A Modelling Project Supporting an Outsourcing Decision –

Did We Miss an Opportunity to “Speak Truth to Power” and Get

Ourselves “a Better Client”?

Andreas Größler

Radboud University Nijmegen

Key thesis of an earlier paper (Snabe and Größler, 2006)

System Dynamics is giving away

potential for growth by concentrating on

traditional (expert-dependent),

exploratory (with open results),

academic (generation of knowledge)

modelling.

Case study company

• International company, market leader• Research and development (R&D) is critical• Un-hierarchical organisation• Case study: internationalization of major R&D

division in 2005

Case study: R&D location strategy

This will in R&D be achieved via:

• Increase of productive capacity

• Reduce cost of production to compensate for the required investment

• Free up capacity for new tasks in high-cost locations

• Build up capacity close to emerging markets

• Optimize overall delivery structure

The Company proactively accelerates the transformation towards

a “Global” Company – in R&D, sales and delivery – to retain the

company’s competitive advantages and manifest the market

leadership.

The reinforcing growth loop of internationalization

company growth

strengthening low-cost locationswithout reducing high-cost locations

improvedtime-to-market

reduced unit-priceof R&D

maintained motivationin high-cost locations

improved competitiveness

+ ++ +

+ +

+

+

Business targets (2005)

• No lay-off‘s in high-cost locations due to location strategy

• Growing overall capacity and thereby reach target level for FTE’s in cost-effective locations 2007: 25% of the divisions total population (from 10% today)

• Comply with budget 2005 board guidelines• Overall no increase of cost of R&D in 2005 • No negative capacity effects in 2005 due to

transfers

Some ”political” challenges

• Fear of losing jobs

• Fight for power-bases

• ”We know what we have – we don’t know what we get”

• Quality of work compromised

The motivation behind the use of modelling

• Creating a structured and “objective” frame for the rather emotional and diverse discussions

• Establishing a forum for exchange of experiences and best practices

• Identifying the best way to reach the business objectives and targets outlined by the board (analysis of scenarios)

• Making the change process effective and efficient

The model

New hired

FTE LC

Productive

FTE LC

Productive

FTE HC

Rookie

FTE HCHCjob-trained

LC TOTAL ROOKIE TIME

LC QUIT

FRACTION HC QUIT

FRACTION

HC ROOKIETIME

INI TOTAL FTE LC

INI TOTAL FTE HC

total FTE LC total FTE HC

LC person cost HC person cost

cost per month

LC TRAININGCOST

HC TRAININGCOST

production per month

LC ROOKIE

PRODUCTIVITY HC ROOKIE

PRODUCTIVITY

Rookie

FTE LC

LC 2a LC2b

LC TRAINING TIME

New hired

FTE HCHC

trainedHChire

HC TRAINING

TIME

REPLACEMENT

IN HC VS. LC

INI HC AVERAGE

PERSON COSTS

HC PERSON COSTINCREASE RATE

<HC hire>

LC HAND-OVER TRAVEL COST

HCquit

<HCquit>

<HC quit>

LC ONGOING

TRAVEL COST

LC PRODUCTIVITY

REDUCTION

LCquit

HC CAPACITY USE

ON HAND-OVER

<LC quit>

LC replacing HC quit

handover capacityreduction

HAND-OVER FRAKTION

OF LC ROOKIE TIME

handovertravel costs

H-O-R

FTE LC

LC1a

LC1b

<New hired FTE LC>

<H-O-R FTE LC>

LC

flo

w input

LC1c

LC new hire

LC repl. hire

LC PERSON COST

INCREASE RATE

INI LC AVERAGE

PERSON COST

ADDITIONAL

GROWTH

Lessons learned

• Project owners feel comfortable

• Process as a framework for discussion

• Quantification was important:

– Provoked best-practice discussions

– Aligned business case parameters across business units

– Even for factual numbers, people had often misperceptions

• Value of visualisation (”seeing is believing”)

• Learning and alignment facilitated

The project team’s main conclusions from the modelling sessions

• Difficult to avoid productivity loss in year 1

– Most important factors in limiting the ”worse-before-better” effect is reducing the hand-over period and reducing high-cost employee efforts in the hand-over process

• If the capacity build-up has to be self-financing (to some degree), non-replacements in high-cost locations is a necessary policy

• It is more important to focus on reducing the time allocated to new-hire training compared to reduce the cost of new-hire training

Further conclusions (from the discussions rather than the modelling)

• Cost instead of head-count orientation

• Transfer planning; strict replacement management– To secure motivation and morale

– To plan for HC replacements not made by externals

• Best practices to be coordinated– Hiring, bridgehead, hand-over procedures etc.

– How to ensure fast productivity of new employees

– Cost-savings in practical aspects, travel etc.

Targeted participative modelling vs. traditional exploratory SD projects

Messy

problem

Exploratory

Modelling

Problem conceptualisation and

working simulation model

Identification of new

strategies/ policies

Individual learning and

alignment between key change

agents

Business

objectives

& targets

(what to do)

Targeted

Participative

Modelling

Discussion framework established

with respect to change management

Identification of

implementation strategy (how

to do)

Individual learning and alignment

between key change agents

Use of system dynamics in targeted organizational interventions

Advantages

– Learning of behavior & causes

– “Objective” framework for discussions

– Scenario testing

– Complement businesscases in Excel

Disadvantages

– Might be complicated to understand for some

– Not precise (big picture only)

– Can be perceived as on-top time-consume

– Might be manipulative

Discussion of ethical aspects

• Modelling as pacification

• Coercive modelling

• “Limits to growth” not analysed

• Pre-test of model

• Mental models of management

• Short-term benefits for employees

• Academic issue?

• Boundaries of modelling