The Optimum Sourcing Model Reply

Organizations turn to outsourcing their IT related needs for various reasons but few understand the different models available to them and typically arrive at their strategy through the recommendation of an employee, some analyst research or a previous experience. This is not to infer that any of those vehicles are the wrong way to decide but they are usually only a part of the whole evaluation process.

Recently a large global enterprise looking to “save money” turned to an outsourcing strategy and decided that establishing what is known as a Captive would be the best option. This decision was made solely on the desire to own the resources vs. leveraging a relationship with a service provider. The company believed that the Captive would offer them more control, better cost management and the ability to embed their “way of doing things” into this offshore center.

Once the decision was made the execution became the challenge. How do you best source the people and from whom? Which geography makes the most sense from a scale and skills perspective? How do you best identify the right facility and coordinate with local government and business organizations? There are lots of questions to answer and even with the answers in hand, validating the right model is still a necessary task.

There are five outsourcing models that organizations need to consider and when they believe they have selected the right one they then need the right organization to help them pull it together seamlessly. While you might be familiar with these models, a refresh is always a good idea even if it is just for the sanity check to ensure you’ve “ticked the box”. These models include:

  1. Captive: a company’s owned shared service center which involves:
    • Large investment of time, money and effort
    • Large management commitment
    • High risk without local relationships, knowledge
    • High reward possible to maximize value
    • Opportunistic to build internal sourcing model
  2. Joint Venture: an offshore center co-owned by you and another partner involving:
    • Shared costs and complexity to setup and maintain
    • Leverage of extended skills, domain experience, relationships
    • High risk/reward model that is shared, lessening the burden
    • Opportunity to leverage partners knowledge
  3. BOT (Build, Operate, Transfer): an offshore center managed by a partner that includes an option to buy the team:
    • Opportunistic when a firm wants to retain control but lacks local knowledge, relationships
    • Good option to “buy-in” at a good pace to prove the relationship while maintaining commitment
    • Pre-cursor to a Captive facility
    • Good option when the vendor lacks domain experience and there is a need to build that into the relationship
  4. Facilities Management: an offshore center owned by you but all facilities operated by a third party:
    • Similar to BOT model but includes upfront investment to fund and operate the center and all related costs
    • Good option is there is a viable business case completed to validate the need for a Captive
    • High risk involving third party selected to manage facilities
  5. Outsourced: perhaps the best known model and most used:
    • Excellent sourcing strategy/capabilities needed
    • Vendor and Contract management skills, tools and processes must be present
    • High risk due to lack of ultimate control of vendor
    • High reward by leveraging multiple vendors, geographies

With all of these models we could argue pros and cons but what often goes undone is the right level of business case analysis, risk assessment and value prioritization in selecting the right model. Choose a model then choose to plan well and if you have selected a model that you are deep into then investment in getting external validation on how it is actually performing both for your organization and as a benchmark with peer companies.