By Stan Lepeak
Market pundits, analysts and outsourcing service providers tend to get more caught up than buyer organizations in the nomenclature and nuances of different global sourcing models. They enjoy debating the merits of onshore vs. nearshore vs. offshore, and haggling over which shore, if there even is one in the location in question, is the “best” shore or the “right” shore. Outsourcing buyers are increasingly more focused on what is the best model for their back and front office service delivery needs, regardless of the shores involved.
The need for continual improvement
To compete effectively in today’s global economy, organizations must build value and drive sustainable quality improvements and cost reductions. To achieve this they are increasingly reaching beyond their own four walls to access a global network of capabilities and a pool of configurable resources that can be rapidly provisioned and released on demand to meet ever-changing market conditions and evolving business objectives. This increasingly involves the utilization of multiple service delivery locations and models. The challenge has become how to define a sourcing agenda that incorporates an optimal global services delivery mix to meet an organization’s needs. Equally important is how to manage and evolve this model over time in response to changing organizational needs, economic conditions, and service provider and delivery location capabilities.
There are various approaches and models available that can serve as a starting point or framework for organizations designing their own global sourcing and governance models. There is no one size fits all approach. Once an organization has designed a model and approach that is right for them, they need to continually monitor and enhance the model based on changing business needs and conditions and changing market dynamics. The one thing that is fairly certain is that over time, most larger organizations will do more global sourcing from a broader range of locations, and benefits derived from this increased diversity and complexity must be weighed against an organization’s appetite, skills and resources to support the model’s requirements. A solid plan is needed but successful global sourcing is all about execution of that plan on an ongoing basis.
Defining a strategy
There are several key tenets organizations should keep clearly in mind when defining their global sourcing strategy and philosophy:
- The model should be driven by customer need rather than traditional structures and mindset.
- The traditional one-size-fits-all service offerings should give way to a balanced portfolio of retained, outsourced and centralized service offerings with tiered, tailored and bundled services across functions.
- Vendor and service provider management must become more dynamic and evolve into a sophisticated services portfolio management organization and framework.
- Finally, the ultimate goal and sign of success should be increasing agility and competitive advantage rather than merely decreasing costs.
While each of these elements has specific importance to global sourcing efforts, item number two is most relevant when it comes to sourcing model and location assessment. Ten years ago, global sourcing was typically simple point-to-point nearshore (e.g., US to Canada, Western Europe to Eastern/Central Europe) or offshore (e.g., US/Western Europe to India) outsourcing. The extent of global sourcing by most buyer organizations was relatively small, the choice of quality service providers and service offerings was limited, and the goals were straightforward: reduce costs and gain some overall process improvement where possible.
The evolving sourcing landscape
Today the nature and scope of global sourcing has evolved significantly, increasing the need for broader sourcing frameworks that embody concepts such as service portfolio management and place strong emphasis and resources on outsourcing governance and management capabilities. As part of deploying a portfolio of service delivery models (e.g., internal, shared services, captives, outsourced), organizations today need to assess which global service delivery model is best for their needs. The figure below illustrates four options common in the market today.
The most appropriate model for any organization will depend on specific circumstances, needs and sourcing maturity. Some organizations may employ multiple models across different business units and geographies, though ideally over time it is more efficient to have as small a number of models as is necessary.
Once an organization has identified and defined its needs, another critical element to account for is determining the degree to which the organization will own and manage the operations themselves versus using third party service providers. As noted, most organizations will have both models in their portfolio. When utilizing outsourced services, however, organizations need to consider how much control to cede to the service provider in determining the best model. While buyers must understand the model employed, its capabilities and any constraints, they must also recognize that through their chosen outsourcing approach, they are investing in the skills and expertise of the provider to select the best model and then to evolve the model as needed over time. Further, an organization may adopt a single model, but within it deploy internally managed and owned operations as well as outsourced services.
Ultimately, the driving factors for determining the appropriate service model and mix of insourced and outsourced services must be the business case that was laid out for the global sourcing efforts. Availability and consideration of all sourcing model options and applicable “shores” is required and critical to this success, but ultimately are only tools to achieve the broader goal of increasing global competitiveness.
Stan Lepeak is Director, Research, in KPMG’s Shared Services and Outsourcing Advisory group and former managing director of global research for EquaTerra, which was acquired by KPMG in February 2011. Lepeak may be reached at [email protected].
Read his other article for Nearshore Americas on the changes that outsourcing buyers are implementing here.