Good service provider selection not only frees up expensive internal resources or complements non-existent internal skills, but can also significantly contribute towards achieving business goals. This is especially true for small and medium businesses that do not have sufficient funds to appoint people in all the required roles.
But how to approach this topic and how to decide when to insource and when to outsource? And are we not sometimes able to just buy the cheapest option versus developing and investing in a strategic partnership?
Strategic Sourcing is the fourth of 15 BTM Competencies Every IT Leader has to Master, but it keeps popping up as a topic in our Mastermind Groups and thus I feel that it warrants a blog article of its own.
In this article I will introduce the concept of linking outsourcing to your business strategy and assist with identifying some initial leverage opportunities in your business.
Why Is This Competency Important?
Before we look at resourcing any function / activity in an organisation, it is important to consider the stance towards Outsourcing or even better Strategic Sourcing. Virtually no SME will be in the position to insource all IT needs, but how to approach this topic?
It is imperative that the Business and IT Leadership is able to clearly articulate when to insource and when to outsource a specific role and even further to determine the type of relationship that should be started with the respective provider once the decision to outsource is made.
How Does Strategic Sourcing Work?
As has been stated in the introduction, it is essential for any business, but especially any SME, to talk about strategic sourcing before making any decision in terms of resourcing any function. It is just not feasible and, as will be shown, often not even advised to employ all the resources we need internally.
One of the first things to realise is that outsourcing is not necessarily mainly a cost decision. It should rather be linked to the business strategy and each decision should additional to the price tag be qualified according to both, potential for competitive advantage as well as the current internal capability to perform that action.
Even in enterprises it has been shown that decisions about whether to outsource a specific function can be made in a day using the easy methodology introduced below.
IT is in a great position to introduce this topic. The real value will, however, only be realised when the methodology is used throughout the business over time, increasing the credibility of you as a leader.
Already as far back as 2000, Richard C. Insinga and Michael J. Werle did develop a 2-dimensional matrix that clearly links outsourcing to business strategy.
If you would like to know more about this diagram, I can greatly recommend that you read the original article and another interpretive resource by Denis Chamberland, applying Insinga and Werle’s methodology specifically to IT.
When engaging with the methodology, we found that it was still quite intricate when dealing with smaller organisations. To allow for even easier decision making in SMEs, we have subsequently developed a simplified 2x2 matrix:
How to read this diagram:
- First determine the potential for competitive advantage of the function / activity in question. Is it providing your organisation with a differentiator over the competition? Is it readily available in the market? Etc.
- Then assess your own existing capability to perform this function.
- Both of these are to be done as objectively as possible and might need a team to decide and external input is recommended. This first part of the methodology will usually be the most difficult, but also most important as it will determine the successful application of the methodology.
- Now let us look at the diagram itself. The left bottom and top right quadrants are quite clear cut:
- If the function / activity in question does not have much competitive advantage and you have no or low capability in-house, then this is a prime candidate for outsourcing. Generally look at forming strategic win-win relationships with your suppliers to get the best results. If the service in question is a real commodity, price does become the determining factor - you can negotiate the best deal rather than forming a more strategic partnership.
- Conversely, if we are dealing with a strategic function / activity that will give you competitive advantage and you already have strong capability, then do keep this insourced and keep investing in it.
- The two question marks come in with the other two quadrants:
- The service / function is a commodity and you are strong at performing it: If you can perform it cost-effectively in-house, then keep it that way, but do not spend many resources developing it further unless this will move it into the top right quadrant. You might alternatively decide to outsource and either the outsourcer takes over your resources for this or you redeploy them in a more strategic function.
- If the potential for competitive advantage is high, but you do not have sufficient resources available at present, you can either develop or hire that capability or you forge a strategic relationship with another organisation to get or develop it. In the latter case it is imperative to choose wisely and strategically.
As with any methodology it is vital that you do not follow it blindly, but that you understand its applicability and also its limits in your environment. The motto will be to “adopt and adapt”.
The Starting Point to Maximise Service Provider Impact
I would suggest that you start by mapping any function / position that you currently aim to recruit for or outsource in your company.
The first imperative is to define the position on the two “axes” of these functions (“Potential for Competitive Advantage” and “Internal Capability”).
There might be some low-hanging fruit that become immediately obvious.
It is always easier to understand a new methodology if one can apply it to one’s own business and environment.
In the past few years since we developed our matrix, I have introduced it to many IT and business leaders and it has always amazed me, how quickly it can be implemented and the immediate simplification of decision making it provides.
Get a Firm Undertaking Towards Strategic Sourcing
Strategic sourcing is a key competency to acquire and, especially if you have a limited budget, it is vital that you get a strong endorsement by your company leadership and establish the mindset to leverage service providers effectively.
Mapping any functional decision on the strategic sourcing model has to become a habit. Once it is used, I can guarantee that you will very soon reap the benefits.
To summarise - strategic sourcing:
- is a key Business Technology Management competency that any business should subscribe to
- requires you to understand competitive advantage and internal capabilities of every business decision taken
- helps you greatly simplify complicated sourcing decisions
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Please feel free to tell us in the comments below whether you found the information valuable or if you would like to relay some of your experiences with this topic. You can at any time also contact us directly.