Sourcing Strategy – Key To Success In The Dynamic Environment Of The Credit Crunch
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The sourcing strategy is about defining what an organization wants to do with the tasks, functions or processes that are not differentiating the organization from its competitors. Should these business functions be delegated to a separate business unit (shared services center) or to a third party (outsourcing)?
Many sourcing decisions fail to deliver their potential value. The reason for this failure is generally that not enough of these sourcing decisions are based on an explicit strategy and/or are providing the guidance on how to successfully execute a chosen strategy. Some key questions are: How do you define the right sourcing strategy? Which activities can be outsourced and which should be kept in-house? How do you trade-off short and long-term objectives? What is the impact of the credit crunch on sourcing strategies?
DEFINING YOUR STRATEGY
Challenging times prove once more that everything is susceptible to change! The definition, implementation and execution of a sourcing strategy should be considered a closed loop process and not a spin-off resulting from tight markets. The efficiency of the outsourced function should act as a driver for evaluating the sourcing strategy, but business dynamics might also require a change of scope to ensure a more suitable model. This is illustrated below.
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Analysis and definition
The starting point is an understanding of various sourcing models and evaluating them in order to come to the right decision for your organization. In our experience, companies focus too much on one area of the spectrum. For instance, outsourcing is often perceived as the next step after shared services center optimization. But is this really the right sourcing model for your organization?
Selecting the right sourcing model means finding the right combination of ownership (owned or not owned), rightshore (onshore, nearshore or offshore) and management (tight touch or light touch) or governance model. George Yip, et al, (2007) captured these three elements in a cube of sourcing models, called the Global Sourcing of Services (GSS) cube®.
(Click Image to view bigger model)
The decision model is built around eight different execution models impacted by specific characteristics that influence the expected value across each execution mode. The sourcing strategy with the least impact from the perspective of ownership, location change and intensity of management is a shared services center (front-lower-left side) – the best known sourcing model. Moving to the other end of the spectrum (back-upper-right side) the organization chooses for the highest impact sourcing strategy: outsourcing to an offshore third party where management attention is not critical. This model can be highly lucrative, but involves moving towards less control. Does this fit your organization and environment?
Scenario planning and business case
In this step the most beneficial sourcing models are analyzed in more detail. A business case is developed for each scenario, offering a detailed overview of the costs and benefits.
Selection and preparation
Essential for the execution of the "make or buy" decision, you need to prepare for change as soon as the preferred sourcing scenario is defined, aligned with the business strategy and validated. If an external sourcing model is chosen, this means selecting and negotiating with one or multiple service providers. This is a time-intensive step -- you need to make sure that a service provider is capable of fulfilling the outsourced process, or if an in-house sourcing model is chosen, you need to be prepared to move workload within the organization. This might involve building a new shared services center to take over the workload.
Transition or migration
After the steps above, which prepare for change, a transformation or migration will take place. The migration with the highest impact will be the sourcing of functions or processes to an external party offshore. The following elements need to be addressed in the standing organization:
- Definition and alignment of the governance model
- Ensuring that the critical knowledge and experience is captured and remains within the organization
- Process descriptions and gaining clear insight in the way of working with the third party (either external or internal)
- Definition of service levels and key performance indicators
- Training of employees in the standing organization
Delivery or operations
As soon as the delivery takes place, service levels need to be monitored and in the case of a third party, innovation needs to be encouraged. Regardless of the sourcing model, the sourced function or process needs to be monitored, controlled and managed. This applies to both the provider (i.e. owned or not owned) and the demand organization. Research has proven that if this is not the case the benefits of sourcing decrease rapidly.
IMPACT OF THE CURRENT MARKETS ON SOURCING STRATEGIES
In these challenging times, companies have been postponing big decisions and the financial sector has been cautious in granting loans. The priority has been to stabilize the organization and to carry out a strategic review, which has led to a short-term freeze of sourcing initiatives. However, industry experts are in agreement that a new wave of outsourcing and shared services will follow.
One of the trends we see today is that the current financial crisis is driving many companies to sell their shared service centers to third-party service providers. This is most likely the quickest way to free up cash and increase flexibility. It also contributes to the stabilization of the organization and to a focus on core business. However, a more reserved strategy is advised when these operations are highly interwoven with processes that provide high added value to the organization. Not only might your competitors have access to your differentiators but the risk of dependency is much higher and with much greater consequences.
At the same time, organizations will have a more rigorous view on what can be outsourced. As they look to become more efficient, more cost effective and focus more on their core business, preparations to outsource several processes have already started. A challenging market demands decisive measures. However, there is great risk from rash decisions: loss of control in areas that impact your core business could result in deception in the long run. Lessons learned from the former outsourcing wave have proven this true.
In our recent survey (Outsourcing Strategy Survey 2009 - 2010) in which we interviewed more than 40 organizations, we asked about the pay-back period for sourcing deals. About six months ago, organizations were aiming for a pay-back period of less than four years. Currently, especially in the financial services industry, companies are aiming for pay-back periods of less than one year.
Benefiting from the potential value of a new sourcing strategy means not only a shorter decision-making process, but also exerts pressure on shortening the implementation phase. To ensure a good governance model in the execution phase and realizing sustainable results, good project management and change management is of the utmost importance.
Looking at a longer timeframe, we see that those companies able to convert multi-sourcing into an increased focus on core business and increased agility, will come out ahead. In contrast with classical outsourcing waves, we see these companies outsourcing several "high-value add functions," as well.