Global Sourcing as a Value Creator – in 3 Stages

Last month I shared with you some "hard" evidence on the added value of developing a well-thought strategy for global sourcing. If done properly, rethinking the global footprint of value chains through global sourcing strategies can dramatically improve business processes and create new value. The reason is that global sourcing enables companies to perform each of their business activities where it makes the most sense economically and strategically. But it is far from simple. So, today, I will report on my conclusions about what it means to develop a well-thought out strategy for global sourcing that has the potential to create competitive advantages. It is based on many hours of observation and interviews with successful, and less successful, client companies across both the United-States and Europe over a period of 7 years. In a nutshell, my research shows that developing a well-thought out strategy requires a vision for global sourcing that is developed through a progressive process of learning-by-doing. It typically includes three main stages. Stage 1: Labour arbitrage and scale (or, "do it cheaper and larger") At first, companies often source simple, repetitive and codified tasks that do not require specific expertise. The objective is to reduce labour costs by replacing high-paid employees with cheaper offshore workers. They also discover that the access to a less-expensive labour force makes it economically viable to scale-up certain activities that traditionally receive less attention because they are not part of the core business. For instance, due to limited resources, an industrial company favoured technical leadership and kept marketing and sales expenses to the minimum. Through an adequate global sourcing strategy that combined onshore and offshore teams, and with minimum investment, that company was able to scale-up existing efforts and undertake new direct marketing and sales support activities that boosted revenue. Stage 2: Process reengineering (or, "do it better") After gaining experience and confidence that high quality work can be done elsewhere, companies typically start to reconsider the way they operate, and look at how global sourcing can help improve through the reengineering of certain processes. External providers may play a key role in that context as they build their expertise by undertaking similar or related activities for different clients. If invited to the table, they will be a very good source of suggestions that companies can tap into, and partner with. A vision for global sourcing therefore also requires a good knowledge of the risks and benefits of outsourcing arrangements versus in-house solutions, and how to choose the provider to partner with in function of your specific needs. Stage 3: Value creation (or, "experiment with new services and models") The third stage is a profound rethinking of the way companies see global sourcing – looking beyond a means to do things cheaper, on a larger scale, or better, to seeing it as a means to do new things and create new value. This involves leveraging their global service delivery structure to develop new knowledge and capabilities, experimenting with new business models, and developing new product and service offerings that were previously unimaginable. For instance, thanks to a team of engineers in the Philippines who interact real time with clients from around the world, a global electronics company developed a new capability in on-line product design that opened a completely new line of business. So, our research shows that developing competitive advantages through greater efficiencies and fundamentally transformed business processes requires a strategic vision that goes well beyond labour cost savings. But the majority of companies that start sourcing business or technical services from foreign locations – emerging markets in particular – focus on realizing the immediate benefits of labour arbitrage in low cost countries. And that is fine. There is no reason to expect many companies to be able to jump to stage 2 or 3 from the start. As we said, it is a learning process, and in fact that learning process is often necessary to get the organization on board. But starting in stage 1 does not mean managers should not anticipate and start creating a vision for what is coming next, that is stages 2 and 3. And the earlier the better as you want to avoid being locked into a path that delays, or prevents you from taking the full benefit of global sourcing, whether that is because your organization is locked into a particular mind-set, because you have committed to inflexible contractual agreements, or because you have invested resources in a program that does not allow for your new ambitions, and you cannot easily "pull the plug". Moreover, developing a vision for global sourcing does not mean abandoning the benefits of one stage to move to the next one. For certain tasks, it may not make sense to move beyond labour arbitrages or scale advantages. For other activities, labour costs may not be an issue and the objective may be to redesign the process to allow a major drop in the time to market new products. Also, a new source of value creation today may become a standard offering that requires a high focus on cost containment within a few months or years. As with any strategy, defining a vision for global sourcing is a dynamic process that requires periodic revision. The most successful companies are, therefore, those able to develop a long term strategy that exploits the many ways in which global sourcing can help firms gain competitiveness, while being flexible enough to allow for redirection if need be. That is not easy. But open-mindedness helps find the balance between a long term vision and an inflexible strategy. Let me also remind you to participate in the latest ORN survey that assesses the capabilities of companies’ sourcing organizations (ie, the buying side of global sourcing). As promised, I will report on the findings in a later column… To take the survey: click on the "Offshoring survey" button on www.solvay.edu/OFFSHORING [inlinead]

Global Sourcing as a Value Creator – in 3 Stages

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