SOURCING MODELS: WHAT AND WHEN TO OUTSOURCE/OFFSHORE

IS SOURCINGUNIT 2

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FOUR SOURCING MODELS

• Domestic outsourcing• Offshore outsourcing• Domestic insourcing• Captive models

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OUTSOURCING SCOPE

• Total outsourcing >80%• Total in-house sourcing <20%• Selective sourcing 20-80%

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SOURCING CONSIDERATIONS

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CRITERIA FOR DISTINGUISHING BETWEEN O/S MODEL TYPES

• Resource ownership• Resource management• Customer/supplier relationship• Location of supplier staff• Type of contract

Willcocks, et al 2006

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FIVE OUTSOURCING MODELS

• Time and materials model• Exchange-based model• Netsourcing model• Joint venture model• Enterprise-partnership model

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VENDOR SELECTION

• The careful selection of the “right” vendor is imperative• Consistent• Trustworthy, etc

• Outsourcing is more successful when used for maintenance or valuable, but not vitally significant, components • …but, newer systems are becoming increasingly

more important

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• McFarlan & Nolan, 1995

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Aka. Impact of IT on core strategy 9

FURTHER INFO ON THE STRATEGIC GRID

• Levina notes that for offshoring, some adjustments are necessary

• If activity has a high impact on operations, at least part of the activity needs to be onshore

• Low impact on IT for both, it becomes difficult to decide• May require deep domain knowledge• Offshore vendors may not possess

• Low impact on core, high on strategy (IP, data security sensitive info)• Levina suggests consider for outsourcing, but under careful

mgmt• Some large vendors are specialized in security, etc

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FACTORS INFLUENCING SUITABILITY OF PROCESSES FOR O/S

• Not critical • Scale of process• Costs for searching, creating metrics, managing

relationship may be too great for a small process• Projects may be too large as well….cost of mgmt too high

for OS

• Processes influenced by rapidly changing tech• Good candidates for O/S

• O/S good for activities with high degree of variance

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FUNDAMENTAL MISTAKES IN OFFSHORING DECISION-MAKING

1. Too little time spent evaluating processes• Difficulty defining: • “core” processes – inhouse• “critical” – buy from experts• “commodity” – o/s

2. Do not consider risks3. Do not understand that o/s is not all-or-nothing

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FACTORS INFLUENCING SUITABILITY OF PROCESSES FOR OFFSHORING

• Substantial levels of comm – not offshoring• Value of processes to org – high value=no

offshore• Rank processes by two criteria• Potential of value-creation• Potential of value capture

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DECISION-MAKING MATRIX ON O/S

• Order winners- contribute greatly to company’s business ops as well as competitive position• Qualifiers- critical for business ops; don’t add to

competitivness (airline maintenance)• Necessary evils- don’t contribute (inv, payroll,

etc)• Distractions- failed attempts to differentiate (Dell

retail outlets)

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IMPACT OF OPERATIONAL AND STRUCTURAL RISKS ON O/S AND OFF/S

• Operational risk• Structural risk

• With regard to operational risk….• Eval extent to which processes can be codified and

measured

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4 TYPES OF PROCESSES

• Transparent processes (transaction processing, tech support, etc)• Can be clearly measured; low operational risk

• Codifiable processes (litigation support, yield analysis, etc)• Can be measured to some extent and most work can be codified• If final outcome measurement is not measurable, risk is high

• Opaque processes (insurance underwriting, cash-flow forecasting)• Can be codified regarding work being done, but output quality

hard to measure• Risk of off/s moderate but can increasing monitoring (at an

expense) to help• Non-codifiable processes (supply chain coordination)• Cannot be codified• May not be able to measure quality achieved• High risk

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IMPACT OF RISKS (CONT.)

• Ability to monitor work and use metrics help define risks• TPS – easy• R&D – challenging

• Cannot assume vendor works in client’s best interest• When O/Sing processes that require knowledge

transfer, must invest in that transfer• Vendor learning curve may be steep

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RISK MITIGATION FOR STRUCTURAL RISK

• Contractual clauses• Continue with specified rate (+X%) after contract expiry

date• Utilize multiple vendors• Easier to transfer• Competition

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COMPLEX AND “PROBLEMATIC” BUSINESS PROCESSES

• Process complexity adds risk • Criteria for complexity eval

1. Codifiability of data to be transferred 2. Training required3. Cost of monitoring performance levels4. Difficulty in assessing mgrs level of confidence that

their quality assessments are true5. Desired ed level of employees6. Revenue per vendor7. Number of sub-tasks8. Single overall complexity measure

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STEPS FOR PROCESS EVALUATION PRIOR TO DECIDING TO O/S

• We don’t want to outsource to get rid of problematic processes. Thus, we need to evaluate each process to find root cause • Steps

1. Revamp business processes2. Reinforce credibility and trust3. Find the scale-economy sweet spot

1. Consolidation and standardization

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