Sourcing can be deemed as the optimal placement of work, internal or external to a company, to best meet business goals and objectives.
Work components can be performed solely by external suppliers, exclusively by internal “retained” organizations, or (in most instances) by combinations of both.
Organizations have multiple reasons to source work externally, including but not limited to:
- Accessing new capabilities, skills or technologies.
- Reducing time-to-market.
- Facilitating innovation or business transformation.
- Reducing owned asset base.
- Improving tools or processes.
- Re-purposing resources to higher value work.
Similarly, multiple reasons exist to source work internally, such as:
- Gaining a competitive advantage.
- Focusing on core competencies.
- Maintaining control over critical areas and integration points.
- Ensuring retention of key process knowledge.
- Assuring career paths necessary to attract and retain status
- Controlling innovation or new product development.
Outsource versus Insourcing decisions have a lasting impact and must be well thought out. The decision-making process must be both robust and carefully managed. Fundamental considerations include:
- Core Business Knowledge
- Technology marketplace.
- Economies of scale.
- Business and regulatory environment.
- Human Resource Strategies.
- Risk Management
The following section covers each area in greater detail, outlining key questions that client organizations need address to determine whether outsourcing or insourcing is appropriate.
Core Business Knowledge
The core business process knowledge cannot be purchased “o the street,” such as insight into how proprietary technology is used in manufacturing processes.
Outsourcing such service elements is likely to result in failure.
An organization that uses core process knowledge to its competitive advantage in creating products and delivering services must retain all the components necessary to continue and build upon that success.
The key question: Is core business process knowledge necessary to successfully perform this work?
In today’s rapidly changing technology marketplace, sourcing strategies must be planned in the context of the long-term horizon. As cutting edge technologies mature and become commoditized sourcing externally is often beneficial.
As components of the service became commoditized once more, the cycle repeated and a supplier was again tasked with much of the work. The key question: How does the technology lifecycle impact the ability to in- or outsource?
Economies of Scale
Before going to the marketplace to outsource , businesses need to consider the providers’ perspectives and assess whether or not the scale of the opportunity is sufficient to interest bidders.
A related consideration is whether a sufficient supply base of prospective providers exists to ensure adequate competition for a given organization’s size, scope and complexity.
While sole-sourcing is sometimes necessary, a lack of competition severely reduces leverage, perhaps not on the initial buy, but certainly when an entrenched incumbent faces little competition at renewal.
The key question: Will a potential provider be able to leverage economies of scale to make a profit, while delivering equivalent service at a lower price point than could be acquired internally?
Business and Regulatory Environment
The key question: How do current and anticipated regulations constrain sourcing decision-making?
Human Resources Strategies
Employees should be aware of knowledge, skill and ability requirements for a viable career path within their company, or, conversely, avenues to pursue to move to an external service provider. Forethought can avoid adverse impact on both the buyer and the seller.
Service providers often wish to acquire key personnel to mitigate transition risks, whereas buyer organizations need talent to oversee contracts and perform retained work.
The key question: Where sourcing decisions impact company personnel, what is the best way to mitigate any adverse impact?
Enterprises must have the ability to assess and manage operational, technical and business risks for work given to outside suppliers. Even when “fully outsourced,” certain retained functions such as security, supplier oversight, or enterprise architecture are typically necessary to keep providers focused on client interests, ensure that change proposals can be adequately vetted, and facilitate cooperation amongst suppliers in multi-sourced environments.
A robust governance process is essential for transitioning to new suppliers or contracts, refreshing and sun-setting technology, vetting and implementing changes, assuring innovation and addressing the myriad tasks necessary for smooth operation.
HOW AND WHERE TO SOURCE?
Business objectives and required service delivery locations are paramount in the decision-making process. While insourcing decisions can be fairly self-evident, outsourcing decisions have far more tentacles that can move in more directions than anticipated. Additional considerations arise when determining whether the outsourcing initiative involves buying something relatively straightforward like hardware or contingent labor, versus acquiring a complex service.
In general, the greater the expected business outcome, the more complex the relationship between buyer and seller is likely to be. This complexity must be recited in the contract and managed accordingly.
Business objectives range from buying commodities or support labor as inexpensively as possible (commonly referred to as utility deals) to driving transformational change that can make or break a business.
The former might include purchasing IT hardware or infrastructure services, whereas the latter might be moving from brick and mortar banking to ATM machines and web services. Clearly, expectations, Terms & Conditions, pricing structures, Statements of Work and Service Levels will vary significantly.
True innovation should not be expected from a utility deal, but is an iron-clad requirement of a transformational one. The potential supply base is impacted as well, as service providers who excel at utility deals are rarely the best at transformational initiatives, and vice versa.
Once the business objectives are clear, a decision must be made regarding where the work will be performed. Choices may be restricted by regulation, but more often than not control, cultural compatibility and communication are the determining factors for what aspects of the work can be done remotely versus on the client site. Issues such as tax policy and public relations impacts can also have implications where work is performed; specially, whether rural sourcing, near-shoring or offshoring could be viable options. If offshoring is pursued, site considerations include location (whether a follow-the-sun model is important), culture and language compatibility, economic and political stability, legal climate and intellectual property laws, security and a host of other issues. Whatever offshore location is selected, contingency plans and risk mitigation strategies must be developed accordingly.
WHAT TO MANAGE WHEN OUTSOURCED?
When functions or processes are outsourced, client organizations still need to retain certain responsibilities
while businesses generally outsource , many retain control over architecture, integration and security.
Defining an appropriate role for the retained function requires proactive planning and a structured framework succulently granular to address the unanticipated challenges that inevitably arise in an enterprise environment.
MANAGING MULTIPLE PROVIDERS
The final piece of the puzzle involves developing a strategy to manage multiple suppliers. This requires addressing not just the touch points and interfaces between the client and vendor teams, but between different vendors.
Key success factors for managing a multi-vendor environment include a contracting process that builds in an understanding of what the post-contract environment should look like in terms of vendor collaboration.
By setting expectations early, clients can allow providers to build that understanding into best and final offers. Contractual language and shared service levels can be used to require service-based interactions between providers and participation in collaborative activities and mechanisms. Once the relationship starts, cross-provider process integration workshops and governance forums involving the provider team should be instituted to oversee strategic objectives, as well as address the detailed operational interactions and touch points that occur between different providers and between providers and the client team. Ongoing process performance evaluation that produces a scorecard for each provider can incent the team members to work toward shared goals.