TO SOURCE, OR OUTSOURCE … THAT IS THE QUESTION!
5 years ago Hutch Morzaria 2
Continuing our discussion about ITIL Service Strategy, lets start talking about Sourcing. Sourcing is about analysing how to most effectively source and deploy the resources and capabilities required to deliver outcomes to customers. A sourcing decision is key in determining the best combination of suppliers (internal vs. external) to provide the most cost effective and efficient delivery of services.
I’ve spoken about outsourcing at some length in the past (here, here and here), but those posts were focused more on whether or not you should outsource. Lets talk here about what outsourcing is and why some businesses utilize it.
In a nutshell Outsourcing is using another company/organization to perform services on your behalf for your customers. Now you could outsource lots of different things – HR Functions for your own internal team, IT Support for your customers etc… – what makes the decision on whether or not you should outsource is the question of value. Are you able to provide more value to your customers and shareholders by outsourcing vs. doing the activity in house? Generally speaking this question of value has been driven by financial considerations, unfortunately, most financial analyses do not include all the costs related to sourcing options, leading to difficult relationships with service providers, involving unexpected costs and service issues.
What should you outsource?
Generally speaking you should outsource anything that is non-critical to your business. By focusing on your core strengths you can be more successful and removing tasks that are only peripherally related (if that) to your business will allow your organization to focus even more on the things that make you successful.
Once candidates for sourcing are identified, the following questions can be used to clarify matters:
- Do the candidate services improve the business’s resources and capabilities?
- How closely are the candidate services connected to the business’s competitive and strategic resources and capabilities?
- Do the candidate services require extensive interactions between the service providers and the business’s competitive and strategic resources and capabilities?
Dependent upon the answers to those questions a decision needs to be made on whether or not to outsource some or all of a service. If the responses uncover minimal dependencies and infrequent interactions between the sourced services and the business’s competitive and strategic positioning, then the candidates are strong contenders – conversely however if the answers show a strong relationship with the business’ competitive or strategic position, then care must be taken.
When outsourcing – especially in the instances where outsourcing a key service, care must be taken to ensure that businesses do not get impacted negatively. Some of the key vulnerabilities that might be experienced are:
- Substitution: ‘Why do I need the service provider when its supplier can offer the same services?’ The sourced vendor develops competing capabilities and replaces the sourcing organization
- Disruption: The sourced vendor has a direct impact on quality or reputation of the sourcing organization. This is of significant concern for those organizations that have outsourced their support or engineering and design organizations.
- Distinctiveness: The sourced vendor is the source of distinctiveness for the sourcing organization. The sourcing organization then becomes particularly dependent on the continued development and success of the second organization
One key concern/issue with outsourcing is responsibility. Outsourcing does not mean that a service or its performance are no longer important. In most cases, it often means that the service is so important that it should be provided by a service provider that can do a better (or more cost-effective) job. Just because a service has been outsourced does not remove the responsibility from the vendor. While a 3rd party could be providing technical support on a product or service, the customer always has recourse to organization that they purchased the original product/service from..
Other types of Sourcing
While most people consider Outsourcing (& Insourcing) as the only two options, there are in actuality a variety of different ways that services can be sourced.
- Insourcing – internal parts of the organization do the work. Clearly defined departments with specific responsibilities.
- Outsourcing – a 3rd party that specializes in a specific role, provides that service to an organization through a well defined plan with specific deliverable’s, KPIs and SLAs.
- Partnership – a formal arrangement between 2 or more parties to work together on a specific role or responsibility. The focus here tends to be on strategic partnerships that leverage critical expertise or market opportunities.
- Co-sourcing or multi-sourcing – a mix of insourcing and outsourcing where a number of external organizations work together to design, develop, transition, maintain, operate and/or support a portion of a service.
- Business process outsourcing (BPO) – a growing trend (especially among the larger multinationals) where an entire business function (customer service, technical support, accounting, HR etc…) is provided by a 3rd party.
There are a host of other common (Application Services, Knowledge Process Outsourcing (KPO), Cloud etc…) and uncommon ways of sourcing services, in fact the only real distinction is that businesses will do what makes sense for the business!
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