In this era of global slowdown, rising unemployment and economic uncertainty organizations are facing difficult choices on global sourcing strategy and objectives. What was once a fairly straight-forward set of decisions based on business imperatives like lower costs and quality are now more complicated. Emerging technology trends, labor concerns and regulation are now much more closely tied to the decision. With these challenges, many organizations now expect global sourcing to address an expanded array of objectives.
It's clear that the Global Sourcing industry is going through a turning point. For an industry that built itself on seamless transfer of talent using a global talent supply chain, and an increasingly sophisticated global delivery model, some of the recent trends like rising protectionism, driven by the current recession, could wash away the advances that helped companies be more competitive.
Technology trends like cloud computing, platform-based services and utility-based pricing are also impacting the future direction of global sourcing. For those with experience in structuring and solving large outsourcing deals across the flat world, it is obvious that in today's environment, achieving seemingly disparate objectives from global sourcing is a conundrum. Listed below are five apparently disparate sourcing objectives.
1. Efficiency with Innovation
Sourcing initiatives typically focus on eliminating inefficiencies and controlling costs. However, the benefits do not stop at increased efficiency alone. New value through innovation and transformation are also created.
One the one hand, especially in today's economic situation, when cost savings has become so critical, it is easy to lose sight of the innovation angle. On the other, some clients are expecting innovation even before the engagement gets going. A leading diversified consumer goods company recently asked Infosys to identify innovation opportunities even while the selection process was in process. In this case, it so happened that internal teams were already working on a solution-specific co-creation model with another unit of this company for a joint client of ours, and that helped us address the seemingly contradictory expectations.
2. Insource, Outsource, Captive, Offshore
In the post-TARP world, when banks like Bank of America are not even hiring fresh non-U.S. MBAs due to government restrictions, and where the hiring of H1-Bs is reduced, the decision on whether to outsource is not driven by business needs alone.
Typically, outsourcing is expected to accomplish one or more of the objectives mentioned above. Assume your customer, who has just let go of several employees, needs to conserve cash and still wants to proceed with a strategic project. For a mid-tier pharmaceutical company that recently went through such a change, global sourcing is a reality they could not ignore. Their budgets can now be stretched much further than before, and they have access to quality talent at prices far lower than their ability to otherwise hire, creating a cutting-edge platform that will improve their research productivity.
For global corporations with large captives of their own in low-cost and/or high-talent locations, there is the added complexity of whether to beef up operations in the captives or outsource. Often, in these cases, business needs are overridden by legislation and social needs. It might become important to hire locally in the head office to meet job growth requirements, while offshoring is actively discouraged. Reconciling these needs in the short term without hurting long term growth and resilience is a priority for all sourcing decision makers.
3. Low Risk with Maximum Savings
Sourcing initiatives are not just driven by a need to save costs, but also by a desire to minimize risks. In one recent case, a leading pharmaceutical company pushed almost all its vendor partners to the edge in terms of rate negotiations, securing rock-bottom levels from all. Any further rate drops, and the partners would not make any profit. Now the company wants to reduce its IT costs even further, and is asking vendors to propose non-linear models for billing. These models won't depend on actual resources, but will be based on specific business or IT outcomes and transactions. Presumably this will lower their costs (and partner revenues), while increasing the profitability for the partners since they can now manage the cost-basis of delivery much better.
Utility or outcome based pricing, aided by platform-based delivery models and cloud computing applications, are becoming more the norm and will soon overtake traditional T&M and fixed price commercial constructs, according to leading research firm, Gartner.
4. Quick Transitions with Minimum Disruptions
Companies want to complete transitions quickly with a minimal impact on their business. A quick transition helps avoid the dreaded 'bubble,' reduces risks due to attrition and helps contain media fall-out. On the other hand, quick transitions can be potentially disruptive.
Traditional outsourcing addresses these two issues by using a 100% people and asset transfer model. In the case of global sourcing (as opposed to just outsourcing), more creative models are required to reconcile these two disparate objectives. Organizational change management addresses multiple stakeholder needs and provides a template for ongoing communications, while taking on additional importance for basic sourcing deals as well.
In one of the most publicized IT global sourcing transactions in recent history, ABN Amro awarded its entire applications portfolio for maintenance to Infosys and TCS. The entire transition period extended to well over a year. It is highly unlikely that a transition of that size and duration will be attempted in the current scenario when the business cycles are in such a flux.
5. Accelerated Results without a Learning Curve
As business needs become more critical and the urgency increases, there is intense pressure to achieve accelerated results while avoiding the pitfalls and mistakes made by past adopters of different kinds of sourcing. Companies do not have the time to go through a learning curve and they pass this pressure through the sourcing eco-system.
Companies have to decide between awarding sourcing contracts to one single broad-based player, a set of players with similar capabilities in a multi-vendor scenario, or choosing from a mix of generalists and specialist niche-providers. While they might get a certain level of simplicity in choosing a lower number of partners, they might also be losing out on best of breed providers and capabilities to help them be competitive in the long run.
Global sourcing is buffeted between business imperatives and a changing playing field and is in for a big change. The economic downturn and increased government involvement have added a level of complexity to sourcing decisions that is leading to disparate sourcing objectives. Reconciling them to achieve short-term results and long-term objectives is a conundrum that companies will continue to grapple with.
Global Sourcing is a barometer for the world economy: a rise in indicators associated with a healthy and vibrant global sourcing sector will also correlate with a reviving global economy and companies' financial health.
R. Arun Kumar is the Industry Head - Life Science at Infosys. Infosys Technologies is a global leader in the "next generation" of IT and consulting with revenues of over $4 billion. Infosys defines, designs and delivers technology-enabled business solutions that help Global 2000 companies win in a Flat World. http://www.infosys.com/global-sourcing/default.asp
Interested in information related to this topic? Subscribe to our weekly Value-chain eNewsletter.