loses his job. The winning bidder offers him a job but tells him that his pay is less than that in his last job because the margins are worse in the new contract. He takes the job because the alternatives are few for persons of his profile.
10. So here we have it – 3 parties to an outsourcing contract, each responding rationally to the reality he is facing, and yet the result can sometimes be a vicious cycle of price war, stagnation and decline if not managed well.
11. How can an industry and its players avoid such a scenario? I suggest 5 ideas for discussion:
12. Buyer education and recognition – don’t just look at price, but value (standards, quality, “reserve price”, etc.) Let us create more platforms to recognize buying organizations that are consistently and effectively best-sourcing. Ask them to share their experiences so that others can learn and follow. Give their corporate reputations the respect that they deserve.
13. Product and Service differentiation by providers (including trust building (Prosec), initiative in service enlargement and integration with buyer (ISS-NUH), etc.) – Value Creation. There is a saying that if you think you are a hammer, then everything looks like a nail. For Service providers to wean themselves away from pricing as the only tactic, they have to learn what other ways they can differentiate their service and still compete successfully. Here, too, we must give credit and recognition to those who have forge ahead on this path, and explain the value of this to industry, as well as provide avenues for such knowledge to be shared and spread. Companies need to learn such skills, just as individuals need to upgrade their skills. With a more diverse set of tools, companies will have more ways to package and market their offerings.
14. Having said that, we must not go away with the delusion that price is not important in winning contracts. Of course it is important. And companies must find ways of sustaining and improving their cost-competitiveness.
15. One of the cost elements faced by service companies is the healthcare and health insurance cost of their contract workers, both local and foreign. To help employers in this area, NTUC INCOME and NTUC Healthcare have jointly designed a comprehensive medical package at an attractive price that features outpatient and in-patient coverage, one-stop medical screening and work permit processing (in the case of foreign workers). They believe that employers choosing this product can save up to 50% and 15% on their outpatient and inpatient expenses respectively. They will be happy to provide details on request.
16. Worker upgrading and Job Redesign and Recreation to lift individual and profession standards and performance – Productivity improvement. Skills upgrading and certification will be part of this process. Sustained across time, this will boost the value of jobs and enable workers to earn more, and have better prospects.
17. To bring such help to more workers, the UCCW is mounting a series of road shows nationwide starting in November. The road shows will inform such workers of their rights, help them enhance their employability and explain to them the benefits of the Government Workfare Income Supplement and how to sign up. In the meantime, low wage workers who become members with the Unit for Casual & Contract workers by the end of October are also eligible to apply for NTUC Healthcare vouchers funded by a $150,000 donation from NTUC Healthcare.
18. Sector upgrading to lift overall standards, performance and outcomes. This includes Process redesign, breakthrough technology, cost structure reform, etc. Beyond what individual workers and companies can do with their tendering practices, industry bodies must also work with relevant partners and agencies to transform their respective industries. The value-add and productivity levels of each industry are fundamentals that define the size of pie. Grow these, and the pie will grow.
19. As the saying goes, “If you want a different outcome, you must do things differently”.
20. I hope these thoughts can be helpful to you as you share your experiences and discuss ideas to spur best-sourcing in the industries you come from.
Thank you.
