global sourcing of services model

An introduction to the Global Sourcing of Services Model

Stefan Westdijk & Oedger Meijborg

A decision support tool driving effective

Sourcing Strategy decisions

Table of content

Introduction

Introduction to our Approach

The Sourcing Decision and Capgemini’s Research

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The GSS Model Explained

A Case Study

Sourcing strategies

What is sourcing?

Sourcing is delegating business functions to a separate business unit or third party.

What is a sourcing strategy?

A sourcing strategy is about defining what an organisation wants to do with tasks,

functions or processes that are not differentiating the organisation from its

competitors.

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Why do you need a good sourcing strategy?

To make the right sourcing decision

To deliver the expected value

To provide guidance on the execution

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Table of content

Introduction



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A Case Study


The definition, execution and evaluation of a sourcing strategy is a continuous process.

Due to the changing internal and external environment, the sourcing strategy can

change over time. Therefore, a closed loop process is developed as visualized below.

Each step contains several activities and deliverables which will support you to develop

a sourcing strategy that fits your organisation and your organisation’s environment.

Analysis and Definition






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Delivery or Operations


Transition or Migration


Selection and Preparation


Scenario Planning and

Business Case


Business Case

InternalForces

ExternalForces

ExternalForces








Business Case


Business Case








Business Case


Business Case

InternalForces

ExternalForces

ExternalForces

The Analysis and Definition phase results in a well-considered sourcing strategy using the GSS model as an Executive Decision Support tool

Delivery or

Operations

Analysis and

Definition

Analysis and

Definition

Scenario

Planning and

Business

Case

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Transition or

MigrationSelection and

Preparation

Deliverables

• Check on suitability of sourcing opportunity

• Insight in different sourcing modes, high-level

benefits and the background of sourcing strategies

• Current state analysis

• Sourcing vision and strategy

• A detailed plan of approach

• Actor and impact assessment

Requirements/Needs

• Vision on process/function to be sourced

• Multidisciplinary team

• Involvement of corporate management

• GSS model

• Benchmark data

Table of content

Introduction



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A Case Study

The Sourcing Decision & Capgemini’s Research

Companies and public sector organisations can achieve significant performance

improvement through effective Global Sourcing of Services (GSS) but face a number of

daunting choices including:

� Whether to outsource or source in-house

� Whether to source onshore or offshore

� Which countries and providers to source from

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� How to manage relationships with providers.

Our research shows that sourcing decisions made on a tactical basis under-achieve as

they tend to focus on short-term cost reduction.

Derived from extensive and original research the GSS Model is designed to help

organisations make these sourcing decisions more effectively by providing a systematic

approach to diagnosing decision parameters.

The Sourcing Decision & Capgemini’s Research

The development of our Global Sourcing of Services Model has been driven by a range

of different research points:

� A review of prior research, by other organisations and by academics

� Extensive original research working with a number of major multinational

companies; all leaders in their industry. In addition we obtained advice from

European Outsourcing Associations

� Advice from two leading experts on global sourcing - Dr Phanish Puranam of the

London Business School and Professor Mari Sako of the Oxford Saïd Business

School as well as our own expert contacts

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School as well as our own expert contacts

� Input from Capgemini subject matter experts

� The model derived has been validated by testing with the companies that

participated in the initial research

There are key decisions in global sourcing concerning ownership (in-house or outsourced), location (onshore or offshore) and management style (tight or light)

Offshore

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OutsourcedIn-house

Offshore

Onshore Light

Tight

Ownership

Location

ManagementStyle

The decision model has eight Modes as summarized below with three-letter codes for ease of reference

Ownership Location Relationship Label Management Style Code Mode Name

1 In-house ON-shore Close Family Light INL “Back of House”

2 In-house ON-shore Close Family Tight INT “Under the Nose”

3 In-house OFf-shore Extended Family Light IFL “Hand Over the Car Keys”

4 In-house OFf-shore Extended Family Tight IFT “Serve and Protect”

5 Outsourced ON-shore Friends Light ONL “Someone Else’s Challenge”

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5 Outsourced ON-shore Friends Light ONL “Someone Else’s Challenge”

6 Outsourced ON-shore Friends Tight ONT “Cohabitation”

7 Outsourced OFf-shore Acquaintances Light OFL “Move and Forget”

8 Outsourced OFf-shore Acquaintances Tight OFT “Gold Frequent Flyer”

Some service providers will require ongoing tight management while others can be

held at arms’ length. There is clearly a trade-off between cost and risk.

These modes can also be characterized by names which are more commonly used in the sourcing market today

Captive Offshore

(e.g. offshored SSC)

Shared Support organisation

(e.g. facility power house)

Spin off

(e.g. new company)

Horizontally outsourced

(e.g. BPO vendor)Offshore

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Near shoring Vertically outsourced

(e.g. Managed Service Provider)

In house BPO vendor

Optimized in house solution

(e.g. in-house SSC)

Light Management

Tight Management

OutsourcedIn-house

Onshore

Selective sourcing or multiplesourcing is a combination of

various sourcing options

Our research suggests that there are five sets of Environmental Characteristics that affect the choice of global Sourcing Mode

Organisation’s Characteristics

Service Characteristics

SOURCING

DECISION

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Competitor Characteristics

Supply Market Characteristics

Customer Demand

Characteristics

DECISION

Table of content

Introduction



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A Case Study

The Model explained

CC Pr) CM

CI(PVEV −×−=

� Expected Value (EV): expected value of each mode

� Potential Value (PV): potential savings from our research of ownership and location

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� Potential Value (PV): potential savings from our research of ownership and location

� Cost Impact (CI): cost impact, potential cost of set up from our research of

ownership and location

� Collaboration Mode (CM): management style: takes a value of 1 for light and 2 for

tight; research shows tight management halves the cost impact

� Probability (Pr): of the costs being incurred, derived from answering the 30

questions; essentially (CI/CMxPr) represents the risk of incurring costs

� Cost of Collaboration (CC): probable cost of tight and light management for the

ownership and location impacts

Further explanation of the components of the equation

Cost of Collaboration and Management (CC)

Although tighter collaboration reduces the cost impact, it also incurs its own cost.

From our review of existing and our own research, we have set the default costs of collaboration as follows, with all costs as a percentage of the current total cost.

Sourcing Mode Additional Cost of

Light Mgmt

Additional Cost of

Tight Mgmt

In-house, Onshore (IN) 0% 3%

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Changing the sourcing mode and the management mode increases the cost of collaboration or management, up to an additional 10% of base costs for the case of outsourced, offshore and a tight management style.

In-house, Onshore (IN) 0% 3%

In-house, Offshore (IF) 1% 8%

Outsourced, Onshore (ON) 1% 5%

Outsourced, Offshore (OF) 2% 10%

Further explanation of Cost Impact calculation

Cost Category Cost (% of current total cost of providing same activity)

High Low

Search and Contract

4% 0.02%

Restructuring 5% 3%

� Cost of Impact for each cost category

(search and contract, restructuring

etc) is calculated for each question in

the model based on whether the cost

is estimated to be high or low.

� The Sourcing Mode will affect

whether the Cost of Impact is high or

low.

� The percentage costs for each cost

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Process Changes

10% 1%

Transitioning Work

3% 2%

Lost Productivity 11% 3%

Governance 10% 6%

� The percentage costs for each cost

category have been calculated using

Capgemini research with a number of

major multinational companies. They

have been endorsed by Dr Phanish

Puranam of the London Business

School who has completed extensive

research on this subject.

Further explanation of Cost Impact calculation

When calculating Cost Impact for each question in the model the following baseline

assumptions have been applied in order to ensure consistency of calculation:

� The status quo is in house, on shore and light management

� Costs are high unless a legitimate explanation for cost being low is provided in the

stated question

� Governance costs are high for offshore solutions and low for onshore solutions

� Search and contract costs are assumed to be high for both outsourced options and

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� Search and contract costs are assumed to be high for both outsourced options and

low for the in-house off shore option

� Costs fall the greater the level of supplier market maturity

� Restructuring costs are fixed high

� Target location for outsourced offshore and in house offshore is the same (and

hence supply market characteristics for staff, resources etc.) and

� All assumptions hold unless the question in the model indicates that the cost should

behave in a different way to that assumed above

The Model has been discussed with and validated by many companies and (semi-)public sector organisations

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Table of content

Introduction



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A Case Study

A Case Study – Company Introduction

� A large European ICT company is looking for a method to define the appropriate

sourcing strategy for several supply chain processes

� € 13 billion turnover, 45.000 employees, over 35 million customers divided over

several product and service areas

� The organisation has extensive experience in the area of outsourcing and shared

service centers, especially in the area of IT Operations

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service centers, especially in the area of IT Operations

� In the past, sourcing strategy decisions were based on market pressure and

competitive behavior instead of a proper analysis of the different options

� Currently, more and more questions arise within the organisation with regard to

sourcing strategies and a proper method to analyze the different sourcing options

A Case Study – Introduction to the service in scope

� The organisation is looking for an appropriate sourcing strategy for one of their supply

chain processes.

� The sourcing strategy for this supply chain process should fit the organisation and its

environment.

� The supply chain process is a standardized process, but for the execution specific

supply chain knowledge is required. However, the capacity and quality to execute the

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supply chain knowledge is required. However, the capacity and quality to execute the

process in scope is available in the supply market.

� Competitors already outsourced this type of process successfully.

� Currently, this process is executed decentralized within the organisation.

GSS model – Look and Feel

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GSS model – Look and Feel

� For each of the 5 different

environmental

characteristics questions

are defined to analyse the

organisation’s specific

situation

� Each question can be

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� Each question can be

answered at a five point

scale varying from ‘highly

disagree’ to ‘highly agree’

� The model supports the

possibility to adjust the

background parameters to

the specific client situation,

like the potential savings per

sourcing option

A Case Study – GSS Model Input


Question: “Responsibility for performance of this process is clearly defined”

Answer:

Question: “Mistakes in this process will have a significant business impact from a legal,

regulatory or financial point of view”

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regulatory or financial point of view”

Answer:

Question: “The process involves direct contact with the organisation’s clients (e.g.

external clients, suppliers)”

Answer:

9/4/2 2


Customer Demand Characteristics

Question: “Internal customers are more concerned about the cost of the service rather

than service excellence”

Answer:

Question: “The process in scope differentiates your organisation in its competitive

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Question: “The process in scope differentiates your organisation in its competitive

landscape”

Answer:

9/4/2 2


Organisation Characteristics

Question: “In this specific process, most ‘generalist’ employees are capable of

performing other employee’s jobs’”

Answer:

Question: “The organisation is evolving and requirements are changing quickly”

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Question: “The organisation is evolving and requirements are changing quickly”

Answer:

Question: “There is potential for industrial unrest if jobs are lost”

Answer:

9/4/2 2


Competitor Characteristics

Question: “Competitors are known for having distant relationships with their service

provider”

Answer:

Question: “Competitors of your organisation are off-shoring this service successfully”

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Question: “Competitors of your organisation are off-shoring this service successfully”

Answer:

9/4/2 2


Supply Market Characteristics

Question: “Labor attrition rate is low off shore”

Answer:

Question: “The supply market is able to provide this process at maintained service

levels at lower cost”

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levels at lower cost”

Answer:

9/4/2 2

A Case Study – GSS Model Output

309/4/2 3

A Case Study – GSS Model Output

Global Sourcing of Services model

Result Statements


Service is standardised and documented in procedures Service is heavily standardised and therefore can be easily provided by a third

party

Requirements for performing this process can be easily specified and

effectively monitored

Service is easily specified and can be effectively monitored which makes it a likely

candidate for consolidating and sourcing from a different provider

Mistakes in this process will have a significant business impact from a legal,

regulatory or financial point of view

Mistakes will not have a significant impact on business and therefore there is no

business risk in considering alternative sourcing solutions

The process involves direct contact with the organisation’s clients (e.g.

external clients, suppliers)

The process involves direct contact with end customers. This adds complexity to

the delivery of this service remotely. Any process failures will impact on customer

satisfaction.

The service can be delivered remotely without internal staff or customers’

involvement

The service can be delivered remotely and there is no need for involvement from

internal staff or customers, making it a prime candidate for alternative sourcing

considerations

Process decision can be based on standard specified criteria Decisions can be easily made based on pre-determined criteria. This makes this

service a good candidate for alternative sourcing considerations

Responsibility for performance of this process is clearly defined Accountability is easily allocated and therefore the risk of outsourcing is low and the

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Global Sourcing of Services model

Results Summary

SourceModeDescription SourceModeAnalogy AverageEV AverageRank RankofAverageEV RankofAverageRank

Outsourced, Off Shore, Light Management Move and Forget 19,3 1,8 1 1

Outsourced, Off Shore, Tight Management Gold Frequent Flyer 18,1 2,3 2 2

In House, Off Shore, Light Management Hand Over the Car Keys 17,2 2,9 3 3

In House, Off Shore, Tight Management Serve and Protect 16,1 3,5 4 4

Outsourced, On Shore, Tight Management Cohabitation 8,7 5,4 5 5

Outsourced, On Shore, Light Management Someone Else's Problem 6,3 6 6 6

In House, On Shore, Light Management Back of House 0 6,5 7 7

In House, On Shore, Tight Management Under my Nose -3 7,6 8 8

Responsibility for performance of this process is clearly defined Accountability is easily allocated and therefore the risk of outsourcing is low and the

service lends itself to outsourcing

Customer Demand Characteristics

Internal customers are convinced that outsourcing will be beneficial Buy-in exists within the organisation already and will ease the transition from a

change management perspective

Internal customers are more concerned about the cost of the service rather

than service excellence

Service excellence is the main driver and therefore costs may increase as a result

of trying to improve service levels e.g. more qualified staff, higher volume of staff

The process in scope has a significant brand impact The process has no significant brand impact. Adequate process performance

needs to be established at the lowest cost.

The process in scope differentiates your organisation in its competitive

landscape

This process does not differentiate the client in its markets. It is therefore possible

to minimise the cost of service delivery with no brand risk.

A Case Study – How did our Sourcing Strategy Approach and the GSS Model help the client?

To make the right sourcing decision

The GSS model supported the client in evaluating the different

sourcing options. Moreover, the model supported the client in

selecting the sourcing options which are most beneficial and fit the

client’s organisation and environment best.


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Based on the outcome of the GSS model and the subsequent

discussions, the client is currently developing business cases for the

most beneficial sourcing modes.

To provide guidance on the execution

Our sourcing strategy approach directs the client in executing an

appropriate sourcing strategy based on research and best practices.

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