Strategic sourcing – the road to organisational transformation

A BT White Paper

By Professor Robert E Morgan PhD, Talis Consulting Ltd

2Contents1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22. Outsourcing – the concept revisited . . . . . . . . . . . 53. Outsourcing growth – the evidence . . . . . . . . . . . . 74. Strategic sourcing challenges . . . . . . . . . . . . . . . . 95. Business need – the drive for competencies . . . . . . 106. Strategic sourcing as partnership

(or transactional contract) . . . . . . . . . . . . . . . . . . . 137. Strategic sourcing initiation

and development in practice . . . . . . . . . . . . . . . . . 158. Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189. Further information . . . . . . . . . . . . . . . . . . . . . . . 1810. References . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1911. Author biography. . . . . . . . . . . . . . . . . . . . . . . . 20

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There are a number of summary steps to strategicsourcing success that this paper explores. Theseinclude the following main themes:

● Outsourcing as a term does not do justice tothe flexible, relationship-based sourcing thatdepends on an open, partnership method ofdelivering value for the organisation. This paperwill refer to this enhanced area as strategicsourcing and the function of sourcing activity as ameans of achieving the desired goals.

● Sourcing is now an intrinsic vehicle to be used in the transformation process for all organisations, be they large governmentdepartments, large corporate entities,autonomous strategic business units, non-profitmaking organisations or any other form oforganisational constituency.

● Provided sourcing is done well, numerousefficiency, effectiveness and adaptiveness gainsstand to be made.

● There is a wide range of an organisation’sinternal activities that can be potentiallyoutsourced – with the only constraint beingcreativity and imagination.

— Medium sized organisations could have moreto gain in terms of cost realisation and agility ifthey embrace strategic sourcing correctly.

● Nowadays the way in which sourcing iscalibrated is not by whether an organisationoutsources some of its activities or not, it israther more a question of degree – to what extentthe organisation sources its activities.

● Primarily sourcing can provide the potential torealise value, but it also has the potential to createvalue for an organisation.

1. Introduction

● Although there may be a number of challengesin establishing and managing sourcing activities, these are hurdles that canusually be circumvented rather than be seen as insurmountable.

● Strategic sourcing enables organisations tofocus on what they do best – to leverage their keycompetencies and to create market space indoing so.

● Outsourcing is not a panacea. It should beviewed as a partnership with third parties, which requires frequent assessment, adjustmentand modification.

● The identification and selection of partners is critical to strategic sourcing success – soundpartnerships are built upon reciprocity,commitment and shared vision by all engaged parties.

● Sourcing strategy needs to dovetail with overarching corporate and businessstrategies in order to maximise return onoutsourcing investment.

Charles Handy, the respected writer, broadcasterand management professor, entitled his mostrecent book The Elephant and the Flea – NewThinking for a New World1. The metaphor Handyuses might not be immediately apparent uponfirst reading but it becomes clear that much ofwhat underlies his interpretation of futurebusiness success is outsourcing. The elephant is viewed as the large organisation seeking tobecome more agile throughout its entirebusiness, while the flea is the smaller entitywhich lives in the same habitat and serves to provoke new ideas, innovations andimprovements to the way in which the elephantmanages itself.

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The analogy is an interesting one and it servesto provide the basis for the outsourcing

commentary within this paper.

Nowadays, many large and indeed mid-sizedsuccessful organisations can claim to be a newbreed of ‘elephant’ – or what have been describedin the past as ‘shamrock organisations’ with onethird core staff, one third subcontractors and onethird part-time staff and professional advisers. Theymanage themselves in a lean and flexible manner,which enables them to do certain things well, whileleaving what they do not do so well to others.

Handy conveys the simple merits of outsourcingthrough a personal tale: ‘Like most people, Iguess, I painted my house – once. I grew my ownvegetables for a few years. I was poor, and Ineeded to prove to myself that I could do thesethings. I didn’t do them well. In fact, realisticallycosted, my vegetables probably cost more thanthose in the local supermarket. For me thesewere chores, not leisure activities. Eventually, Irealised that it made more sense for me toconcentrate on what I did best and pay for othersto do what they did best. Even if they cost memore per day than I could earn in the same time,I would still benefit if they did the work faster andbetter than I would have done.’

This same reasoning is developed within thispaper; based around the ability of the ‘elephant’to engage others to do work that it is itselfprobably entirely capable of performing, but forsound business and management reasons, itdecides to outsource certain activities to others to

conduct on its behalf. Therefore, enabling the‘elephant’ to continue to develop the activities thatit does best.

The paper considers next what the termoutsourcing means. This is then followed by anevaluation of the growth of outsourcing, whichcontinues with an analysis of the strategicsourcing benefits compared to the risks andproblems potentially involved.

Justification for strategic sourcing engagement isthen considered along with some of the selectedpartnership issues that can plague or strengthenthe sourcing relationship. Finally, somerecommendations for strategic sourcing initiationand development in practice are illustrated.

Outsourcing can range from the full service –using a single vendor, to the selective type –using multiple vendors to provide point servicessuch as applications, network and PC services.For convenience this paper adopts the model offull service outsourcing in its discussion ofoutsourcing practices.

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For years now, recognition has been given to theperformance gains that can be generated fromboth organisational efficiency and effectiveness.The former is concerned with, in the phrasescoined by Peter Drucker, ‘doing things right’,while the latter reflects ‘doing the right things’.Efficient organisations are not necessarilyeffective and vice versa. While many attempt todo things right, this is in itself a misguided aimfor organisations nowadays.

Such is the standard in most industries andsectors that the pursuit of performanceimprovement can no longer be gained fromsimply being more efficient. Moreover, thecampaign for organisational effectiveness thatmany organisations attempt to develop does notcontribute as much to success as might beanticipated. Combined with these two worthyaims, organisations today must fully recognisethat the nature and structure of competition andcustomer markets demands that providers ofproducts and services are agile in all areas oftheir activity. Business agility can be manifest inmany forms, but sourcing provides one of themost compelling and valuable investment vectorsavailable to organisations in their journey towardsbecoming an agile organisation.

A good management team knows what it shoulddo; a successful management team knows what itshould not do!

Outsourcing, far from being a new concept, is atbest commonly misunderstood and at worst ismisapplied. At its most basic level, outsourcingdescribes the situation in which an organisationpurchases goods, services or processes fromexternal vendors that it could otherwise haveproduced in-house. There are a range of possiblesourcing scenarios that can be applied to many

2. Outsourcing – the concept revisited

areas of an organisation’s activities including:transportation, distribution and logistics;manufacturing; marketing and sales; humanresources; finance; customer services;administration; facilities management; with themost common area of outsourcing being ICTactivities2 . These areas are not discrete andoutsourcing negotiations in one area often impactupon activities in another. Therefore, organisationsare finding that the decision whether or not tooutsource is nowadays an inappropriate startingpoint – it is more relevant for management teamsto ask the extent to which they should outsource.

So who is outsourcing? Although the origins ofoutsourcing are to be found in established, largecorporate firms, a growing proportion of thissubsequent growth can be attributed to theproliferation of organisational contexts thatimplement sourcing programs. For instance,central governments of many developed nationshold a remarkable number of outsourcingcontracts enabling their departments to focusmore specifically upon the activities that directlyimpact on their remit. Even so, centralgovernments have still tended to devote much oftheir outsourcing budgets, thus far, toinformation technology outsourcing.

While the scope of the outsourcing market ingeneral has grown and remains strong, eachmarket tends to move at different speeds witheach witnessing a particular pattern of growth.Other public services similarly find that types ofactivity that can be outsourced readily tend to beoutsourced first. However, all this points tooutsourcing growing in an ad hoc and non-systematic way, which can result in organisationsmaintaining a constellation of sourcing contractswith little inter-connection or synergy tappedfrom this experience.

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Various models exist that enable strategicsourcing to be calibrated. By and large, mostmodels can be reduced to an evolutionarycontinuum with five specific landmarks on theroute to transformational outsourcing or strategicsourcing. Each of these stages is brieflydiscussed below.

The embryonic stage exemplifies the situationin which the organisation is confronted withoutsourcing ancillary activities and basiccommodity-type offerings. These activities offerlittle value to be added but they tend specificallyto be outsourced for rudimentary cost savingpurposes to fix immediate problems. There islittle relationship building at this stage and thebasis of the outsourcing contract is primarilytransaction based.

Thereafter, and usually following favourableexperiences at the previous stage, thedevelopmental stage emerges and theorganisation seeks to deploy sourcing to areaswhich are more central to business processes. Atthis juncture in the sourcing pathway, valuebegins to be realised in various areas of supportactivities in the value chain.

The consolidation and inter-linking sourcingstage is experienced next where the organisation

adopts an overarching sourcing strategy, which isdesigned to dovetail with its businessstrategising. At this level, sourcing is considereda key strategic resource which requiresconsiderable pan-organisational management if itis to be exploited for maximum benefit.

The highest order stage that is observed tendsthen to be business process outsourcing,where key process activities are outsourced withfull contractual responsibility granted to thesourcing vendor; also strategic alliances arecommon as the level of integration at this stage ishigh. Such examples include finance or humanresource activities, and there are significantramifications at this stage for co-creating futurevalue opportunities and new value trajectories.

Beyond this stage, emerging models appearwhich can be collectively described as bespokeand custom built architectures for strategicsourcing. These models are commonly unique tothe circumstances that the sourcing organisationis confronted with. They are often hybrid formsof entrepreneurial venturing where strategicalliances occur to create a new independentbusiness entity. They are designed to be distinctbut as always in sourcing, they offer theorganisation the benefit of releasing resources tofocus upon the key competencies.

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Numerous headline statistics are frequently citedto convey the ubiquitous nature of outsourcing.For example, recently reported evidence indicatesthat the global outsourcing market is currently$320 billion, which attributes at least 28 per cent ofthis market to ICT activities3. With more and moreorganisations evaluating the merits of outsourcingparts of the value stream, a ‘bandwagon effect’ isbecoming apparent. As a result of increasingnumber of organisations engaging in forms ofsourcing, greater outsourcing commoditisation isbecoming evident as organisations raise theirgame to a comparable standard.

However, there are two aspects to a fullappreciation of the benefits that can be achievedfrom outsourcing. This natural dichotomybetween the streams of value realisation (whichseeks cost control from outsourcing) and valuecreation (which seeks development andinnovation from sourcing) has importantimplications for benchmarking within sectors.

Organisations that are thinking about building astrategic relationship should view their journeyas a continuum. Value realisation is the mainobjective in the early stages of most outsourcingrelationships, however the vision for a strategicpartnership should have value creation at itsheart. Although the fundamental aim of sourcingis to reduce risk, the benefits can be categorisedinto the areas outlined earlier:

Value realisation● Improve operating performance

● Reduce slack in systems, procedures and processes

● Resources are not available in-house

3. Outsourcing growth – the evidence

˛● Reduce or eliminate operational errors

● Increase consistency and quality standards ofsourced service activity across the organisation

● The activity is problematic and needs tight and focused management

● Increase operational and strategic flexibility soas to facilitate greater agility

● Increase return on investment

● Greater focus of accountability

● Difficulty in recruiting suitable personnel to the outsourced activity

● Reduce the implications of downtime

● Reduce management burden while retaining control

● Reduce operating costs and capital costs

● Increase cost predictability

Value creation● Share risks with strategic sourcing partners

● Opportunity cost advantage by releasing capitalfor investment in other areas of activity

● Enable wider input to innovative practices andperformance improvement

● Encourage a ‘halo effect’ by association withstrategic sourcing partners as ‘experts’

● More profitable use of in-house talent in non-outsourced area

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● Ability to ensure outsourced developments aresynchronised with business developments

● Accelerate time-to-market cycles

● Improve customer service and customersatisfaction

● Improve resource efficiency by betterexploiting core competencies

● Increase value by engaging specific capabilitybundles from sourcing vendors

● Gain access to new market opportunitiesprovided by strategic partners

● Improve existing customer propositions orintroduce new ones

● Enable more rapid growth and expansion of core business

● Increase commitment and employee motivationthroughout the organisation

● Catalysing a refocus of personnel and internalcapabilities on value creating vectors 4

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As outsourcing has developed and become morevisible in organisations of varying types, it is notunreasonable to conclude that it is now a legitimateactivity, which has respected credentials, provenmethodologies, robust metrics and reliable models.

Inevitably, as with all areas of management,strategic sourcing challenges can become visibleat various stages of engagement; but there is afundamental distinction to be made. At the pre-sourcing engagement level, many of the perceivedchallenges can appear as barriers. However, itneeds to be emphasised that it is perceptionsrather than direct experience, which forms thebasis of this impression – consequently, such aperspective is likely to be misguided, and uponfurther assessment is likely to prove misguided.

When some prior organisational experience ofoutsourcing has been gained then challenges canbe interpreted not as perceived barriers but ratheras legitimate difficulties that can be overcome. Aswith all forms of organisational development,challenges are confronted but then need to bemanaged. The outsourcing organisation needs tobe able to manage such difficulties, but in manyinstances where vendors are experienced andcommitted to their relationships, they may takethe lead in an advisory capacity, and in so doing,educate the sourcing organisation. An example ofthis is the practical advice that a company mayhave to go through in communicating keymessages to its staff.

A balanced view needs to be made involvingdetailed scrutiny of the tangible and intangiblefactors that stand to be gained or lost fromsourcing with external vendors. For instance, morethan outsourcing being about losing control, itshould ironically be about regaining control in thelong term. It is often said by management teamsthat they fear the loss and sacrifice in no longer

4. Strategic sourcing challenges

controlling aspects of their organisation’s activities.But this is the double-edged sword of sourcing – inappearing to lose control they gain greater controlby being able to manage their resources better.

In contrast, it stands to reason that there may wellbe cost advantages to outsourcing but this is notnecessarily always the case. Calculating thespecific financial costs associated with in-houseactivity is problematic, as is gauging the potentialcost of the intangible factors that provide asignificant input to in-house activity. However, thisby no means prevents any attempt to calculatethese costs, however crude they may be.

A useful worksheet for considering this is to gaugethe value that can be potentially derived fromsourcing in the form of a benefits/costs model. Themethod is simple and one that involves calibratingall the various metrics used to measure the benefitsfirstly for in-sourced activity (equation 1) andsecondly for the outsourced activity (equation 2).Then these indices should be respectively dividedby the costs – not only financial costs – derivedfrom in-sourced activity and outsourced activity.

Equation 1Benefits of in-sourcing ÷ Costs of in-sourcing= In-sourcing value

Equation 2Benefits of strategic sourcing ÷Costs of strategic sourcing= Strategic sourcing value

Where the calculated value is greater than 1 somedegree of value is generated by this method ofactivity. However, a comparison between bothvalues for equations 1 and 2 will reveal the relativevalue. If strategic sourcing provides greater valuethan in-sourcing, other things being equal, thisshould be the most attractive alternative to pursue.

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Organisations exist for a specific purpose – in seeking to fulfil their duties to a range ofstakeholders, they attempt to achieve a super-ordinate goal. Frequently conveyed through therhetoric of mission statements, corporate visioningprinciples and their raison d’être, they usually seekto achieve something distinctive in their customerofferings. Many North American and Europeanbusiness school professors throughout the lateSixties and Seventies were preoccupied with the way in which organisations adapted theirstructures to meet the requirements of newstrategies, so that the administrative arrangements,systems and processes could support the demandsof innovative strategic designs.

However, with this stepwise process, organisationsgrew in size and significant problems emerged,because at times the structures of the organisationwould lag far behind and overwhelm the strategiesthat they were intended to support. Notsurprisingly, this syndrome can be levelled atmany organisations today where potential successis stifled by bureaucratic, slow, hierarchical andlarge-scale structures.

If first principles of business agility were to beadopted, organisations would need to distileverything they do, to address the issues thatmake them distinctive – to do this they need to askthemselves one fundamental question: what are ourcore competencies and how can we identify them?

Most of the time, organisations do not claim thattheir ICT activities are a core competence. As hasbeen stated by Rita Cunha (Professor at NovaUniversity, Lisbon) recently: ‘IT outsourcing…may improve productivity of resources andupgrade technology and skills, leading to costreduction, service improvement and distinctivetechnical expertise improving critical aspects ofbusiness performance and implementing

5. Business need – the drive for competencies

business transformation initiatives including time-to-market, supply chain management orengineering operations… as well as make firmsconcentrate on core competencies and speed upthe development of new applications for thebusiness units.’ 5

So what are core competencies? According toMaurice Greaver of Greaver and Associates:‘Core competencies are the innovativecombinations of knowledge, special skills,proprietary technologies, information and/orhuman unique operating methods that are wellintegrated into the processes that provide theproduct/service benefits that customers value,and want to buy. Core competencies are whatcreate the attributes that make the organisation’sproducts/services different, and moreimportantly what makes the customer want tobuy the products/services.’ 6

James B Quinn of Dartmouth College, extendsthis view and argues that an organisation’s main purpose should be to concentrate ondeveloping a ‘best-in-world’ competency portfoliothat customers care about: ‘An effective corecompetency strategy focuses on two to four cross-functional, intellectually-based service activitiesor knowledge and skill sets that the company canbuild and maintain at best-in-world levels toprovide a flexible platform for futureinnovations.’7

This notion of core competencies can be viewedas a hub-and-spoke system. The hub representsthe distinctive purpose of the organisation, whichis manifest as its core competency strategy – ie,what it can achieve by fully exploiting its corecompetencies. The spokes, on the other hand, actas supporting mechanisms to achieve themaximum possible from the organisations corecompetency strategy (see Figure 1).

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Since the watershed outsourcing deal thatEastman Kodak struck in 1989, this corecompetencies question has been at the forefrontof outsourcing campaigns. According to corecompetence theories 8, the value proposition iscompletely clear: A driving strategic parameter isthat all organisations should consider at leastoutsourcing any activity that does not explicitlycontribute to core business purpose.

Despite the numbers indicating year-on-yearexponential growth in all sourcing modes, there remains a common initial reaction bymanagement teams to absorb the costs of in-house activity. Michael Porter of HarvardBusiness School crystallised the organisation as avalue chain; a network of primary and supportactivities that enable organisations to convertinputs to outputs. Doing these primary activities

Figure 1: Core competency strategy (hub) andoutsourcing activities (spoke)

Core competency strategy

● unique and distinctivecombination of competencies

● resources deployed tomaximise the return oncompetencies

● competencies that areperceived to be valuable by customers

● sustainability of core competencies

Outsourcing activities

● providing support tocore competencies

● vehicles to achieveefficiency andeffectiveness in key areas (value realisation)

Outsourcing activities

● opportunities to provide strategic input to core competencies (value creation)

● ability to create innovationin other ‘spokes’ andsustain core competencies

© Talis Consulting Limited, 2003

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well is vital but so too should organisationsrealise the contribution that support activitiesprovide to all areas of the value chain. Despite theassertion that all these activities should providevalue and be synchronised with one another, thisdoes not imply whatsoever that all, or indeedmany, of these value chain activities should be

performed in-house. Making the organisationleaner 9 is crucial but identifying the corecompetencies that make it distinctive andbuilding value creating sourcing arrangementsaround these, so as to augment thesecompetencies, is now a central feature of strategicsourcing plans 10.

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Where sourcing is deemed to be the mostappropriate alternative11, a determined andmeasured approach to outsourcing evolution isnecessary to building a relationship with thesourcing vendor. Strategic sourcing is certainlyan attractive vehicle in a bid to create an agileorganisation, but it is not a substitute for creatinga coherent strategy for managing resources tooptimise strategic performance.

Sourcing needs to be viewed as a strategic issueand not as a tactical or operational consideration.However, evidence points to the fact thatmanagement teams often do not developformalised systems and procedures to overseeand govern the sourcing contract.

Giga recently reported that few organisationshave established arrangements for the ongoingmanagement of outsourcing or strategic sourcingrelationships 12 illustrating, in part, the reason forthe high mortality of so many outsourcingcontracts; approximately 25 per cent fail withinthe first two years, which increases to 50 per centfailing across a five year horizon.

Organisations do not outsource – people do!Sourcing is, and will remain, a people-basedexchange process and these behavioural issuesare the bases for the success that can be achievedor they can just as easily be the reason for thecollapse of the contract. Of all the various types ofinter-organisational exchange that can take place,outsourcing can be one of the most complex.

As is often the case with new initiatives, partiestend to engage initially with enthusiasm and highexpectations, which all too often becomechallenged by day-to-day realities. Repeatedly,organisations which are surveyed to gain an

6. Strategic sourcing as partnership (or transactional contract)

understanding of the criteria they explicitlyemploy in screening potential outsourcingvendors generate a list resembling:

● the vendor’s commitment to quality

● the vendor’s price

● the vendor’s testimonials and industry reputation

● contract terms and their flexibility

● the vendor’s range of resources available

● the vendor’s ability to add value

● geographical and physical location 14.

However, despite the importance of theseconsiderations in creating credible sourcingagreements, they do not capture one of the mostvital elements for in-life strategic sourcingmanagement: relationship building and day-to-dayinteractions between the sourcing provider andthe client organisation.

This relational quality needs to be establishedearly. While it can develop and mature incommitment terms, sourcing partnership needs‘corporate glue’. Typically, sourcing is a strategic-level decision and it requires the buy-in of the topmanagement team in not only initiating thesourcing arrangement but also in developing anongoing commitment to its progress.

It is often said that executives are excellent attaking decisions but poor at solving problems.Decision making is but one component of theproblem solving process. Frequently, topmanagement teams justify their abdication of

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tactical and operational responsibility becausesuch detail is beyond their horizon and so itbecomes the responsibility of mid-level managersto implement the outsourcing apparatus. Whilethis is, prima facie, an implicit feature in thestructural design of organisations and individualroles and responsibilities, it results insignificantly reduced momentum behind thesourcing arrangement. This, in turn, often resultsin the potential sourcing opportunities not beingfully exploited. At the same time, more often thannot, the top management team may have turnedtheir attention to some other agenda issue thatpreoccupies them, which has the implication ofrelegating sourcing opportunities even further.Consequently, corporate glue (as described byGartner) is required to make strategic sourcing‘sticky’, so that there is an organic cohesivenessto the development of strategic sourcing.

Bill Boyd of NCI Information Systems, suggeststhat a successful relationship between outsourcingparties needs to be based on three principles:

● a statement of work must be drafted and agreedupon between both parties

● agreement should be made between theinterface methods on a day-to-day basis betweenassigned liaison personnel within both parties, and

● a plan of communications, setting out the fullschedule of meetings and reporting structures,should be in place so that each party is informedregularly by the other.

In addition to Boyd’s mechanistic elements, afourth element needs to be considered – ‘softfactors’, and these are considered in Section 7.These include the intangible ‘fuzz’ that envelopessuccessful relationships such as shared vision,common end goals and willingness to partner.

As a consequence of these agreements, trust andconfidence can build, responsiveness can besecured and so innovation can thrive15. What thisinvolves is establishing good citizenshipbehaviours. This is problematic because much ofwhat outsourcing can represent to organisationsis at odds with fostering good citizenship; forexample, the properties of sourcing are flexibility,cost-savings, minimum service expectations, etc,which typically conflict with citizenship values ofloyalty, trust, motivation and dedication.

While good relationship building practices help toenhance the value generated from the agreement,a simple reality means that all too oftencitizenship is a rare quality from the outsourcingpartner. As has been suggested, the mereexistence of outsourcing contractors means that:‘they are in a market rather than a familialrelationship with the organisation, and marketactors are expected to exploit their opportunities,not to take care of one another’.16

Fundamentally, business relationships areinherently intangible, ambiguous and oftentransient. This makes their measurement all themore difficult. However, just because the issuesare ‘soft’, does not mean that they cannot bemeasured using qualitative metrics.

Measurement batteries have been developed forleadership, culture, relationships and resilience inoutsourcing agreements by Nancy Hutchin of theOutsourcing Institute17. These issues areimportant factors in maintaining and developingthe agreement and need to be incorporated indue diligence measures. It is only by being awareof and then measuring these soft aspects of theexchange, that improvements in the relationshipatmosphere can be created. Only then is thelongevity and sustainability of sourcingagreements likely to improve.

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In the move to consider sourcing initiation andexpansion, questions need to be asked,judgements made and decisions taken. Before theorganisation embarks upon the sourcing journey,or indeed develops its strategic sourcing activities,decision makers need to be cognisant of variousscreening criteria that can be employed to assessthe potential contribution that the sourcing vendorcan make. It is important to assess sourcingvendors in the following respects:

● established track record

● position in the market

● current ability compared against its investmentin acquiring new skills and rolling-out innovations

● depth and scope of current/anticipatedoutsourcing portfolio

● extent to which accountability can be assessed

● ability to build relationships

● flexibility

● scalable ‘learning effects’ (to what degree do vendors understand the sourcingorganisation’s business)

● the vendor’s stance on overcoming operational obstacles

● financial, legal, technical and other duediligence considerations(NB these criteria do not include the legal orfinancial considerations necessary in screening)

Value realisation may well be a desirable optionfor an organisation – where it merely seeks to

7. Strategic sourcing initiation and development in practice

outsource in order to rectify weaknesses in itscurrent operations and practice. In practicalrespects this serves to capture what is known asthe first two stages of the sourcing relationship,which is sourcing utility and enhancement.

Alternatively, and more importantly, strategicsourcing needs to be considered, not as anadjunct to core business, but rather as a key inputto creating future business competencies. Onlythen can an organisation claim to have exploitedthe full potential of strategic sourcing in creatingvalue; which is akin to the third stage of sourcingrelationship being sourcing transformation.

However, the majority of research evidence pointsto the fact that organisations have paid too muchattention to value realisation, to the neglect of valuecreation18. The reason for this is that all too oftenorganisations look towards the marketplace in aquest to imitate best practices and assimilate newideas. Benchmarking activities in this respect servewell to reduce management team anxiety byindicating parity with other players, but they takelittle account of the true value creation.

Is the benefit of strategic sourcing and valuecreation available long-term? It certainly can be,provided some key prescriptions for engagementare considered. These include:

OrganisationStrategic sourcing partnerships require coherentorganisational and resource arrangements.Liaison and reporting lines need to beestablished, roles and responsibilities should beclear and transparent, communication channelsmust be agreed, and systems and procedures thatcascade from the structure should bedocumented and adhered to. The implications of

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this means that there is common understandingand clarity in structure and organisation.

UncertaintyToo often organisations seek to somehow controlchange. If a strategic view to sourcing is adopted,organisations can transform by managing theinevitable uncertainty that surrounds the processof initiation and development of the partnership. By doing this, greater flexibility can be achievedas well as shared risk, so that both parties canrespond to the uncertainty that surrounds theentire business. Fundamentally, managing thisuncertainty is attributed almost entirely to themanagement skills exhibited and the strategicrole that sourcing should take in top managementteam strategising.

TechnologicalStrategic sourcing does not take place in avacuum. Frequently, the context in whichsourcing is engaged is not considered adequately. The technologies employed by the outsourcingorganisation must be considered vital to not onlyrealising value but also to create value. Thesourcing vendor must be familiar with the entiretechnology which provides the customer offering,as well as its current and future resources,competencies, plans, prospects, markets,customers and end users.

SkillsSupporting core competencies are the unique skillsthat enable the organisation to flourish. Theseskills may well be sourced in house, but wherethey are outsourced, greater advantage potentiallystands to be gained with specialist vendorssupplying discrete aspects of light-touch sourcing,through to those one-stop shop vendors providing

full service business process outsourcing. Thesynergy created from complementing anorganisation’s competencies with thosecompetencies of an outsourcing vendor allows forsuperior performance to be gained. One of thedifficulties that can prevail in outsourcing is themyopia that people can potentially bring to thearrangement. Specialist skills are vital, but theyhave their place. More importantly, strategic andbroader skills are necessary so as to oversee thesourcing activities and examine the effects of itscontribution to the strategic sourcing organisation.

OpennessWhile the request for proposals, schedule ofwork, and various contract stages enablesclarification of the strategic sourcing agreement,the essence of successful ongoing sourcingpartnerships is one of openness between parties.Without the mutual exchange of ideas, problems,difficulties and challenges, the partnershipbreaks down and becomes tantamount to being atransactional, exploitative, short-term and entirelycost focused exercise. The spirit of thepartnership cannot be over emphasised, commonend goals are needed to secure alignment, andshared values and guiding principles govern theatmosphere of exchange.

UtilityA utility focus can be conceived of in many ways,but it essentially involves devoting managementand resource attention to providing sourcingvalue, which either directly or indirectly satisfiesthe wants and needs of customers and end users. Whether service or product focused, sourcingorganisations need to leverage their internalcapacities to provide utility in customer markets.Moreover, considering the utility provided bycurrent market incumbents (competitors) and

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potential substitutes (new entrants) means thattransformational sourcing can be dynamic innature, ensuring that changes in processcorrespond to required changes in outputs (utility).

RelationshipsCommonly known as the ‘bow tie’ approach tointerorganisational management, the interactionbetween two or more partners is sourced to asmall number of people in each organisation.Through collaborative relationships, sharedvision for the strategic sourcing agreement canbe created which serves as a sound platformupon which to build the sourcing framework.Cited as one of the main reasons for thebreakdown of outsourcing agreements, poorrelationships mean that a sound exit strategyshould be in place to cover this form ofcontingency. However, it is better to foster asound relationship than plot for a divorce.

CommitmentCommitment from the sourcing vendor needs tobe met with the same from the management teamof the sourcing organisation. However, withsourcing developments come changes inorganisational processes and routines, whichinevitably means resistance will emerge fromemployees. The inertia that can be created needsto be managed and the potential barriers andproblems to sourcing need to be identified early.

Incentives need to be put in place and aneducational programme needs to be followed. Ifemployees do not buy-in to the rationale forsourcing, then prospective transformational gainsstand to be lost and the value of strategicsourcing will not be fully realised.

InnovationOne of the value creation opportunities thatsourcing provides an organisation with isinnovative capabilities that improve the sourcingtasks which, in turn, augment the corecompetencies that they are designed to support.A virtuous circle can be developed therebyimproving the organisation’s offering to themarket place.

NetworkNetwork extensively with information providersto identify changes in strategic sourcing trends.The outsourcing industry changes frequently andthe three Ms of (business) models,methodologies, metrics require constantmonitoring for improvements that can be made tothe way in which strategic sourcing is harnessed.

GovernanceThe governance structures and mechanismsserving to assess, evaluate and coordinate theorganisation’s sourcing strategy need to be tunedto the needs of the business. Ill-conceivedoutsourcing agreements mean that inevitableproblems will be experienced at a later date and,without appropriate governance in place, they willfail to be identified or managed adequately.Strategic sourcing needs to be aligned to thestrategic needs of the business and evaluatedaccordingly. Where business needs shift, soshould strategic sourcing governance bereconfigured to accommodate the dynamicresponse to emerging conditions. Consequently,the sourcing organisation needs to work closelywith the sourcing vendor so as to continuouslyadapt to changing needs.

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This paper has sought to demonstrate many ofthe issues surrounding strategic sourcinginitiation and development. It is not the author’sintention to suggest that strategic sourcing isnecessarily suitable to all organisations. Thedecisions surrounding this strategic issue isaffected by many considerations and, above all,caution should be exercised in progressing downthe sourcing path.

Like all strategic developments, an incrementalapproach needs to be employed working with thesourcing vendor. As knowledge builds andcapabilities develop, sourcing organisations canbuild greater levels of commitment to theirpartners and gradually expand the proportion ofactivities that are outsourced.

8. Conclusion

Many bad experiences and ill-informed anecdotalaccounts exist throughout many industries, but itremains that each organisation has unique needsand, as such, the strategic sourcing partners whoexcel are those that provide bespoke services totheir clients. These successful sourcingorganisations recognise that, however standardiseda process appears, it is the customisation of theirservices that adds value to their clients. When thisis achieved, strategic sourcing is a true companionto organisational success.

9. Further information

For more information, contact your BT AccountManager, phone us free on

0800 400 478

or find us at

www.bt.com/business

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1 Handy C, The Elephant and the Flea: NewThinking for a New World. Arrow, London, 2001

2 The Outsourcing Institute and Dun andBradstreet, The 2000 Outsourcing Index. Available at www.outsourcing.com

3 (ibid)

4 Deavers K L, Outsourcing: a CorporateCompetitiveness Strategy, not a Search for LowWages. Journal of Labour Research, Vol 18 (4), pp 503-519, 1997; DiRomualdo A and Gurbaxani V, Strategic Intentfor IT Outsourcing. Sloan Management Review,Vol 38 (4), pp 67-80, 1998; Interview with Maurice Greaver hosted by FrankCasale. Available at www.outsourcing.com; Verizon, The IT Outsourcing Dilemma:Considerations in the Evaluation of IT as aBusiness Strategy. Available at www.verizonIT.com; Kelley B, Outsourcing Marches On. Journal ofBusiness Strategy, Vol 16 (4), pp 51-64, 1995;Newman K, Organisational Transformationduring Institutional Upheaval, Academy ofManagement Review, Vol 25 (3), pp 602-619

5 Cunha R C, Privatisation and Outsourcing, in C L Cooper and R J Burke (Eds), The New Worldof Work, pp 29-46, Blackwell, Oxford, 2002

6 Interview with Maurice Greaver hosted byFrank Casale. Available at www.outsourcing.com

7 Quinn JB, Strategic Outsourcing: LeveragingKnowledge Capabilities. Sloan ManagementReview, Vol 40 (2), 1999

8 See Prahalad C K and Hamel G, The CoreCompetence of the Corporation. Harvard BusinessReview, Vol 69 (May/June) pp 79-91, 1990

10. References

9 Womack J P and Jones D T, Lean Thinking:Banish Waste and Create Wealth in YourCorporation. Simon and Schuster, New York, 1996

10 Mazzawi E, Transformational Outsourcing.Business Strategy Review, Vol 13 (3), 2002

11 Giera J, How to Determine When Outsourcing isthe Only Alternative. Ideabyte, Giga InformationGroup Inc, RIB 062002-00105, 2002

12 Giera J, Live from GigaWorld: VendorManagement for Outsourcing and IT Services –The Role of the Chief Sourcing Officer. PlanningAssumption, Giga Information Group Inc, RPA052002-00016, 2002

13 The Outsourcing Institute and Dun andBradstreet, The 2000 Outsourcing Index, availableat www.outsourcing.com

14 The Outsourcing Institute, Survey of Currentand Potential Outsourcing End-Users, TheOutsourcing Institute, New York, 1998

15 Boyd W, Creating Win-Win OutsourcingRelationships. The Outsourcing Institute, NewYork 2002

16 Pearce J, Towards an Organisational Behaviourof Contract Labourers: Their PsychologicalInvolvement and Effects on Employee Co-Workers. Academy of Management Journal Vol 36 (5), pp 1082-1096, 1993

17 Hutchin NL, Measurement in Systems: AQualitative View (or How to Handle the SoftStuff?). The Outsourcing Institute, New York, 2002

18 Venkatraman N, Beyond Outsourcing: ManagingIT Resources as a Value Centre. SloanManagement Review, Vol 38 (3), pp 51-64, 1997

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In 1999 Professor Robert Morgan joined thenewly established School of Management andBusiness at the University of Wales, Aberystwythas the Foundation Chair in Marketing andStrategic Management and Head of theMarketing and Business Organisation ResearchGroup. He is a Chartered Marketer and a Fellowof both the Chartered Institute of Marketing(CIM) and the US Academy of Marketing Science(AMS), and is actively involved as a member inmany other global professional organisationsincluding the Strategic Management Society(SMS), American Marketing Association (AMA),European Marketing Academy (EMAC) and theAcademy of Marketing (AM). He is chair forbusiness-to-business research at the 2003 WorldMarketing Congress in Perth, Australia. He is therecipient of many research distinctions for hismanagement writing and various teachingexcellence awards.

Following his first degree in Management Studiesat Cardiff Business School, Cardiff University, hegained industrial experience within the electronic

11. Author biography

components supply sector, and returned to hisalma mater to develop an academic career,completing his doctorate in global strategy andworking as a researcher, lecturer and seniorresearch fellow in marketing and strategy.Following this, he moved to take up anappointment at University of Wales Aberystwythwhere he is currently professor and chair.

Professor Morgan’s main academic andconsulting interests are business agility,knowledge management and corporateentrepreneurship. His research reports andpapers number over 90 which includepublications in many leading internationalacademic journals in the business managementfield, along with other articles in executivejournals, conference proceedings, books, editedworks and other media. His research findingsand management ideas have been presented tovarious governmental and corporate audiences,most commonly within the US and UK but also inArgentina, Australia, Germany, Greece, Malaysia,Norway, Spain and Turkey.

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