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Deconstructing Strategic Sourcing.  Core Elements for Consideration.

by By Bartek Skalski of Soitron Poland

The very concept of outsourcing has changed massively over the past 20 years, and during this time it has become more complex and sophisticated. In practice, it should be more aligned to optimising operations.  While outsourcing is a general catch-all phrase, in reality there is a great difference between simplistic approach and more thought-through strategy.

In the early days of outsourcing, it was common practice to off-shore some back-end task-based operations to the lowest cost location.  This is rarely the case today, as modern organisations now want to remain agile need to confront the entire aspect differently:

1. Is the outsourcing location still crucial?
Location is critical.  The common issues such as where to locate your business are driven by the usual factors that Gartner, IDG or AT Kearney would rank the outsourcing destination countries on are still valid. They include aspects of the educational system and related number of graduates per year, government stability and support, cultural alignment (time zones, languages), countries’ approach to IP security, infrastructure etc.
However there might be slightly different takes on these issues, as in most of the areas the top scoring outsourcing destinations will go head to head.
The key problem in the current business environment is sustainability.  Most organisations want to know whether their investment will sustain the market changes, and hence questions like attrition and fluctuation on job market, compound annual growth rate (CAGR) in terms of salary, real estate market situation, or saturation are all becoming more important.

Furthermore the strategy or location for business process or desired skillsets may be completely different than strategy for other business process or skillsets, even if both processes would complement each other within the same operations group.
In such environment, only organisations with the right expertise to forecast and have the capabilities to scale and adjust their strategy to address specific processes, in addition to being able to offer alternatives (e.g. location, capability or process wise) will be taking the advantage.

2. Quality, quality and quality
A typical rule of the thumb is that in order to replace an on-shore resource, you need two to three full-time equivalent’s (FTE) off-shore. This approach is incorrect, because it does not drive the efficiency from the starting point. Organisations should build in their efficiency factors and KPI’s very early in the process and avoid FTE-based comparisons. Although they may be limited by lack of maturity which is common when starting to provide service only recently transitioned, this problem needs to be confronted together with the efficiency issue during early design phase.
Businesses with very strong change management and process reengineering capability, equipped with high quality resources, and driven by continuous improvement may be better positioned to address these requirements.
The bottle neck though is that companies may not be flexible enough, and able to dedicate/relocate their top quality resources to run such changes. Many times the firefighter approach is more common, and issues are being addressed as they arise which is slowing down the entire transformation, and affects time allocated to realise the benefits.

3. A question of underutilisation
Once an implementation is complete and a new Shared Services or support centre is running, it is often the case that the demand for the services offered is not quite as expected. This is very common situation as large organisations typically face resistance to change, lack of trust and maturity. These problems are difficult to crack especially in the short term, and require ongoing effort to breach the gap between ‘old state’ and ‘new state’ of mind in the organisation.

Even if the centre has overcome these early issues and is up and running at the expected utilisation rate, the situation may change because of the shifting market. This again highlights the problem of flexibility and scalability. Very often once the investment is made the organisations are reluctant to downscale and struggle with building a model that is more closely tracking to the picks and drops in the internal demand. That is because they are too much driven by the number of headcounts as opposed to measuring the operational efficiency.
The solution to that may be to an extent third party subcontracting or outsourcing, and Pay Per Use or Pay Per Service model.

4. ‘In house’ or maybe strategic partnership
Companies that don’t specialise in strategic sourcing, and their core operations are creating values elsewhere, are unable to address certain issues.  They learn their outsourcing process and strategy on the way.
The answer to those problems may be partnership with flexible, and agile players that are focused on providing core skills to complement the location strategy, who can professionally address transition and transformation process, who can offer maturity in the areas of nearshoring, offshoring and foresee market changes.
The innovation is also a key aspect that the process can bring, and most of the organisations would miss if they consider only task based offshoring instead of developing holistic, more synergetic model.

Insourcing fresh talents into organisations, different maturity, and culture is natural incubator for innovation.
Relying on the skilled business partner, and moving part if not the entire problem, may give organisations the ability to focus on their core business, and also to develop more insight into their established processes, which are operative but may not be the most effective.
The businesses which can accept such insights may outperform those which only rely on their own expertise, and mostly aim to protect their resources.

Conclusion

While we acknowledge that outsourcing, if done correctly, can significantly decrease costs while increase the productivity, competitiveness and value of a business, key factors need to be aligned.  Strategic Sourcing is a vital part of the success of businesses these days, and the most important thing is making sure it is aligned completely with an organisations short and long term goals.

The more flexible and adaptable organisations are, the more advantage can be gained.

Visit Soitron’s website here and learn more.


 

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