From Tactical Outsourcing To Strategic Sourcing
Outsourcing need not be a mere cost saving operation but can become a very important element in creating a winning strategy
Jul 06, 2005
Until now, outsourcing has been considered by most companies, particularly in the financial services industry, as little more than a tactical form of reducing the cost of acquiring ancillary services. However, enlightened financial services providers have come to focus less on achieving incremental cost improvements (10 to 20 per cent), and, instead, are evaluating all their capabilities to define a winning global sourcing strategy.
We define global sourcing as acquiring "the right competency, at the right cost, from the right source, from the right shore." Specifically, it stands for sourcing operational and technology activities (and resources) from global "competency" centres. For example, as part of its global sourcing strategy, a US bank may turn to India for market research, Russia for derivatives processing and Ireland for customer service.
Sourcing needs to become a strategic process whereby companies accept the idea of unbundling their value-chain and focus on operating it in the most optimal way to achieve transformational cost savings (30-60 per cent) and transformational revenue growth. For many organisations, this type of analysis will often lead to the adoption of an outsourcing strategy.
It’s control, not ownership that matters: The need to define a comprehensive sourcing strategy is rooted in relatively recent geopolitical, macroeconomic and technology developments. These developments have fundamentally changed the world by making business capabilities portable on a global basis. Leading organisations realise that what matters most isn’t the ownership, but the control of business capabilities. Their approach: look at all the organisation’s capabilities and only keep captive those unique capabilities that offer competitive advantage and are critical to revenue growth. All other capabilities, as core as they may seem, can be considered for outsourcing.
The financial services industry has been at the forefront in taking advantage of the global sourcing opportunity. Led by pioneers such as GE Capital, Deutsche Bank, HSBC and Citigroup, almost every financial services firm is engaged either in using global sourcing or in planning for it actively. The high tech industry for years has exploited global sourcing for its manufactured processes. Led by giants such as Dell, Texas Instruments and Intel, the industry has begun to utilise globally dispersed locations for R&D, customer service and related business processes as well. Other industries increasingly taking advantage of global sourcing include retail, telecommunications and media.
Who’s insourcing?
The question then becomes who will "insource" all those capabilities that companies want to control, but don’t need to own anymore? The answer is fairly straight forward: companies that specialise in commodity services within the value-chain and leverage critical mass in ways that allows them to provide top quality service at costs that no vertically-integrated "parent" company could ever dream of. These service providers can be newly formed companies or spin-offs from parent companies.
Indeed, in some cases, a company may decide to keep in-house capabilities that don’t differentiate the organisation from its competitors. This will happen when a company has reached a level of efficiency that allows it to successfully become itself an insourcer of these capabilities towards third-parties. This will be the case when capabilities can be provided at a high level of quality and below average industry cost. You will often see these types of in-sourcing initiatives lead to spin-off businesses as competitors will be more comfortable to outsource to an independent service provider rather than to one of their own.
For example, although American Express (AMEX) considered transaction processing as a strategic capability for its card business, the company realised how much of a commodity service it was becoming and did not hesitate in the early 90's to spin it off. This allowed AMEX to focus on the capabilities that differentiate them from their competitors — i.e. risk management and marketing and sales — while benefiting from the services of a company specialised in card processing. This led to considerable cost reductions and improved quality, as this newly formed company developed its business by providing other card issuers with processing services based on a successful "shoring" strategy.
Which sourcing model is right for me? On-shoring, near-shoring or off-shoring are the various ways companies can implement their captive sourcing and outsourcing strategy. Off-shoring and near-shoring bring the well-known opportunity to reduce costs.
Moreover, in many cases, the decision to off-shore or near-shore is also driven by a quest for better quality, access to specific skills and reduced cycle times (via 24/7 work shifts), all critical to support revenue growth and reduce time to market for new product and service initiatives. Leading firms will consider a mix of these three sourcing alternatives based on the optimal balance between rewards and risks.
Off-shoring or near-shoring is not to be limited to the well known IT or contact centre functions. Business Process Off-shoring (BPO) is showing considerable growth particularly in the areas of finance & accounting, transaction processing (i.e. credit cards and claims), data and customer order entry, customer service, collection and sales and marketing. Furthermore we also see emergence of Knowledge Process Off-shoring (KPO) in the areas of financial research, competitive intelligence, engineering, etc.
Implementing a successful strategy: Defining a comprehensive and successful sourcing strategy is not easy. The key obstacles that most firms have encountered when developing it are workforce resistance, concerns about reliability, security, a loss of control, and communication difficulties, particularly when the strategy involves a near-shore and/or off-shore element that comes with linguistic, cultural, distance and time-zone barriers. To overcome these various obstacles, it is critical to link the sourcing strategy with a well established overall operating model. Defining this new operating model is the first step in implementing the sourcing strategy.
The next step is to re-engineer the various processes across the company and to ensure that they properly integrate with and support the new global sourcing framework.
Technology augmentation (not replacement) can facilitate this process considerably and further improve the newly defined processes from a cost, control and service level perspective. Workflow, self-serve portals and digitisation — integrated with the legacy solutions — are typical examples of non-intrusive technology augmentation.
To obtain the optimal capabilities mix when outsourcing, it is critical not to short-change vendor due diligence and to not hesitate using multiple vendors.
Over-investing in program management and proactive change management will allow mitigating risks to achieve a successful implementation. A successful global sourcing strategy will provide cost reductions, improved controls and better service levels to internal and external clients.
Rewards are significant: Properly implemented, global sourcing strategies offer significant benefits. Leaders in global sourcing enjoy unparalleled competitive advantages by way of lower costs, improved quality and responsiveness. According to Deloitte, financial services firms in the developed world could save $138 billion over the next five years from off-shoring. However, more than cost, it’s the quality and other benefits that are providing further fodder to off-shoring. According the 2003 TPG/Baruch offshoring Survey, two-thirds of the businesses surveyed reported gains in quality. Access to skills, reducing cycle time, etc., were other key benefits.
Its time to reconsider traditional outsourcing approaches that focus on incremental cost savings. While it requires more careful decision-making and coordination, strategic sourcing, effectively implemented, offers tremendous benefits that simply cannot be overlooked.
We define global sourcing as acquiring "the right competency, at the right cost, from the right source, from the right shore." Specifically, it stands for sourcing operational and technology activities (and resources) from global "competency" centres. For example, as part of its global sourcing strategy, a US bank may turn to India for market research, Russia for derivatives processing and Ireland for customer service.
Sourcing needs to become a strategic process whereby companies accept the idea of unbundling their value-chain and focus on operating it in the most optimal way to achieve transformational cost savings (30-60 per cent) and transformational revenue growth. For many organisations, this type of analysis will often lead to the adoption of an outsourcing strategy.
It’s control, not ownership that matters: The need to define a comprehensive sourcing strategy is rooted in relatively recent geopolitical, macroeconomic and technology developments. These developments have fundamentally changed the world by making business capabilities portable on a global basis. Leading organisations realise that what matters most isn’t the ownership, but the control of business capabilities. Their approach: look at all the organisation’s capabilities and only keep captive those unique capabilities that offer competitive advantage and are critical to revenue growth. All other capabilities, as core as they may seem, can be considered for outsourcing.
The financial services industry has been at the forefront in taking advantage of the global sourcing opportunity. Led by pioneers such as GE Capital, Deutsche Bank, HSBC and Citigroup, almost every financial services firm is engaged either in using global sourcing or in planning for it actively. The high tech industry for years has exploited global sourcing for its manufactured processes. Led by giants such as Dell, Texas Instruments and Intel, the industry has begun to utilise globally dispersed locations for R&D, customer service and related business processes as well. Other industries increasingly taking advantage of global sourcing include retail, telecommunications and media.
Who’s insourcing?
The question then becomes who will "insource" all those capabilities that companies want to control, but don’t need to own anymore? The answer is fairly straight forward: companies that specialise in commodity services within the value-chain and leverage critical mass in ways that allows them to provide top quality service at costs that no vertically-integrated "parent" company could ever dream of. These service providers can be newly formed companies or spin-offs from parent companies.
Indeed, in some cases, a company may decide to keep in-house capabilities that don’t differentiate the organisation from its competitors. This will happen when a company has reached a level of efficiency that allows it to successfully become itself an insourcer of these capabilities towards third-parties. This will be the case when capabilities can be provided at a high level of quality and below average industry cost. You will often see these types of in-sourcing initiatives lead to spin-off businesses as competitors will be more comfortable to outsource to an independent service provider rather than to one of their own.
For example, although American Express (AMEX) considered transaction processing as a strategic capability for its card business, the company realised how much of a commodity service it was becoming and did not hesitate in the early 90's to spin it off. This allowed AMEX to focus on the capabilities that differentiate them from their competitors — i.e. risk management and marketing and sales — while benefiting from the services of a company specialised in card processing. This led to considerable cost reductions and improved quality, as this newly formed company developed its business by providing other card issuers with processing services based on a successful "shoring" strategy.
Which sourcing model is right for me? On-shoring, near-shoring or off-shoring are the various ways companies can implement their captive sourcing and outsourcing strategy. Off-shoring and near-shoring bring the well-known opportunity to reduce costs.
Moreover, in many cases, the decision to off-shore or near-shore is also driven by a quest for better quality, access to specific skills and reduced cycle times (via 24/7 work shifts), all critical to support revenue growth and reduce time to market for new product and service initiatives. Leading firms will consider a mix of these three sourcing alternatives based on the optimal balance between rewards and risks.
Off-shoring or near-shoring is not to be limited to the well known IT or contact centre functions. Business Process Off-shoring (BPO) is showing considerable growth particularly in the areas of finance & accounting, transaction processing (i.e. credit cards and claims), data and customer order entry, customer service, collection and sales and marketing. Furthermore we also see emergence of Knowledge Process Off-shoring (KPO) in the areas of financial research, competitive intelligence, engineering, etc.
Implementing a successful strategy: Defining a comprehensive and successful sourcing strategy is not easy. The key obstacles that most firms have encountered when developing it are workforce resistance, concerns about reliability, security, a loss of control, and communication difficulties, particularly when the strategy involves a near-shore and/or off-shore element that comes with linguistic, cultural, distance and time-zone barriers. To overcome these various obstacles, it is critical to link the sourcing strategy with a well established overall operating model. Defining this new operating model is the first step in implementing the sourcing strategy.
The next step is to re-engineer the various processes across the company and to ensure that they properly integrate with and support the new global sourcing framework.
Technology augmentation (not replacement) can facilitate this process considerably and further improve the newly defined processes from a cost, control and service level perspective. Workflow, self-serve portals and digitisation — integrated with the legacy solutions — are typical examples of non-intrusive technology augmentation.
To obtain the optimal capabilities mix when outsourcing, it is critical not to short-change vendor due diligence and to not hesitate using multiple vendors.
Over-investing in program management and proactive change management will allow mitigating risks to achieve a successful implementation. A successful global sourcing strategy will provide cost reductions, improved controls and better service levels to internal and external clients.
Rewards are significant: Properly implemented, global sourcing strategies offer significant benefits. Leaders in global sourcing enjoy unparalleled competitive advantages by way of lower costs, improved quality and responsiveness. According to Deloitte, financial services firms in the developed world could save $138 billion over the next five years from off-shoring. However, more than cost, it’s the quality and other benefits that are providing further fodder to off-shoring. According the 2003 TPG/Baruch offshoring Survey, two-thirds of the businesses surveyed reported gains in quality. Access to skills, reducing cycle time, etc., were other key benefits.
Its time to reconsider traditional outsourcing approaches that focus on incremental cost savings. While it requires more careful decision-making and coordination, strategic sourcing, effectively implemented, offers tremendous benefits that simply cannot be overlooked.