IS SOURCING
UNIT 2
SOURCING MODELS: WHAT AND WHEN TO
OUTSOURCE/OFFSHORE
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FOUR SOURCING MODELS
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Domestic outsourcing
Offshore outsourcing
Domestic insourcing
Captive models
2
OUTSOURCING SCOPE
• Total outsourcing >80%
• Total in-house sourcing <20%
• Selective sourcing 20-80%
3
SOURCING CONSIDERATIONS
4
CRITERIA FOR DISTINGUISHING
BETWEEN O/S MODEL TYPES
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•
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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
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•
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Time and materials model
Exchange-based model
Netsourcing model
Joint venture model
Enterprise-partnership model
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7
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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Aka. Impact of IT on core operations
•
McFarlan & Nolan, 1995
Aka. Impact of IT on core strategy
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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 risks
3. 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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15
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.
2.
3.
4.
5.
6.
7.
8.
Codifiability of data to be transferred
Training required
Cost of monitoring performance levels
Difficulty in assessing mgrs level of confidence that their
quality assessments are true
Desired ed level of employees
Revenue per vendor
Number of sub-tasks
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 processes
2. Reinforce credibility and trust
3. Find the scale-economy sweet spot
1.
Consolidation and standardization
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