Insight

The need for delivery and supplier resiliency

Are your recovery service levels up to date?

Alicia Kuhn

Alicia Kuhn

Director Advisory, Procurement & Business Services, KPMG US

+1 404 219 7978

Kim Huddle

Kim Huddle

Managing Director, Consumer & Retail Industry Lead, KPMG US

+1 832-515-7106

As our economy begins to spring back to normalcy from the initial COVID-19 response, the one-third of companies that reported less-than-hoped-for resilience from their offshore providers (May 2020 KPMG survey), many are examining the resiliency of their arrangements.  On the opposite side of the coin, only 7% of respondents reported issues in near shore locations.

For offshore users, COVID-19 exposed risks that include leanness unable to respond, infrastructure issues, and socio-economic issues.  By creating super-lean organizations, companies have increased efficiency and made it possible to serve more stakeholders across the globe. But “as the pandemic has made abundantly clear, the hyper-efficient, low cost country supply model is [less] resilient”, according to John Jullens, Strategy Principal from KPMG.  Infrastructure limitations to homes in some countries extended recovery time.  And, in a related issue, socio-economic status of some workers posed insufficient bandwidth for work-from-home resources who had elected no or low bandwidth contracts for their personal use.

Many 3rd party arrangements conceived of local and regional business disruptions, but not all contemplated global disruptions.  Systemic stress has ranged from overnight revenue shrinkage to overnight revenue explosion.  Disruptions such as this have made obvious that issues from operations as well as cash flow and borrowing mechanisms can jeopardize the enterprise and its place in the marketplace.  In some cases, BC/DR provisions that gradually stand up operations can be of little use where brand and enterprise viability are at stake.

One tool that can help deal with business disruption is resiliency.  But such a notion is not always contemplated in 3rd party service provisioning.  Giving life to the concept of resilience, a concept that requires clear definition, is purposeful design.

KPMG advocates for resilient design, which has two vectors; resistance and recovery. Michigan State University presents a model for supply chain resilience that we think instructive - 3rd party supplier resiliency.  In their model, resistance is the capacity of the system to avoid or contain disruption, and recovery is the capacity to stabilize and to return to normal.

In times of emergency a range of disruptions may occur.  These could include things such as personnel unavailability, calls for cash conservation, systems outages, process disruption, order cancellations, production reforecasts, extended payment terms, reforecasting of cash, demand for scenario development, failure of an entire delivery channel (e.g. offshore delivery model), and more.

Key tools to avoid and contain disruption and to stabilize process and 3rd party supplier performance along with recovery from disruptions are planning and testing, location strategy, delivery model, horizontal work shifting and partnership assessment.

Planning and Testing:  Evaluation of risk should include the development of an analytical toolkit that contains models of potential events, tabletop workshops and simulations.  Simulations, for example, can be used to model and test the various possible ramifications of an event such as relocating a plant, or the result of a catastrophic event.  Models and workshops can be used to test the cost impact of redundancy built into critical processes, and analytical risk tools can be employed to accelerate the process.

Location Strategy:  Reshoring to nearshore locations that better support new work environments could be tied to regions with better infrastructure, regulatory, and socio-economic conditions (e.g., Central America, Central and Eastern Europe).  The operational footprint should not just consider pure economics, but the tax implications and real estate demands as the enterprise adapts overall to a new footprint recognizing that greater speed to a remote model is possible.

Moves away from global low cost offshore centers is not, however, an omnibus assumption.  Many offshore markets, captive offshores and 3rd party providers exist in areas of strong infrastructure and have proven their agility to move to work from home and other flexible work models.  The necessary context is to examine offshore market conditions, shifts in national policy, and historic and potential response to crisis.

Delivery Model:  Any realignment of production locations may require evaluation of embedded resources.  It is possible that lessons learned during lockdowns might permit or even create a preference for remote resources where they had historically been local or embedded with operations.  Similarly, a new view of the use of centers of expertise and their deployment may have emerged that can be driven into delivery models with a new definition of expertise, or a move from physical to logical centers of expertise.

Legacy thought on labor as a delivery channel has morphed into three distinct elements of labor; center-based labor, distributed labor, digital labor and flexible labor arrangements.  Flexible labor includes both work from home and gig labor (independent contractors, online platform workers, contract firm workers, on-call workers and temporary workers).  Such flexible labor services can provide a robustness and resilience of their own.  Changes to a remote workforce, for example, may provide opportunities for hiring in lower cost areas while permitting a broader distribution of risk.  Reemphasis of cross training and the insertion of redundancies in critical processes to make the core function and 3rd party contracts more resilient in a post-pandemic world should be considered.  Horizontal work shifting from one channel or sub-channel to another can likewise offer temporary relief in an emergency.  And finally, process automation can be employed to lend greater resilience.

Assess Partnerships:  Partners that have displayed agility and responsiveness, who have demonstrated a capacity to avoid and constrain failure and disruption during COVID -19, may offer best of breed opportunities for designing into other solutions and contracts.  After-effects meetings and lessons-learned sessions could provide high value.

Other Considerations:  Where levels of activity are concerned, BPO contracts may include provisions for minimum revenue, renegotiation provisions for activity levels outside a predefined range, temporary relief from service level obligations, and other provisions that require attention or renegotiation.

Where loans under the CARES Act are concerned, entering into such a loan may trigger a prohibition against outsourcing or offshoring jobs for the term of the loan plus two years beyond repayment.  If CARES Act loans have been entered into, the company may be in a position that requires BPO exit (see CARES Act page 523, lines 18 through 21).

In as much as we have experienced multiple pandemics and epidemics in the last 20 years (SARS, MERS, H1N1 and now COVID-19), is a pandemic scenario necessary in your BC/DR plan?  And are your recovery service levels up to date?

Conclusion:  Resilience is a critical concept to drive into operations to help manage high impact/low probability events.  The well-conceived business continuity plan is still valid so long as it is resilient to the circumstances at hand.

Listen to the most recent podcast from our GBS team here.  Visit KPMG’s resource pages on to the COVID-19 page and Global Business Services.