The terms ‘strategic sourcing’ and ‘sourcing strategy’ are in wide use in sourcing circles, but there is little shared understanding of precisely what they mean. The result is not just linguistic confusion; by not clearly identifying and distinguishing what makes an approach genuinely strategic, companies run the risk of ending up with a series of tactical operating models that may deliver short-term cost benefits but which lock in existing inefficiencies and fail to address the root causes of poor performance.
The tactical approach to sourcing is characterised by service models at the business or functional levels that pull in opposing directions, by a lack of standardisation and consequently a waste of supply or purchasing leverage, and by the appearance of unexpected dependencies and risks across the business. The result is a dysfunctional operating model that fails to address the future needs of the business. One consequence of the growth of outsourcing to encompass not only IT but also business processes and increasingly higher-value knowledge processes is that the tactical approach is becoming more prevalent. A distributed organisation further exacerbates the problem.
In contrast, the strategic approach results in an alignment between sourcing options and business objectives, and in our experience leads to more significant and sustainable benefits for the company. What is required is a standard set of definitions that clarify the distinction between strategic from tactical sourcing.
In broad terms, the two key questions a company faces are ‘what to do?’ and ‘how to do it?’. One way to address these questions is through a consideration of the interaction between four distinct views of the company. At the highest level is a corporate strategy. This is a clear statement of the company’s target proposition, and what makes it unique and differentiating.
The outward looking corporate strategy informs – and is informed by – an operating model, the internal view of the way the company should be structured.
The next level of detail is a sourcing model, which specifies the internal or external organisations or groups that will perform the activities needed to deliver the functional areas or business processes set out in the operating model. Finally, and supporting the sourcing model, a service delivery framework provides a detailed mapping of how and to what level of quality each of the required services are to be delivered, and how the supply and demand of these services will be managed.
From model to strategy
Typically, separate business units and geographies – and often individual functional units within these – will have their own distinct sourcing models. In order to transform such discrete or tactical sourcing into a sourcing strategy, two conditions are required.
First, the distinct areas within the sourcing model must be joined up across business units, functions and geographies into a single, coherent picture. Second, and most important, the joined-up sourcing model must be aligned with the enterprise strategy – and hence the operating model – and in particular the objectives for growth and change implied by the enterprise strategy.
Such a joined-up approach will lead to a clear framework for sourcing across the company, consisting of a series of guidelines that will enable specific business activities to be categorised and evaluated, and thus each aligned to a set of well-defined sourcing options. This in turn will determine the optimum sourcing state at the local or business unit area, whether that is outsourcing, offshoring, in-sourcing, or whatever. The strategic sourcing process ensures that the local sourcing state, and hence the local service delivery model, is not only aligned with, but can also help to drive forward, the critical operational aspects of the business strategy. Further, it will be a straightforward matter to ensure that each local sourcing state is responsive to the changes in operating model or enterprise strategy.
By connecting a company’s operational base to its business aspirations, the strategic sourcing approach has two advantages. First, and most important, it shifts the emphasis from short-term cost-cutting and process efficiency to the strategic change imperative and long-term value creation of the enterprise. The second key advantage of the strategic approach is that by creating an opportunity to identify the optimum service framework across the company, scale economies can be maximised and more significant and sustainable cost savings delivered than via the tactical approach.
The upshot is that strategic sourcing can be a significant differentiator for companies as they strive to enhance their competitive advantage.
Out of India – Who's best placed to exploit the world's biggest pool of low-cost, highly skilled IT service labour? – February 2007