Wednesday, September 27, 2006

Strategic Outsourcing


In 1990’s outsourcing IT services was a mere cost saving operation. But by 2005, outsourcing has become an important element in creating a winning strategy. For example, in 2004 Barthi Airtel of India outsourced all its IT needs to IBM in a $750 Million deal. In 2006, Airtel signed another $100 million deal with IBM to manage and deliver services delivery platform.

"The implementation of SDP will enable Bharti Airtel to have an integrated environment that will incorporate all of Airtel's content and applications services under one platform," said Mr Manoj Kohli, President, Bharti Airtel.

The above example shows how outsourcing has grown from a mere tactical solution to that of a strategic solution.

Global Sourcing Strategy

Until now, outsourcing has been considered by most companies, particularly in the telecom services industry, as little more than a tactical form of reducing the cost of acquiring ancillary services. However, enlightened telecom services providers have come to focus less on achieving incremental cost improvements (10 to 20 per cent) and are evaluating all their capabilities to define a winning global sourcing strategy.

Global sourcing strategy can be defined 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" centers. For example, as part of its global sourcing strategy, a Barthi Airtel may turn to Siemens/Nokia for network maintenance, IBM for IT services and 24x7 customer for customer service. Global sourcing also means sourcing the best services from the best locations. For example: Bank of America uses India for getting IT services and market research, England for Derivative analysis, and Ireland for customer services.

In these situations, 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 organizations, this type of analysis will often lead to the adoption of a global outsourcing strategy.

Sourcing Strategy relies on Control

It’s control, not ownership that matters - The need to define a comprehensive sourcing strategy is rooted in relatively recent geopolitical, macro economic and technology developments. These developments have fundamentally changed the world by making business capabilities portable on a global basis. Leading organizations realize that what matters most isn’t the ownership, but the control of business capabilities.

Approach

Look at all the organization'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 utilize 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.

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 offshore 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 center 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 one can see emergence of Knowledge Process Off-shoring (KPO) in the areas of financial research, competitive intelligence, Market research, engineering R&D, 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 offshore 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 digitization 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 shortchange 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

When 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.

Closing Thoughts

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.

Also See:

Virtual Scale - Alliances for Leverage
Cutting Edge R&D in India
Global R&D Network
Managing Outsourced Projects
Developing a Global Mindset
Managing in the Global Organization
Leadership for a Global Enterprise
Global Product Development Teams

2 comments:

R said...

Glad to see you take a strategic viewpoint!

- MB

obackoffice said...

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