Is Your Sourcing Strategy Watertight? Not without the "Concurrent" Option

by Prof. Ilan Oshri, Dr. Angelika Zimmerman and Dr. Eleni Lioliou – Loughborough Centre for Global Sourcing and Services

Does your firm manage both shared services centers and third party service providers? If it does, did you look to benefit from synergies between the two? By now we know that quite a few companies have been using "concurrent" service sourcing strategies. You probably wonder: what’s "concurrent sourcing"? The simple definition for this term is the utilization of both shared services centers and third party service providers to maximize the returns of the internal sourcing organization. In other words: it is the ideal allocation (at the time) of services to either SSC or third party provider while continuously assessing the returns and considering switching over in case circumstances change.

The fact is that there is very little in the professional media about concurrent services outsourcing strategies. On the other hand, most manufacturers have already gone through this evolutionary phase and consequently maximized their returns based on in-house production and procurement from third parties. Considering that sophisticated client firms are now moving services around the globe and many are re-shoring as part of their efforts to re-organize the global service function, it’s inevitable that concurrent sourcing will become a central sourcing strategy to locate outsourced/insourced functions.

The question is: Are you ready?

You are probably thinking: "We could pursue a concurrent sourcing strategy." And perhaps you could. The starting point would be to have a sourcing manager (or a team) who oversees both shared services and third party provider activities. Put simply, you need to consolidate the management of your internal and external sourcing engagements to be in a position to make calls about how to ration tasks and keep track of returns/results, with a view to possibly switching over by changing the ratio between the SSC and third party provider.

But in devising your concurrent sourcing strategy, you need to figure out the value delivered by each component in this strategy (i.e., SSC and third party) to realize the potential of utilizing internal and external parties.

We recently conducted one of the first-ever studies carried out on concurrent sourcing strategy, surveying 150 managers from client firms (UK & USA) directly involved in managing both third party service providers and shared services centres, in 2013. The main purpose was to understand what value these managers extracted from pursuing a concurrent sourcing strategy and how they perceived the value extracted from their SSCs and third party service providers.

Concurrent Sourcing Strategy: How to Establish its Worth Managers indicated that a concurrent sourcing strategy has impacted the internal sourcing function in various ways. The vast majority perceived this strategy to improve overall sourcing performance, but a minority thought that concurrent sourcing has transformed the internal sourcing function into a professional sourcing unit.

Pursuing a concurrent sourcing strategy has…

Strongly Agree

Improved our overall sourcing performance

73%

Reduced overheads in the internal sourcing function

71%

Improved our business performance

70%

Improved our relationships with external service provider

68%

Standardized our vendor management approach

60%

Made us a professional sourcing unit

53%

Do we like each other?

The results of our survey show that SSCs are still by far more accommodating in their partnerships than third party service providers. Only 11% of the managers stated that they have maintained very close working relationships with their third party service providers, compared with 32% that agreed to this statement with regard to their SSCs. When examining the nature of the relationships, only 23% of the managers said that they were close to third party service providers compared to 34% who said they were close to their SSCs. Forty-four per cent of the managers thought that their relations with the SSCs were long term compared with only 34% who saw long-term relationships with their third party service providers.

Clearly, SSCs have far closer relationships with the parent firm than the third party service providers.

Do we understand each other?

Understanding each other in terms of goals, business domain and objectives is key for a long-term collaboration. Managers thought that they understood their SSCs’ procedures and practices far better than their third party service providers’. More importantly, 43% of the managers strongly believed that SSCs understood their business domain and objectives compared with only 31% who held a similar view about their third party service providers.

One important element in ensuring that the firm and its internal and external providers are on the same page is the exchange of knowledge between these entities. In this regard, managers perceived SSCs to be more forthcoming in sharing methodologies (42% vs. 28%) and know-how (38% vs. 22%) than third party service providers.

Do we trust each other?

Trust is an important indicator of the health of a relationship and can have serious implications for performance and long-term collaboration. When asked about pursuing beneficial decisions for the client under all circumstances, 34% of the managers believed SSCs were doing so, while only 26% thought the same with regard to third party service providers. More managers thought that SSCs presented a truthful picture of the issues (36%) as compared to third party service providers (29%).

Who is doing better: SSCs or third party providers?

In the eyes of client firm managers, third party providers have performed better than SSCs with regard to the ability to achieve desired cost savings (36% vs. 32%). However, SSCs were seen to be performing better by 5-10 points per each item, concerning: (i) services meet expectations; (ii) satisfaction with overall benefits; (iii) helping to refocus the client business; (iv) enhancing customer satisfaction; and (v) introducing new ways to compete. Clearly, SSCs are not perceived to be a source of cost savings but rather a center of excellence with the ability to have an impact on the client firm at the operational and strategic level.

Are you getting your Concurrent Strategy right? There are three main issues you need to consider when thinking about the results of this study.

Firstly, you are probably not leveraging enough the close relationships you have developed with your shared services centers to deliver high-end services from these units. SSCs understand the client firm much better than third party providers and also are aligned better with the client firm than a vendor. We think that such relational advantage should inform the decision making process with regard to task allocation (SSC or vendor). Currently, the vast majority of decisions are based mainly on cost and skill availability consideration, with little attention given to the effect of relational governance on performance. Secondly, be aware that – according to our study – vendors are outperformed by SSCs on any performance indicator but cost .

There are two important aspects in these results:

First, service providers really need to strengthen the relational component in their outsourcing engagements. Second, client firms need to consider the strategic intent behind the outsourcing. Why do you outsource and how does it fit into the capabilities the SSC and the vendor offer?

Last but not least, some of the early adopters of concurrent sourcing strategy already see returns from the synergies between SSCs and their vendors. However, many of them lack a standardized approach to carry out this strategy and our results show that the sourcing approach within the client firm is far from professionalized. Without a standardized and professional approach to concurrent sourcing, client firms will end up just "talking the talk" but hardly "walking the walk."