For many years, executives believed that costs could be reduced by outsourcing certain functions to specialty firms. Businesses that had seen savings by outsourcing logistics, warehousing, real estate, payroll administration, maintenance repair and operations and IT Operations, for example, began to seek larger and more significant targets. But these were still only from a labor pricing and cost reduction perspective.
More recently, capability improvement has emerged as another rationale for outsourcing. Additional performance goals above cost should be driving capability investment decisions.
Strategic sourcing allows companies to take full advantage of new capability opportunities, cost, and flexibility levers; whether delivered by traditional suppliers and BPO suppliers, trading partners, distributors, agents and even customer self-service models. Key questions to consider include:New capability opportunities
- Are there predictable changes foreseeable? If so, what do we need to capitalize on them.
- What is the business payoff (capability strategic value to cost)?
- How much risk can we take on? Can the risk be shared with partners, customers?
- What are the related infrastructure and other component costs to mobilize the capability?
- What are the sources of uncertainty that make flexibility valuable?
- Can improvements in current capabilities buy us time?
In an uncertain and volatile business climate, there are strategic advantages to outsourcing or brokering capabilities:
- Speed: close capability performance gaps quickly. Supplier has unique IP/ distinct competency to deliver the capability for you.
- Improve quality: CMM Level 5, ISO 9000, etc., required for new markets
- Displace responsibility: reduce hassle factor, address regulatory issues and compliance. Also, to retain IT staff and increase company resources/flexibility to focus on strategic work
- Enable Agility: access to skilled resources and ‘state of the art’ technology, and/or access to technology updates to accelerate business transformation
By thinking about sourcing in terms of value to cost and volatility, leaders can identify which sourcing partners are needed and when. For underperforming capabilities, high value with low risk is a "source now" decision. High value with lots of volatility suggests value in delaying ownership of the capability. Here the decision could be outsource it in the interim while learning about competitors, technology, and other factors creating the volatility.