Sourcing strategy Capabilities- Valutrics
Outsourcing works because it can deliver higher value and frees up internal resources to focus on a company’s core competency. Outsourcing has become a mainstream business practice and the factors behind the increasing use of outsourcing are becoming far more complex than the simple need to cut costs and increase IT efficiencies.
Outsourcing can provide a higher level of service than might reasonably be expected from an internal department. Faster response times, higher compliance, and convenient access to benefits engender employee loyalty, minimizing liability and turnover costs.
But senior executives of many organizations still have not realized the full potential of the “O” tool. Most of the time, outsourcing is resorted to as a tactical tool when forced by squeezing margins, either due to a loss of pricing power or an increase in the cost base. In such circumstances, more often than not, the desired results do not materialize. But blaming the tool is unjustified. Rather, in most cases, the planning and implementation is erroneous. It needs to be understood that the benefits of outsourcing go far beyond cost savings. Enterprises must build outsourcing relationships as long-term partnerships to further the strategic goals of the organization. In the connected economy companies need to build an internal competency around outsourcing so that they can work with partners to build the kind of responsive business ecosystem they need to compete.
It is pertinent to define two important terms:
Business strategy: The first step toward any business evolution. Everyone would agree that to stay in business in the competitive, connected economy of the third millennium, business strategy must drive every decision. Business strategy refers to a broad and general concept, including the broader business approach, that is, markets, business models, competitive approach, business processes, partnerships and so on. It also defines a set of objectives, typically associated with a perceived value.
Sourcing strategy: The sourcing strategy defines who will fulfill various parts of the objectives as defined by the business strategy. The activity could be a project, a service or a process, related to IT or the business processes. The provider can be internal or external like an offshore external service provider (ESP). In a classic world, the trend was toward integrating the organization forward and backward, which typically resulted in big monolithic organizations. The mantra was to define the business strategy and quickly develop/ procure the abilities required to fulfill the business objectives. If internal capabilities were not enough or difficult to develop, the organizations used to look, often just tactically, to the external market to fill the gap. We think this kind of business culture is on the wane and a partnership based world is fast emerging. In this world, businesses will become far more virtual than they are today and highly dependent on their partner network, making each organization’s value chain more connected to its partner’s network than it is today.
Changing customer preferences and technological advancement have brought an end to the command-and-control era for enterprises. The days when an enterprise could generate value simply by building a better device (with a few partnerships) have given way to an age of interconnectedness in which value is built as much by collaborating with the right peers as by providing great products and services.
For organizations in this world, the sourcing strategy would be the second step. In this dynamic world, once a business strategy or initiative has been defined, that is, what is to be done, the next step is not to define how the fulfillment of defined objectives is achieved. Rather, the enterprises would have to identify what sources will fulfill different business processes, that is, who will do it.
This is an emerging world in which objectives become more important than how to achieve them, and external collaboration is leveraged not only to extend but also mostly to add value to the enterprises’ business capabilities. This move can be synthesized into an evolution from tactical “out tasking” toward strategic sourcing.
In such a world, the sourcing strategy is practically fused into the business strategy. The business/sourcing strategy will be built with the network partners, and those that fail in their sourcing strategy will also fail as a business. We believe that a sound sourcing strategy has enormous potential to become a competitive advantage in the connected economy. We reckon that two key tendencies are driving this paradigm shift and forcing enterprises to fundamentally reshape their business strategies while also constructing a sourcing strategy. For example, the shape of the telecoms industry has changed beyond recognition over the past 10 years as integrated monopolists adopt radical sourcing models. These changes are also reflected within the airline industry as it has disaggregated into a constellation of best-in-class service providers.
What are the drivers of a partnership-based world? There are two key tendencies shaping a new partnership-based world: increasingly competitive thresholds due to globalization, and the falling cost of communication with the resultant industrialization of the value chains of service sector firms.
Increasing competitive thresholds due to globalization Global market expansion and the growing availability of products and services lead to increased competition, and consumers demanding better products and services. Businesses that were accustomed to running in a command-and-control environment where they had direct control over most of their value cycle must be prepared for the threat of competitors with better ability.
In the changed environment, they can lose business to a competitor with a better product or service, or a better production cycle and, therefore, a lower price. They can lose business because a competitor has a better and deeper understanding of client needs or a more established brand. The world asks for excellence, but it is impossible to excel in every aspect. Businesses must make tough decisions regarding the core value and specialization that will drive the entire business strategy. Success requires that everything that is part of the core business must achieve excellence and become a true competitive weapon and differentiator. Sourcing in this area will be very specific and controlled.
The rest of the enterprise cannot be left aside, as it is part of the value chain and includes unavoidable functions and processes. The objective of non-core processes will be set at a “competitive parity” level. As the IT/business process service market develops, partners that have such processes as their core business will make them available at a “competitive parity” level. This is where the sourcing strategy will help enterprises to choose the right partner and build a long-term strategic relationship and where the market for BPO, BSP and specialized horizontal and vertical utility providers applies.
Industrialization of service value chain We are now riding a tidal wave of change that has created an information assembly line – information now can be standardized, built to order, assembled from components, picked, packed, stored and shipped, all using a process resembling manufacturing’s assembly line. In the early twentieth century, manufacturing moved from the local shed to large-scale, mass-production facilities. Assembly line and economies of scale became the name of the game. By 1950, the small was out and big was beautiful.
By 1980, manufacturing firms in the U.S. started realizing the potential of offshoring production. In 1985, AT&T transferred production of residential telephones from its U.S.-based production facility to Singapore. In 1987, GM phased out production of some of its cars in the U.S. and moved it to Mexico.
At first, firms used offshoring as a tactical move to reduce costs but soon the sourcing moves snowballed into strategic weapons. Corporations that showed flexibility and adopted new strategies, such as IBM, GE and Intel, survived and succeeded. Companies like Zenith, American Motors and RCA, which remained entrenched in old positions, have gone away. The offshoring movement in manufacturing started with the globalization of markets for manufactured products and a drop in transportation costs. Different components of a product were manufactured in different places, transported to different locations closer to the big markets, assembled and marketed. With the advent of information technology, a similar phenomenon is revolutionizing the service industry as well. Technology is creating an information assembly line. Industrialized information becomes steadily more efficient, less expensive and more highly automated. The cost of logistics and storage are minimal; only labor and intellectual property matter. Technological advancement over the past two decades has enabled us to transfer massive amounts of data and information on the Internet at a very low cost, from one point in the world to anywhere else, in no time and with virtually no loss of quality.
Similarly, steep drops in international telephony tariffs and huge bandwidth mean that the call center for customer relationship and query resolution can be located in nearby Ireland where again the wages are far less than wages in the U.S. Except for core activities like product design, pricing, risk management, brand management, and portfolio management, where the scope of outsourcing will have to be limited and controlled, technological advances have made outsourcing a lucrative option. A high degree of outsourcing is possible in support activities like IT infrastructure (software development, network administration, and so on), HR functions (payroll processing, recruitment, and so on) and general administration (accounting, tax related matters, and so on).
It is therefore imperative for enterprises to map out their sourcing strategies carefully, as failing to do so might seriously undermine their competitiveness in the connected economy.
Various dimensions of strategic sourcing Strategic sourcing is a critical competence that will provide business value. While the pressure on margins pushes organizations toward cost control measures, the need to streamline and interconnect business processes all along the value chain is high.
Strategic sourcing can be a core capability for business and government enterprises. It allows them to manage innovation, and deliver processes and services effectively and efficiently to the internal organization, business partners, and clients or constituency.
According to Gartner, there are five key dimensions of strategic sourcing:
- Business goals
- Internal capability
- External market capability
- Sourcing models
- Sourcing governance.
Business goals
The key elements in drafting a sourcing strategy are the defined business goals, the competitive position and the value proposition of business. Strategic sourcing is not just about outsourcing current business or IT services. The basis for executing any IT-enabled business strategy is part of the overall business question: How should an enterprise compete in the connected economy? In the changing world, sourcing strategies and their execution will encompass a wide range of business and IT initiatives aimed at exploiting a perceived business value identified by the business strategy.
This perceived value can be external (that is, initiatives regarding supply chain, CRM, new products and markets, and differentiation over the competitors) or internal (for example cost reduction, improvements in product and service quality or time-to-market, and systems supporting the virtual organization). The sourcing strategy must ensure that the business objectives are fulfilled and other relevant dimensions of this subject are understood and evolved accordingly.
Internal capability
All enterprises candidly admit that their internal IT capabilities and resources (that is, competences, business processes, IT processes and services) can no longer cope with their changing business needs in the connected economy. Thus the traditional outsourcing deals will not be able to cope with the pressure of continuous business change. Changing technologies and competitive pressure are leading to the increasing use of external service providers (ESP’s). Most current business processes are suited to change in the connected economy. Many manual internal processes – which are often bureaucratic and paper-based – will be superseded by the more direct interaction of IT systems, for example build-to-order systems connected to a web B2C front end or a B2B marketplace.
The sourcing strategy must help organizations to bridge the gap between the capabilities required to succeed in this fast-changing world and internal capabilities.
External market capability
Although the market for IT services is still in its infancy or early maturity, the service market for business processes, for example finance and administration, human resource management (HRM), logistics, general services and real estate management, should be considered more static and mature than IT services.
Besides business goals and internal capabilities, the sourcing strategy is also defined by the external market capabilities. The connected economy is changing the delivery methods of many traditional business services or processes, for example applications running as part of BPO are becoming web-based and interconnected with other customer or third party applications. The sourcing strategy needs to be flexible to adjust to the improvement in technology and therefore external market capabilities.
Sourcing alternatives and models
Once the internal and external capabilities are determined, these capabilities can be engaged and exploited through different sourcing approaches and models. This is largely a make-or-buy type of decision. Various arrangements such as partnership, joint venture, merger and acquisition, and so on can be used, depending on a number of factors.
Sourcing governance
The model of sourcing governance is in effect the sum of management capabilities, methods and processes, organizational roles and responsibilities, and rules and agreements that support the dynamic delivery of services in a mixed (that is, internal and external) environment. The model must cross traditional enterprise boundaries and be installed as part of the business, the internal IT function and the external providers, including, to some extent, even subcontractors and provider’s partners. The two key elements of sourcing governance are skills and processes.