Smart-sourcing - A Strategic Approach to Outsourcing

What is Smart-sourcing? 

Definition of Smart-sourcing Smart-sourcing is a set of strategies that focus on the conception and implementation of an optimal, enterprise business process model that integrates all essential business processes to produce maximum value at the lowest possible cost for all stakeholders

With the many buzz words floating around the industry like out-sourcing, in-sourcing, off-shore, near-shore, off-shore out-sourcing, off-sourcing, Greenfield out-sourcing, co-sourcing, and the like; you may be confused as to exactly what is ‘Smart-sourcing’ and how does it apply to you?  Therefore let us define ‘Smart-sourcing’  - Smart-sourcing is a set of strategies that focus on the conception and implementation of an optimal enterprise business process model that integrates all essential business processes to produce maximum value at the lowest possible cost for all stakeholders.   No ‘single sourcing strategy’, regardless of the size or breadth of the enterprise, will produce optimal value for all stakeholders.  A better approach is a Smart-sourcing strategy that recognizes those ‘Opportunity’ activities that produce competitive advantage and represent core competencies of the enterprise, as distinct from those ‘Risk’ activities that require sound execution to avoid competitive disadvantage but do not produce competitive distinction.  Smart-sourcing strategies can then be implemented to focus on tighter ownership and control of the ‘Opportunity’ activities, while looking to support sound execution at the lowest possible cost of ‘Risk’ activities.


Why Would You Consider Smart-sourcing?

Reasons for Smart-sourcing ·       Fluctuating capacity requirements ·       Cost pressures ·       Competitive pressures ·       Customer demands ·       Access to needed skills ·       Improve quality ·       Accelerate business growth ·       Extend and expand business

Before embarking on a new journey, every senior executive of the firm must ask some fundamental questions, and ‘Why’ is a logical first step.


Fluctuating Capacity Requirements

Virtually every business has ‘peaks & valleys’ in their workload, and many have looked offshore for lower cost labor.  For example, it seems in the IT industry there is always more demand from the user community than there is supply of IT resources to fulfill those requests.  By establishing strong relationships with offshore IT service providers, many firms have found gross savings in excess of 50% over in-house programming skills.  The attraction of offshore service partnerships for both staff augmentation and project work has seen a tremendous growth that is only projected to accelerate.

Cost Pressures

Cost pressures abound in business and very few firms are isolated from the increasing demand for business performance improvement.  Pressures from customers, , competitors, analysts and shareholders are forcing many companies to aggressively seek new ways of delivering similar products and services but at reduced costs.  For many businesses labor contributes a very significant portion of the cost of goods sold (CGS).  When you couple this with the additional costs for recruiting and training new staff on an annual basis, it is easy to understand why so many businesses are moving costs to lower cost economies.


Competitive Pressures


Not only does the pressure to lower cost come from within, competition is another reason many firms are looking at Smart-sourcing strategies.  To remain competitive, any internal  function must offer a stronger value proposition (higher value coupled with lower costs) than other potential outside providers.  And, just like the foreign automakers in the 1980s coming on-shore, providers from lower cost economies are looking to bring their quality solutions and lower-costs of manufacturing, execution, delivery, and support into higher cost North American and European markets.


Customer Demands

Ever increasing customer demands are another reason for Smart-sourcing, as businesses need to implement stronger retention strategies for their customers.  By leveraging external resources, many businesses are able to meet (and exceed) customer requests for specialized services, enhanced and new products, and customized offerings that may not be part of current standard offerings or competencies. 


Access to Needed Skills

With the advent of new technologies rapidly being embraced by businesses, many managers find themselves in need to access specialized skills to assist in their technology evolutionary path.  One reason to look at Smart-sourcing these specialized skills may be to protect current staff supporting legacy operations and infrastructure and rapidly respond to newer technologies without having to add the direct expense of the labor, as well as eliminate the delay in time required to either hire new staff or retrain existing staff.


Improve Quality

While many companies initially go offshore to gain cost reductions and efficiencies, they stay and expand their offshore operations and sourcing and service partnerships because of improved quality and productivity.  For example, in the IT industry Carnegie Mellon’s Software Engineering Institute’s Capability Maturity Model (SEI CMM) standards are now widely recognized as the benchmark for quality processes in software engineering and development.  Of the five recognized levels within the SEI CMM standards, level 5 is the highest and at present, only 116 locations in 73 companies have been audited and certified at this level.  Of these SEI CMM Level 5 organizations exhibiting the highest level of quality processes in software engineering and development, 71 of them, a remarkable 61%, are located in India.  Only 30 of the level 5 certified locations are within the US and virtually all of those are related to the defense industry with only a small handful in the commercial software space.


Accelerate Business Growth

Investors these days do not seem pleased with firms unless they can grow their business in the range of 20 percent annually.  During periods of ‘organic’ growth only, this is a very difficult task for management.  Therefore, to assist in acceleration of the business, firms are looking at out-sourcing alternatives to assist in this growth.  Examples include rapid sales cycles requiring additional resources for implementation and support and leveraging out-sourced staffing to assist in deployment and support.  This provides increases in top line numbers, without added direct costs into the business.


Extend and Expand Business

Additionally, to assist in furthering the organic growth, more businesses are looking at extensions & expansion of their services and competencies, by leveraging strategic partnered solutions to be able to provide more to their existing customers and attract new customers with enhanced and new products.  Again, smart-sourcing partnerships can provide a mechanism to add to additional products and services without taking on proportionate expenses.

No matter what your pressure(s) may be today, it is only a matter of time that many of the above and combinations of the above will be facing you in your decisions of how to improve new and improved deliverables to external and internal customers and while also lowering costs.


Competing Priorities

In every organization and across its many departments, units, and functions there are many competing priorities, activities, and processes.  An important responsibility of executive management of the firm is to balance all of these competing priorities in the battle for budget allocations and funding dollars.  To help create an analytical model to assist in understanding this, let us draw on the work conducted by the Boston Consulting Group and their famous BCG “box”.  In the diagram shown in Figure 1, you find a classic BCG Box representing the situation in which businesses find themselves with initiatives and activities in various stages of the product maturity life cycle.  These stages may be labeled: 1) High Potential, 2) Strategic, 3) Operational, and 4) Support.

As new products, services, or technology arrive on the scene, they typically represent ‘High Potential” opportunities.  High Potential opportunities generally find acceptance from early adopters in the markets.  Early adopters, while often eager and vocal supporters of a new line of business, still make up a relatively minor portion of the total potential market.  Therefore, we attach the characterization of High Potential to products and services at this stage in the product life cycle.  These early adopters often become market leaders and the new line of business begins to enjoy broader market adoption and growth.  At this point, the initiative and its associated processes become “Strategic” to the organization.  As the line of business achieves further market penetration and broad market acceptance, many organizations find the solution becoming fundamental to their business.  At this point the sales, support, and development functions of the company associated with this line of business are considered in the “Operational” quadrant in our model.  Lastly, as the product/service or technology becomes prolific throughout the industry, it becomes very much “business as usual” for the company and enters the “Support” quadrant of the model.  In this model we see organizations derive competitive advantage by being excellent in the high potential and strategic quadrants of our model.  An example of this movement of a new product / service and technology can be found in the banking industry in the ATMs of the 1970’s where it was very high potential as an innovative product for the banking community, then throughout the 1980’s ATMs became a strategic initiative for virtually every financial institution of size in North America, and then over the 1990’s this service transitioned into first operational and then support activities of the banking community.  One might also say that on-line banking and the Internet have gone through similar stages at this point, albeit in a much more rapid cycle of adoption and product maturity for the industry. 

The challenge for any organization is which high potential and strategic activities and opportunities to invest in, and how to shift existing funding to them from the operational and support activities of the business as they mature.  The shift in funding priorities must be properly paced.  While excellence in operational and support activities will not produce competitive advantage for an organization, if these activities are not done well they can become a competitive disadvantage.  Thus in Figure 2, we see how the high potential and strategic quadrant represent the opportunity quadrants for a business in which competitive advantages are typically derived.  The operational and tactical quadrants represent the areas in which risks and threats are experienced and competitive disadvantage can result for poor execution. 

This model can help managers better identify and understand how a Smart-sourcing strategy can help the organization achieve maximum value at the lowest cost to all stakeholders.  Activities and processes in the high potential and strategic quadrants require the most attention, direct ownership and control as these activities are key to the success and growth of the enterprise and those from which competitive advantage is produced.  Activities and processes in the operational and support quadrants should be done well enough to avoid competitive disadvantage but lower costs are often more important in these quadrants than direct ownership and control.  A Smart-sourcing strategy would suggest that moving to outsource some functions in the operational and tactical quadrants to 3^rd party service providers for whom those activities and processes are core competencies can produce quality processes at significantly lower costs.  This frees the enterprise to concentrate more of its attention and resources on the high potential and strategic activities.  Figure 2 illustrates the concept of moving your internal initiatives from quadrant 1 through 4 and looking for ways to offset your resources with those of “smart-source” service providers.

Conclusion


Leveraging offshore economies of scale will be a requirement of your business.  You must recognize this fact.  It is not a matter of should you outsource, it is just a matter of when you will do it and how (what approach) you’ll take in doing so.

The competitive pressures within your industry will increase.  Just like the retail manufacturing of the 1970’s, managers will be required to look at their internal operations and find significant ways to reduce costs to remain viable and competitive.  The demand and pressure to reduce costs will only increase over time.

To survive, and be able to turn from “Good to Great” you must discover your core competencies and begin to leverage them to your fullest advantage.  And, in finding your core competencies you will also need to find sourcing partners where their core competencies fill in for your gaps and weaknesses in you’re bringing the total product, service, or solution to your user community.  Therefore, you will need to implement Partnership Relationship Management (the Partnership Model) disciplines into your organization, and seek those sourcing partners that embrace that model as well.

Smart-sourcing provides the means for you to source appropriate solutions for given business processes in your supply chain to your organization.  It is a means to successful survival.

© Harbour Bridge Ventures, Inc., 2009, All Rights Reserved