From tactical outsourcing to strategic sourcing

27 September 2005

Defining a comprehensive and successful sourcing strategy is not easy. It is critical to link the sourcing strategy with a well established overall operating model. Defining this operating model is the first step in implementing the sourcing strategy, write Jos Schmitt and Suresh Gupta, partners, Capco, global integrated transformation strategy consultancy, for the financial services industry.

Until now, outsourcing has been considered by most companies, particularly in the financial services industry, as little more than a tactical form of reducing the cost of acquiring ancillary services. However, enlightened financial services providers have come to focus less on achieving incremental cost improvements (10 per cent – 20 per cent), and, instead, are evaluating all their capabilities to define a winning global sourcing strategy.

We define global sourcing as acquiring "the right competency, at the right cost, from the right source, from the right shore." Specifically, it stands for sourcing operational and technology activities (and resources) from global "competency" centers. For example, as part of its global sourcing strategy, a US bank may turn to India for market research, Russia for derivatives processing and Ireland for customer service.

Sourcing needs to become a strategic process whereby companies accept the idea of unbundling their value-chain and focus on operating it in the most optimal way to achieve transformational cost savings (30 per cent – 60 per cent) and transformational revenue growth. For many organisations, this type of analysis will often lead to the adoption of an outsourcing strategy.

It's control, not ownership that matters
The need to define a comprehensive sourcing strategy is rooted in relatively recent geopolitical, macroeconomic and technology developments. These developments have fundamentally changed the world by making business capabilities portable on a global basis.

Leading organisations realise that what matters most isn't the ownership, but the control of business capabilities. Their approach: look at all the organisation's capabilities and only keep captive those unique capabilities that offer competitive advantage and are critical to revenue growth. All other capabilities, as core as they may seem, can be considered for outsourcing.