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Global Outsourcing Strategy Planning

 

Many organizations view sourcing as an operational decision made only in response to the business’s strategy. Sourcing as strategy suggests that, instead, outsourcing is an integral part of the development of that strategy; that an organization’s sourcing decisions are essential to its ability to create competitive advantage. This changes when in the strategic process the question of the sources of competitive advantage gets asked and answered. Sourcing as strategy is, then, a top-down approach to identifying the sources of competitive advantage—both internal and external—and then ensuring that the organization’s investment and execution plans are aligned with this strategy. Instead of positioning business process outsourcing as an outcome of the organization’s investment decisions, sourcing as strategy positions it as an essential driver of those decisions.

The first step of the process is to segment the organization’s marketplace. This segmentation is typically done by identifying the combinations of customers served and the products and services with which they are served. These groups may then be further broken down by geographies or other delineations unique to the markets that the organization operates in or intends to operate in. When complete, this segmentation may result in as little as two or as many as dozens of segments. The identification of these segments is the essential first step in developing the organization’s strategy and is the basis for all the steps that follow.
The second step is to project the changes in these segments over the planning period. Typically, this planning period can be no more than two to three years. This shortened strategic planning time frame is a direct result of the hyper-competitive environment. It is also a key reason that internal investments, which typically require much longer periods to achieve a full return, can no longer be the default option for organizations. The potential changes in the environment are looked at in terms of projected changes in society, business, and their overall structures; changes in the customers themselves, including their needs, preferences, and financial situations; and, of course, changes in technology and its potential impact on all of the other factors being considered. There need not be only one projection. Scenario planning can be used to describe more than one possible future along with the unique characteristics and probabilities of each.
The next step is to assess each of the segments in terms of their overall size and growth. Just as importantly, each segment must be looked at in terms of the current competitors, likely future competitors, and how each competitor may fair in terms of its market share.
The fourth step is to decide, based on the opportunity available to the organization, which segments to pursue and what it will take to dominate in each. The former means selecting those segments that are most attractive in terms of growth and opportunity. The latter means deciding what competitive advantages the organization needs to have in order to not only successfully compete, but to move itself toward a position of leadership.
These needed competitive advantages should be stated in specific, measurable terms. If cost is an element of advantage, then what cost points does the organization need to hit to be successful? If differentiation is the road to dominance, then specifically what will that differentiation be? Will it be design, features, performance, quality, ease of use, prestige, speed, customer service, guarantees, or other characteristics? And, how are they to be objectively measured?
At the end of step four, the organization has created a list of market segments it desires to serve and what it believes is needed to compete and win in those segments.
The fifth step, source, is then the essential link between the market-facing side of the organization’s strategy and the sourcing side. It is the mapping of the required competitive advantages across the operational activities of the business to determine where and how each advantage will be created. Some of these competitive advantages may be found in the organization’s internal operations, but others are just as likely to be sourced through external relationships, while still others may come from unique ways the organization blends its internal and external sources. All other activities—those that need to be done and done well but offer little or no opportunity for creating a competitive  advantage—are nonstrategic and should be sourced at the operational level on a purely competition-driven basis. Sourcing as strategy is a seniorlevel executive process, competing nonstrategic, commodity activities is an operational-level process.
The sixth step is to forecast the business outcomes from these decisions about segments and sources of competitive advantage. For commercial organizations, this forecast is in terms of revenue, costs, profit, and other key financial indicators. For noncommercial enterprises, these outcomes may be forecasted in different terms, such as budget targets and the number of constituents served. This is the process of taking the strategic plan and turning it into a set of forecasted outcomes. This can be expected to create a slight iterative loop where the segments served and sources of competitive advantage get adjusted to bring the forecasts in line with intended outcomes.
The seventh and last step of the top-down process is to invest in execution. This means allocating all the forms of investments available to the organization: its capital, its operating funds, its people, and its intellectual properties. This alignment—this fit, if you will—between the organization’s strategic plan and its execution plan is the essential step in transforming strategy into action.
This seven-step process makes sourcing an integral part of strategic planning. It expands the view of the sources of competitive advantage available to an organization, thereby enabling it to better compete in the market segments it chooses to pursue. It also elevates the organization’s outside relationships so that the ones that contribute competitive advantage are treated as an integral part of the organization’s strategic planning process and as part of its network of strategic assets.
The top-down approach   requires that the strategic plans of the organization and of its key outside sources be connected. The result is a weaving together of a network of relationships at the highest levels of the organization.

Zero-Based Sourcing
Just as organizations have used newer budgeting approaches, such as zero-based budgeting, to improve the linkage between their goals and how they spend their money, new approaches to how organizations go about making sourcing decisions are needed as well.
Sourcing, just like budgeting, has traditionally been done assuming that the recent past is a good predictor for the near future. That is, that future types and levels of internal sourcing will generally match current ones with some incremental adjustments up and down in response to specific changes in the business climate. But, just as this traditional approach to budgeting has given way to newer ones, global business process outsourcing requires that organizations rethink this traditional approach to sourcing.
Zero-based budgeting requires that the funding of each and every part of the organization’s operation be fully re-justified at each planning cycle from an assumed base of zero. Zero-based sourcing, then, means that the sourcing decision for each and every aspect of the business’s operation be re-justified at every business planning cycle from a base of zero. The fact that an area of the business’s operation is internally sourced today does not predetermine how it will be sourced in the future. With zero-based sourcing, the source for every part of the business’s operation is routinely retested against the business’s needs and the marketplace of available sources, and that retesting takes place with every business planning cycle.
The question then becomes, If we were starting this business from scratch today, how would we source that work? Are new competitors internally sourcing the same things we are, or have they identified new,  external sources to leverage their competitive advantage?
Adopting zero-based sourcing as a management practice can help move the organization down the path toward an optimal sourcing strategy much quicker. It frees the organization from the need to justify changes against an assumption of the status quo. It puts every part of the organization on notice that its subject to the same testing at every planning cycle. Just as brand-new parts of the organization are sourced from a blank piece of paper, existing parts of the operation are sourced the same way. Outsourcing is no longer positioned as an intervention directed toward specific parts of the business because of implied problems; it becomes seen as part of the regular strategic planning process, just like capital allocation and budgeting.
Zero-based sourcing is, of course, not the only new approach that can be borrowed for the world of budgeting. Another one is just-in-time sourcing. Here, the organization adopts a continuous sourcing analysis that is performed throughout the planning period and takes place on a project-by-project basis. Current sourcing decisions are considered to last only as long as the projects that created them. In fact, shared services centers are often managed exactly this way, with the organization’s internal customers free to take their business on a project-by-project basis to the source they believe can best contribute to the outcomes they seek— whether inside or outside the organization. Shared services centers essentially compete for the internal customer’s business on a day-in and day-out basis.
These approaches suggest that all parts of a business’s operation— including those internally and externally sourced—need to be constantly tested against the marketplace of sources emerging worldwide. Any delay in identification and consideration of these new sources can contribute to higher costs and reduced competitive positioning. Adopting zerobased sourcing can accelerate the process of change and, thus, better recognize any rapidly emerging opportunities. In evaluating which of these sourcing approaches to adopt, organizations first should look at how quickly their business environment is changing relative to the costs of re-justifying its current sourcing decisions. Certainly these newer approaches will not be the best use of resources for every organization. But for those organizations that already recognize the need to respond to an increasingly hyper-competitive environment, these approaches can accelerate the needed changes and bring about an understanding and adjustment to the new business realities that much sooner.

Competitive advantage in Zero-Based Sourcing
Since they were first introduced by the author in 1996, the following three questions have been used by hundreds of organizations to determine the areas of the business that are least likely to deliver a unique competitive advantage:
1. If starting from scratch today, would we really build the capability inside?
2. Are we so good at it that others would hire us to do it for them?
3. Is this an area of the business from which our future leaders will come?
If the answer is yes to all three questions, then the activity is either a source of unique competitive advantage or close enough to one to remain internally sourced until evaluated from a more strategic, top-down perspective.
If the answer is no to any of the three, then looking at what the marketplace of external service providers has to offer is appropriate.
The first question of the three-question test captures the essence of zero-based sourcing. It asks what the organization would do if it was being formed today. Would it invest in creating the capability internally or would its leaders’ first inclination be to look for sources available in the external marketplace? It also tests the organization’s existing sourcing choices against what new competitors entering its marketplace are doing. Are new competitors also building this capability for themselves, thereby validating its unique contribution or suggesting that adequate external sources are not available, or are they acquiring the capability from the outside and then focusing their internal investments elsewhere?
The importance of this single question in properly shaping a company’s investment decisions has recently been revalidated by the venture capital market. Many venture capital firms now require that companies they plan to invest in externally source all of their nondifferentiating functions, such as finance, accounting, human resources, and basic information technology services.
The second question gets at the very heart of organizational hubris. Successful organizations are, often because of their very success, filled with a belief that because they are successful, they must be good at everything they do, and that the unique ways they do things directly contribute to that success. This belief is often reflected in statements such as “we are different” or “we are unique.” One great way to challenge this hubris is to simply ask if other companies would hire yours to perform that internal function for them. Could your company sell this activity as a service in an open, competitive marketplace? Could it successfully compete against the marketplace of service providers that do it for a living?
Would another company hire yours to process its receivables, payables, or payroll? Is there a marketplace for your organization’s real estate portfolio management services? Are your assembly and test capabilities markedly superior to the norm for the industry? Are they superior to the top companies that perform that work for your competitors?
Finally, the third question establishes just how valued the skills needed to perform the activity are to the organization. Are they the skills that are so highly prized that they are reflected in the knowledge- and experienceset of the company’s top leaders? In its chief executive officer? Activities that are based on highly valued skills naturally receive the lion’s share of internal funding for their development and support. The people in those areas are likely to be able to see a career path leading to the company’s corner office. The organization is likely to be attracting the best and brightest in those fields.

 

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