Point of View on Sourcing Strategies


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Point of View on Sourcing Strategies

  1. 1. PoV_Sourcing_RZ 01.02.2008 13:01 Uhr Seite 1 Cover-Sector/Discipline/Alliance the way we see it Point of view on sourcing strategy Defining the right sourcing strategy for your organization
  2. 2. PoV_Sourcing_RZ 01.02.2008 13:01 Uhr Seite 3 the way we see it Point of view on sourcing strategy Utrecht Capgemini Consulting Nederland BV January 2008 © 2008 Capgemini. No part of this document may be modified, deleted or expanded by any process or means without prior written approval from Capgemini Point of view on sourcing strategy 3
  3. 3. PoV_Sourcing_RZ 01.02.2008 13:01 Uhr Seite 4 Introduction Besides the need for cost reductions and flexibility, does your company also struggle to decrease the time to market of your products or services and simultaneously create value? Especially given the consequences of today’s volatile and rapidly transforming global markets? Increased competition, cost reduction opportunities and the agility to respond to globalization are just a few factors to take into consideration when preparing to define a sourcing strategy. Increased competition Political and Cost reduction environmental and increased challenges time to market Agility to respond to globalisation A clear and well defined sourcing strategy is the key to success in a dynamic environment. But what is a good sourcing strategy? What are the main trends and insights? How do you define the right sourcing strategy for your organization? Which elements should be part of a compelling sourcing strategy? Which activities can be outsourced and which should be kept in-house? How do you trade-off short and long-term objectives? The questions are many and varied. Sourcing encompasses all support functions that underpin an organization’s core business. These support processes include Finance, Human Resources Management, Information Support Management and Procurement, but can also include processes that are more critical to your core business. Records show that most sourcing decisions fail to deliver the potential value. In most cases the reason for this failure is that few sourcing decisions are based on an explicit strategy and/or are providing the guidance on how to successfully execute a chosen sourcing strategy. This point of view from Capgemini will take you through the different sourcing options you have as a company. It also looks at the selection and validation of the appropriate sourcing mode and the different sourcing approaches that need to be considered. This will give you an insight not only into the different theories behind strategic sourcing, but also into an effective execution in combination with a concrete implementation plan. 4
  4. 4. PoV_Sourcing_RZ 01.02.2008 13:01 Uhr Seite 5 Table of contents 1. Sourcing strategies 06 1.1 Rationale behind sourcing strategies 06 1.2 Choosing the right sourcing strategy 07 1.2.1 Ownership 08 1.2.2 Rightshore: onshore, nearshore or offshore 08 1.2.3 Management: tight or light? 09 1.3 Approaches to implementation 09 1.4 The multi-tower question 09 2. Sourcing: trends and insights 10 2.1 Human Resources 10 2.2 Procurement 12 2.3 Finance & Accounting 13 2.4 IT Sourcing 14 2.5 The future of global sourcing of services 16 2.5.1 The utility model 16 2.5.2 SaaS: Software as a Service 17 3. Sourcing strategy approach 18 3.1 The closed loop sourcing strategy process 18 3.3 Why Capgemini 22 Authors: Stefan Westdijk, Mark Hofland, Johan Hiensch, Ton van Dolder, Michel Borgers, Ron Broeren
  5. 5. PoV_Sourcing_RZ 01.02.2008 13:01 Uhr Seite 6 1 Sourcing strategies Sourcing is the delegation There are numerous definitions of sourcing. Generally, sourcing can be of business functions to a defined as delegating business functions to a separate business unit or third separate business unit or party. A sourcing strategy encompasses all functions that underpin the core third party. business of an organization. By altering the management of these support functions, organizations aim to optimize and improve their operating model. The sourcing strategy is about defining what an organization wants to do with the tasks, functions or processes that are not differentiating the organization from its competitors. And the strategy does not only apply to the non-critical processes but to every task, function or process that provides added value to the organization. A sourcing strategy is 1.1 Rationale behind sourcing strategies the direction of the organization regarding Defining and implementing a sourcing strategy can have a major impact on management of functions several business functions and processes, including Finance & Accounting, and elements of the direct Human Resource Management, Information Support Management, Procurement, value chain in order to Marketing and Sales and Logistics. optimize the operating model of the organization Finance and Accounting Non critical processes Human Resources Management Mar Information Support Management gin Procurement Critical processes Inbound Marketing Mar Logistics & Outbound and Operations Services gin Supplier Logistics Sales Relations Porter’s value chain1 can be used to define the scope of the sourcing strategy. The basis of the sourcing strategy is what to ‘make’ and what to ‘buy’. Every enterprise will have to identify whether a specific business function or supporting process provides a strategic advantage over its competitors. The primary drivers for sourcing of functions or processes are: s Less ownership of infrastructure and resources, based on a desire to increase flexibility s Increased agility and decreased time to market s Focus on core business and the need to become more cost effective 1Competitive advantage: creating and sustaining superior performance, M.E. Porter, 1985 6
  6. 6. PoV_Sourcing_RZ 01.02.2008 13:01 Uhr Seite 7 the way we see it 1.2 Choosing the right sourcing strategy Outsourcing is often perceived as the next step after optimization of a shared service center. But is this really the right sourcing strategy for your organization? Capgemini has carried out basic research into the global sourcing of services. As part of this research, decision makers from a number of private and public sector organizations were interviewed. We sought to define a comprehensive set of global sourcing modes, understand the potential value of each global sourcing mode and how environmental characteristics influence an organization’s service sourcing options. Finally, we wanted to understand the influence of collaborative competence on transactional risk to assess the relative value to be expected from a service sourcing decision. Selecting the right sourcing mode means finding the right combination of ownership (owned or not owned), rightshore (onshore, nearshore or offshore) and management (tight touch or light touch) or governance model. These three elements have been captured in a cube of sourcing options or sourcing modes. This cube is called the Global Sourcing Strategie cube®. Shared Support Organization Nearshoring (e.g. facility power house) Spin off (e.g. new company) Captive offshored (e.g. offshored SSC) Horizontally outsourced (e.g. BPO vendor) Uffshore Selective sourcing or multiple Vertically outsourced sourcing is a combination of (e.g. Managed Service Providers) various sourcing options Light Onshore Touch In house BPO Vendor Tight Touch Owned Not owned Optimized in house solution (e.g. in house SSC, in sourcing or optimised processes) On the basis of interviews with several decision makers a decision support tool model has been defined, called the GSS cube®. This cube will allow organizations to assess the relative merits of each sourcing option for their given circumstance. Based on the GSS cube’s three dimensions, sourcing can take on different forms. The sourcing strategy with the least impact from the perspective of ownership, location change and intensity of management is a shared service center. Shared service centers are undoubtedly the best known sourcing option or mode. The concept of shared service centers emerged in the 1970s in North America and is now widespread in Europe and Asia. Today companies either choose to optimize existing shared service centers or set up new shared service centers in competitive markets. By diagnosing existing shared service centers, it appears that outsourcing becomes critical, including the transfer of business processes to offshore and near- shore locations. However, many companies in Western Europe have not yet embraced Point of view on sourcing strategy Sourcing strategies 7
  7. 7. PoV_Sourcing_RZ 01.02.2008 13:01 Uhr Seite 8 the full potential of technology enablement and the extension of the European Union. Evaluating the geographical scope and location strategy can be lucrative, whether this is outsourcing or cross-border shared services as potential sourcing strategies. This could take the organization in the direction of the highest impact sourcing strategy from an ownership, location and management perspective: out- sourcing to an offshored third party where management attention is not critical. 1.2.1 Ownership Increasingly, companies prefer to outsource work to different providers instead of negotiating one large contract. The most successful companies are using multiple sourcing as a strategic best practice, not just to save money but to increase organizational flexibility and time to market. Disciplined multi sourcing offers a new framework to help organizations gain control of their sourcing decisions and ensure that their service relationships (whether insourced or outsourced) deliver long-term value and support business strategies. The expected gains are best achieved through proper coordination with internal systems and processes and not by ad hoc attempts at blindly reducing costs. Our experience clearly shows that the most successful companies are using third parties as a strategic best practice in order to increase organizational flexibility. The gains achieved by having no ownership of a specific function or process require proper coordination with internal systems and processes. 1.2.2 Rightshore: onshore, nearshore or offshore Cost saving remains the key criterion for most organizations in the process of defining the right sourcing strategy. But even in low-wage countries such as India and China prices are rising quickly and margins are becoming tighter. The borders between onshore versus offshore delivery of business process outsourcing services are beginning to blur. Unsurprisingly, therefore, companies are increasingly focusing on the other benefits of outsourcing, such as workforce flexibility, improved quality of processes or functions, faster time to market and the acquisition of additional hard-to-find skills. Still, labor savings can be enormous and gains in efficiency, productivity, quality, and revenues can be huge when fully leveraging offshore talent. While the adoption of a shared service structure is viewed by many as an appro- priate strategy to pursue, most companies still struggle to devise optimal strategies and to generate adequate returns on investments for their projects. This is because none of the approaches that are commonly adopted is recognized as universally effective. Based on our experience, offshoring is an important part of the overall growth strategy of many large organizations. The key driver for offshoring is not about low wage prices but rather workforce flexibility, quicker time to market and gaining additional skills. When offshoring risks are too high (poor service quality, lack of cultural fit or loss of control) a captive model is applied. This captive model ensures that offshore components adhere strictly to corporate procedures and rules. 8
  8. 8. PoV_Sourcing_RZ 01.02.2008 13:01 Uhr Seite 9 the way we see it 1.2.3 Management: Tight or light Offshore outsourcing can deliver on its promises, but it takes a tremendous amount of detailed management on both the client and the supplier sides to realize expected benefits. Poorly managed cost-saving strategies can end up costing far more than the original savings planned. This has resulted in a number of companies pulling back from offshore activities. Such strategies must therefore be carefully planned and implemented. A good alternative is to find an onshore service provider who manages all offshore activities. From the initial sourcing strategy decision through to managing a long-term sourcing relationship, enterprises must understand the impact of relationship complexities and new business constructs in a changing world. The key to a successful sourcing strategy is not about crafting the plan and finding the most appropriate partners but lies within the management of the delivery or execution of the sourcing strategy. Successful deals are those built for change. From the initial sourcing strategy through managing the long-term relationship, organizations must understand the impact of relationship complexities and new business conducts in a changing world. 1.3 Approaches to implementation As soon as the right and most beneficial sourcing mode has been selected, an implementation scenario needs to be defined. Organizations should assess internal services, decide what they want to achieve, and determine how to get there. There are five implementation possibilities that might be considered: 1. No transformation: current processes and methodologies can be optimized. 2. Reengineer and move: transform the process and then outsource. 3. Move and reengineer: outsource the process and then transform. 4. Step by step: programmed transformation. 5. One big leap: lift and shift concept. A business case can be made once the objectives of potential sourcing scenarios along with the appropriate approach are clearly defined. This will result in a proper identification of the benefits, investments and potential risks and mitigations. 1.4 The multi-tower question In a multi-tower approach In paragraph 1.1 we discussed that, based on the competitive advantage generated processes are handled by your processes, a strategy needs to define which processes will remain core to and sourced to a single the organization and which ones need to be ‘sourced’. Regardless of your chosen service provider sourcing mode, a strategy for managing a ‘multi-tower’ approach is an option. In the case of outsourcing processes such as Finance & Accounting, HR and Pro- curement, this approach sees the processes being bundled and sourced to a single service provider. In the case of keeping ownership of these processes in- house, this implies the setting up of a single shared service center where the processes will be executed on an integrated basis. Service suppliers are beginning to show synergies but as an organization you might not be utilizing the best supplier for each process or service. Point of view on sourcing strategy Sourcing strategies 9
  9. 9. PoV_Sourcing_RZ 01.02.2008 13:01 Uhr Seite 10 2 Sourcing: Trends and Insights Sourcing strategies are not limited to an organization’s supportive functions or processes. Capgemini believes that sourcing strategies should look at corporate development through the lens of sourcing. This would require elements of the direct value chain to be considered in order to optimize the operating model. In this way, the definition of a sourcing strategy will help organizations focus on where most value is added and it will support decisions on what an organization should ‘make’ or ‘buy’ in terms of processes and functions. In Europe, Human Resources, Procurement and Finance & Accounting are the most mature processes currently being subjected to sourcing strategies from a supportive service perspective. 2.1 Human Resources The offshore delivery of Human Resource services has increased rapidly in the past few years, largely due to the fact that HR processes lend themselves well to outsourcing. In 2005, the total enterprise spending in this area amounted to € 23.6 billion, the highest spending of all BPO services2. Traditionally, payroll processing is the most popular choice when it comes to outsourcing HR- processes. Enterprises are now considering the outsourcing of recruitment, training and compensation and benefits administration. Driven mainly by cost savings, organizations are increasingly looking at outsourcing end-to-end comprehensive HR processes instead of a single process. Among these comprehensive HR-processes are HR compliance and talent management. Multi- process outsourcing offers economies of scale. Besides reducing the costs of provi- ding HR services, several other benefits can be achieved, including improving service levels, enabling management to focus on core business activities and better access to functional and technical experts. Human Resources outsourcing is often presented as the next step after a Human Resource shared service center. HR outsourcing including the payroll function is often part of larger transformational deals involving multiple disciplines such as Information Technology or Finance & Accounting. The potential scope for HR outsourcing is presented in the following diagram3. This shows that the more ‘critical’ elements of the Human Resources function, like Records management and recruiting, do not have a high priority because they are perceived as critical to the organization by the interviewees. Language problems and legislative complexity are also key issues in HR BPO. In particular, (multi-) local organizations are affected by these issues. Most global players are able to cope with these problems and still manage to make a good business case for HR BPO. But rising labor costs around the world are pressuring profitability. 2 HR BPO Market to Grow to $32 Billion Worldwide by 2010, Gartner, 2006 3 Dataquest User Survey Analysis HR BPO, Gartner, 2006 10
  10. 10. PoV_Sourcing_RZ 01.02.2008 13:01 Uhr Seite 11 the way we see it Payroll Benefits administration Education and training Records Management Recruiting and stuffing Hring administration Other 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% s Currently outsourcing s Considering outsourcing s Not outsourcing Based on research, it is clear that organizations are reluctant to outsource key elements of the Human Resource function. In accordance with the GSS cube® presented earlier the potential scope for HR outsourcing is shown in the next diagram: Leave and working hours administration Payroll Compensation and Benefit admin Owned processes, offshore = - Absence management Proces optimization Non client facing, (mature) - HR information depending on client facing % Transactional processes - Knowledge management of process. - Performance management Client facing, Transactional processes with light local Records regulations Management HR Filing Voluntary Exit Offshore Retirement administration - Labour relations Non client facing, - Organisational design Non transactional processes Light and governance Touch - Re-organisations - HR projects Tight Benchmarking Onshore Touch - HR policy Employee Introduction (doc ’s) Owned Not owned - Selection process - Introduction - Position management - Career Management Client facing, Non transactional processes - Talent Management with tight local regulations /Management development - Recruiting - Involuntary exit - Hiring - Decease - Expats & Impats - Education & Training Despite the reluctance, there are many possibilities for benefiting from an HR sourcing strategy. Point of view on sourcing strategy Sourcing: Trends and Insights 11
  11. 11. PoV_Sourcing_RZ 01.02.2008 13:01 Uhr Seite 12 2.2 Procurement A 10% price reduction Most organizations are spending approximately between 40% (e.g. services in goods and services industry) and 75% (e.g. manufacturing) of their annual revenues on the procured can have the procurement of goods and services. Every Euro that doesn’t go to taxes, same impact on depreciation, or salaries goes either to pay suppliers or directly to the bottom line. corporate profits as a Companies can therefore significantly improve their profit margin through 30% increase in sales! aggressively managing supplier relationships. A BPO Procurement service consists of two main types of services (and the combination of these two is called full service BPO Procurement): s Purchase-to-Pay which is the provision of transaction processing support to manage the administration involved in the ‘procure-to-pay cycle’ for indirect goods and services or direct procurement; s Source-to-Contract includes strategic sourcing and the management of contracts. The spend managed by the BPO service provider creates a continuous leverage for spend aggregation. “Increasing the quality of BPO Procurement is in a relatively embryonic stage. Early adopters can be found our procurement services in high-tech, manufacturing and financial services sectors. Most organizations is the main reason for focus on the outsourcing of indirect categories. Potentially, strong gains lie in outsourcing a significant enterprise-wide strategic BPO Procurement. Few companies have adopted this part of the procurement model, however. A more common sourcing strategy for the procurement function function.” is an offshored shared service center. These shared service centers are executing a subset of processes for global organization in order to: s Drive standardization of the processes s Reduce the cost of the supportive procurement processes s Leverage low-wage resources The potential scope for BPO Procurement is presented in the following diagram4. If all the elements are (partly) outsourced, it can be referred to as full service BPO Procurement. 4 Strategies and Insights for Today’s CPO, Capgemini, 2006 12
  12. 12. PoV_Sourcing_RZ 01.02.2008 13:01 Uhr Seite 13 the way we see it Project Strategic Supplier Purchase Management planning Sourcing Management to Pay Reporting • Commodity specifications • Strategic • Supplier planning selection • Contract • Validation of • Negotiations evaluations In-house • Management strategy • Contract • Supplier reporting finalization meetings requirements • Requisitions • PO approval • Purchasing • Transaction processing and • Monitoring and strategy • Commodity • Define service management reporting on requirements profiling levels • Compliance compliance • Savings • Market research • Service level monitoring • Exception identification • Supplier research reporting • Requisition management • Define • Bid preparation • Prepared support • P2P reporting Outsourced communication contract • Invoice • Spend offerings evaluations settlement intelligence • Supplier adoption • Manage • Manage accounts payable inventory levels • Manage • Expedite payments to suppliers • Stock management A key element in BPO Procurement, and this is applicable to all outsourcing deals, is the management of the split: processes executed in-house need to be fully aligned with the outsourced processes. A compelling governance model should therefore be defined and managed. 2.3 Finance & Accounting During the first unpredictable years of the 21st century, the CFO had to focus on his more traditional roles as ‘internal organizer’ and ‘compliance controller’ to cope with requirements such as the need to reduce costs during the recession following the internet-bubble and the need to regain control to comply with the new IFRS and SOX-regulations in the aftermath of the accounting scandals. Today, and confirmed by the recent Capgemini CFO survey5, the CFO is able to refocus again on transforming the finance function such that the function can expand its role as ‘business partner’. In this role, the finance function should “The simple and basic enable value creation and should be FIT for the future: principles of delivering - by creating Focus on an efficient and effective finance infrastructure; both short term profitability and generating - by providing Insight to support your business in decision-making; long term sustainable - by enhancing assurance to obtain Trust from stakeholders. growth through innovation and investment.” This requires a transformation to create an innovative and flexible finance function. 5 Source: Capgemini CFO-Agenda 2008, dimensions of a successful strategy. 239 CFOs and financial managers of different European organizations participated in this study on trends and developments in the finance function 6 FAO Market Update, Everest, 2006 Point of view on sourcing strategy Sourcing: Trends and Insights 13
  13. 13. PoV_Sourcing_RZ 01.02.2008 13:01 Uhr Seite 14 STRATEGY & DECISION SUPPORT Finance Policy, Steering & Control Framework, Strategy & Decision Making, Strategic Planning & Support, Financial Analysis & Treasury In-house STRATEGY DECISION CORPORATE PERFORMANCE SUPPORT MANAGEMENT STRATEGY Planning, Budgeting and Reporting, DECISION Management, & Financial Reports, SUPPORT Financial Applications Management, CORPORATE Tax Planning Sourced PERFORMANCE MANAGEMENT CORPORATE TRANSACTION PROCESSING PERFORMANCE General Accounting, Accounts MANAGEMENT Receivable, Accounts Payable, Fixed Assets, General Ledger, Billing, TRANSACTION Credit & Collections, Travel & PROCESSING TRANSACTION Expense, Standard Reporting, Cost PROCESSING Accounting, Tax Accounting & Reporting People / Process / Technology People / Process / Technology Finance Transformation: towards a Low Cost, High Quality and Added Value Finance Function Focus on the internal efficiencies within the finance function is needed to achieve a low-cost, high-quality and flexible organization. This could be reached by exploiting the rich utilization of low-cost talent resources through globalization, and achieving greater manageability of the finance function across business units and geographies6. These are the two critical elements of the F&A sourcing strategy. “Outsourcing F&A In the past, bringing the F&A processes towards a Financial Shared Services Center processes enables us to was the way to achieve lower costs and greater manageability. It is still a proven focus our time and solution for your sourcing question, but not the only one. Many businesses are resources on our core experiencing increasing skills scarcity and rising costs of finance talent where a business areas, which third-party service provider can bridge this gap for many of their F&A processes. impact our profitability and competitive advantage.” - In this emerging rapid-growth phase of F&A function or proces outsourcing Beth Summers, (at a rate of 16.4%, outsourcing F&A shows the highest compound annual growth Chief Financial Officer rate of all BPO services in Europe7) we see different adoption dynamics. Market at analysis8 shows that in Energy & Utilities and Travel & Logistics outsourcing of Hydro One F&A is already common; however in Financial Services there is still a lot to gain. However, most companies struggle to find their way in the jungle of sourcing terminology and to define their own sourcing strategy. Furthermore, there are risks from a managerial and governance perspective, not only during the selection phase but especially in the long term. Therefore, organizations need to identify and prioritize the risks and should set up risk monitoring and risk mitigation. Capgemini found that careful supervision (including periodic evaluation) is the key to successfully executing the sourcing strategy. Successful in this case means keeping the gap between potential value and achieved value as small as possible. This requires the careful vetting of potential vendors, the development of clear performance metrics and targets for which vendors will be held accountable, and the monitoring of not only the quantitative performance of vendors but also the reaction of end users who are directly dependent on the vendors’ work. 7 European Finance And Accounting BPO Spending Forecast, Forrester, 2006 8 FAO Market Update, Everest, 2006 14
  14. 14. PoV_Sourcing_RZ 01.02.2008 13:01 Uhr Seite 15 the way we see it 2.4 IT Sourcing The IT sourcing market is still growing: with 31,6% more spending predicted for 2011 compared to 20079. The IT offshore market alone is growing with a com- pound annual growth rate of 16,5% in Western Europe and 14,4% in the US until 2009. Companies still see the advantages of outsourcing IT to external partners. The top three drivers for outsourcing and offshoring IT are still cost reduction, increased flexibility and increasing quality. At 82%, cost reduction is at the top of the list of drivers, with the others respectively at 46 and 43%.10 A key reason for this is that the IT function is still inevitably perceived as a costly support function, instead of a possible business enabler. IT budget allocation per IT value chain step in percent 49 3 43 5 39 3 39 41 4 2 Offshoring 3 Share of total 41 Distributed 4 36 5 IT budged 0 delivery 25 4 32 32 0 2 27 23 Near- 8 shoring 0 0 8 Concep- Infra- Strategy & Test & Application structure Step in the IT Planning tualization Realization Rollout Management Manage- Support value chain & design ment Looking at the different IT delivery options, the most common is still nearshoring (outsourced to partner in the company’s own country or a country nearby). When companies want to use offshore delivery they invariably choose a distri- buted delivery approach and to a lesser extent opt for direct offshoring. Those companies offshoring largely source Realization, followed by Infrastructure Management, Application Management and Support.11 To make such decisions you have to design your own sourcing strategy. This is a complex task characterized as non-routine and often with the use of incomplete information. In recent scientific research we have discovered that 110 different variables can influence the right sourcing mode.12 These variables are situational factors, risks, outsourcing drivers, etc. In this process of defining the right sourcing mode there are two common pitfalls. The first is the large amount of management attention required for the outsourcing partner meaning that there is much less for the standing organization. The retaining organization has to manage the outsourcing contracts and should therefore transform to a demand management organization. Secondly, companies are focusing on the sourcing strategy but forgetting that after the transformation the success of the sourcing has to be measured. During the design of the sourcing strategy you have to define when a sourcing strategy is successful and with which parameters you want to measure this success. 9 Gartner, June 2007 10 European CIO Survey 2006, Capgemini 11 European CIO Survey 2006, Capgemini 12 Thesis ‘Towards an ontology for designing successful outsourcing strategies and choosing aligned Point of view on sourcing strategy Sourcing: Trends and Insights 15
  15. 15. PoV_Sourcing_RZ 01.02.2008 13:01 Uhr Seite 16 2.5 The future of global sourcing of services The future of global As the dynamic and competitive marketplace drives further commoditization, sourcing of services is industrialization and globalization, players are pushed to compete not only on often defined as ‘3GO’: product innovation and cost but also on flexibility and the ability to interact with third generation out- external partners. sourcing. SP=Utility Business Integration Operations AD AM IM SP=BPO Business Integration Operations AD AM IM SP=SaaS Business Integration Operations AD AM IM COTS Business Integration Operations AD AM IM In House - CSD • The development of Utility Service Providers (SP) are Business driven by consortia of vendors eager to leverage economies Integration Operations of scales from different customer while eliminating the need for asset (people and technology) ownership on the AD AM IM customer side. IM Customer owns the function/assets IM Suppliers owns the assets IM Supplier and/or Customer owns the assets Evolving sourcing models enable organizations to realize their strategic objectives. Primarily in the competitive financial services industry, given current develop- ments (European banking consolidation, SEPA) the pressure to reduce asset ownership (people, technology and infrastructure) is driving the trend towards complex and innovative sourcing models. 2.5.1 The utility model The challenge that organizations face is to balance control, compliance and flexibility in order to maintain a competitive edge while reducing cost and asset ownership. On the supply side, vendors compete by offering flexible, trans- action-based pricing for both software and hardware. On the verge of emerging is the Solid Utility, bundling the technology, business process and support in a competitive, price-per-transaction commercial offering. 16
  16. 16. PoV_Sourcing_RZ 01.02.2008 13:01 Uhr Seite 17 the way we see it Demand Side Supply Side – Service Delivery as Utility: Subcontracted The FSI’s metered, scalable, standardized services Services Business Process Utility Vendor Consortium Business Service 1 Business Service 2 HR Services Standard Services BU1 (Recruitment, Training, etc.) Demand Client 1 BU2 Business Service 3 Business Service 4 BU3 Technology Services AM + IM Business Service 5 Business Service 6 BU1 Demand Client 2 BU2 Integration Services (One Off) Opt: Business Service 7 Opt: Business Service 8 BU3 Optional Services BU1 Facility Management Opt: Business Service 9 Opt: Business Service 10 Demand Client 3 BU2 BU3 Opt: Business Service 11 Opt: Business Service 12 Regulatory Compliance UTILITY Core Components • WorkflowProcesses • Best Practices Internalnal Services • Authorization • Demand estimation • Regulatory Framework • Service Delivery Management Back Office Administration UTILITY Core Interfaces • Billing and Settlement • Archiving and • CRM Interfaces Scanning • Risk Profile Setting • Information provisioning On the supply side, service will be delivered as utilities in terms of metered, scalable and standardized services. 2.5.2 SaaS: Software as a Service While the ‘utility’ is likely to dominate in the highly transactional-based domains (such as payments, cards and possibly mortgages), the new emerging trend is the SaaS (software as a service) model. The attraction for SaaS lies in the ability to purchase transaction-based services without having to own the asset, while at the same time maintaining a competitive edge in terms of performance. The challenge that clients face today is to persuade the service providers to de- velop such solutions by taking over their current legacy (people and technology) and turning it into a service (offered via a SaaS model, for instance) that is highly tailored to them, as a foundation client. Professional service providers acting as transformation partners and with a strong operational capability are ideally positioned to develop such solutions due to their current customer base, size and ability to create standard market solutions that will appeal to a large customer base. Point of view on sourcing strategy Sourcing: Trends and Insights 17
  17. 17. PoV_Sourcing_RZ 01.02.2008 13:01 Uhr Seite 18 3. Sourcing strategy approach The need for cost savings, increased efficiency or strategic orientation can trigger thinking about the right sourcing strategy. Because the elements that affect the sourcing strategy of an organization can change over time, the definition, implementation and execution of a sourcing strategy is considered as a closed loop process. 3.1 The closed loop sourcing strategy process In this five-step closed loop process organizations should continuously go through the steps in order to (re-)define and execute the right sourcing strategy. The closed loop process is visualized in the figure below. Analysis and Definition Scenario Delivery or Planning and Operations Business Case Transition or Selection and Migration Preparation Not only is the efficiency of the outsourced function a driver for evaluating the sourcing strategy, but business dynamics may also require a change of scope to ensure a more suitable sourcing mode. 18
  18. 18. PoV_Sourcing_RZ 01.02.2008 13:01 Uhr Seite 19 the way we see it Step 1: Analysis and Definition A scope for the sourcing strategy will be defined in the analysis and definition Analysis and Definition step. All various sourcing options need to be evaluated in order to come to the Scenario right sourcing mode, including the level of externalization of the processes or Planning and Delivery or Operations Business Case functions in scope. These evaluations should be based on three questions: s Is this process or function providing a competitive edge? Transition or Selection and Migration Preparation s How interwoven is this process with other processes in the organization? s What is the sourcing savings potential of the process or function? External knowledge, benchmark data and experience of the various sourcing options, such as outsourcing, will be used during the analysis. The organization’s readiness and ability to source and the experience of other organizations will be taken into account to make the decision clear and objective. Capgemini has developed a Global Sourcing Strategy model that takes into account several dimensions and areas on which the organization is measured. These are then compared with benchmark data. The outcome of this model is a clear and objective overview of the different sourcing options. During the analysis and definition step, a multidisciplinary team is required to challenge the multi-tower question and the potential integration of various processes and functions in scope. The analysis is of strategic importance to your organization and therefore corporate management should be involved during this step. Step 2: Scenario Planning and Business Case Analysis and Definition On the basis of the outcome of the Global Sourcing Strategy model several scenarios or global sourcing modes have been identified. The most beneficial Delivery or Operations Scenario Planning and Business Case sourcing modes now need to be analyzed in more detail. Capgemini has developed deep dives to analyze and measure the effects of the different sourcing strategies on the organization in more detail. Transition or Selection and Migration Preparation By means of the scenario planning and business case phase the sourcing strategy now needs to be translated at a tactical level. With our experience and expertise we can support your organization on topics such as: s The advantages and disadvantages of centralization and/or decentralization s Which parts of the process should be part of sourcing strategy mode s Which parts of the process are beneficial for outsourcing and/or shared service operation s Which parts of the process should I keep in-house s How do I need to manage possible vendors of outsourcing services s How can I best build a business case reflecting all relevant benefits and costs s What is a best-practice ‘retained organization’ In this phase the standing organization needs to be analyzed and prepared for the new situation. This implies the way of working between the standing organization and the new sourced function. Finally a business case per scenario needs to be developed to support the chosen sourcing mode and function. Point of view on sourcing strategy Sourcing strategy approach 19
  19. 19. PoV_Sourcing_RZ 01.02.2008 13:01 Uhr Seite 20 Step 3: Selection and Preparation Analysis and Definition Selection and preparation is essentially the execution of the ‘make’ or ‘buy’ decisions. The organization should be prepared for the change as soon as the Delivery or Operations Scenario Planning and Business Case preferred sourcing scenario is defined, aligned with the business strategy and validated. Transition or Selection and Migration Preparation When an external sourcing mode is chosen the selection of and negotiation with one or multiple service providers needs to be carried out. In general, this selection process takes a lot of time and effort, because you need to make sure that the service provider is capable of fulfilling the outsourced process or function with at least the same (but preferably even higher) quality. When an in-house sourcing mode is chosen, the organization needs to be pre- pared for the movement of workload within the organization. This might involve the movement of workload from one department to another, or building a new shared service center to take over the workload. Depending on the size of the change (based on the scope, the sourcing mode and the organization’s readiness) you will be setting the scene for the upcoming change of the selected sourcing mode, whether this is in-house sourcing, outsourcing or all variances within this range. Step 4: Transition or Migration Analysis and Definition After the steps above in which the preparation for change is undertaken, a trans- formation or migration will take place. The migration with the highest impact will Delivery or Operations Scenario Planning and Business Case be the sourcing of functions or processes to an external party offshore. Before the actual migration or transition takes place, the standing organization Selection and Transition or Migration Preparation needs to be prepared for the new situation. This implies defining the way of working between the standing organization and the new sourced function. This sourced function can be an external party, a new division within the organization, or one of the multiple options within this spectrum of sourcing possibilities. The following elements need to be addressed in the standing organization: s Definition and alignment of the governance model s Ensuring that the critical knowledge and experience is captured and remains within the organization s Process descriptions and gaining clear insight in the way of working with the third party (either external or internal) s Definition of service levels and key performance indicators s Training of employees in the standing organization 20
  20. 20. PoV_Sourcing_RZ 01.02.2008 13:01 Uhr Seite 21 the way we see it The intensity of this step depends on the quality of the processes or functions before changing. However, before taking further steps the quality of the standing organization must be assured. Change management is therefore a key element in this phase. In general, this step is vital for ensuring the interaction between the standing organization and the sourced functions or processes goes smoothly. The better the alignment of governance model, responsibilities, processes and ways of working between the different parties, the better the processes or functions will operate once in- or outsourced. Step 5: Delivery or Operations Analysis and Definition As soon as the delivery takes place, service levels need to be monitored and in the case of a third party, innovation needs to be encouraged. Regardless of the Delivery or Operations Scenario Planning and Business Case sourcing mode, the sourced function or process needs to be monitored, controlled and managed. This applies to both the provider (i.e. owned or not owned) and the demand organization. In an evolving business the following aspects need to be Transition or Migration Selection and Preparation frequently evaluated: s Translating changing business needs to the organization that is executing the functions, tasks or processes in scope s Evaluating the scope of the tasks, functions or processes s Monitoring the contract and developing the vendor of the services s Evaluating the sourcing strategy in a continuous planning circle Each element of the closed loop process is equally important for the successful outcome of the sourcing strategy, regardless of the sourcing mode chosen. Point of view on sourcing strategy Sourcing strategy approach 21