Welcome to the Six Tenets of Sourcing 2.0 – where a “lights on” approach might just get you fired

Forget all the “phases” of outsourcing that have been debated so vigorously over the last twenty years - the industry is only now evolving  to a new phase, where middle and upper managers are being challenged like never before to bring value to ambitious organizations, or face worrying consequences.

All that rhetoric, all that PowerPoint, all those white papers.  Many providers and advisors desperately tried to portray the outsourcing of IT and business operations being more than simply saving money.  But they were all really painting a pretty veneer over why enterprises were really interested in it:  they wanted to reduce the cost-burden at the bottom of their enterprises.  They wanted to get smaller.  That really was the premise behind Sourcing 1.0.

Welcome to 2013.  We’re only now limping away from five years of cost-containment and reactionary measures, into a world where much of the cost-burden at the bottom of most enterprises’ operating functions has now been hacked away.  Ambitious enterprise leaders are now zoning in on those next layers upwards of their staff investments to understand how to become even more cost efficient and even more nimble, in terms of managing their global operations.  Big and clunky is ugly, lean and scalable is the new corporate sexy.

The transformational capability of middle and upper management is under intense scrutiny as enterprises shift from the reactionary to the radical

Times of economic recovery pose an entirely new set of challenges and skill requirements for middle and upper managers:  no longer is their primary job focus simply to keep a lid on costs and keep the machine ticking along.  Suddenly, they are expected to come up with the “what next?”  Managing operations to drive new ways of achieving value is far, far harder than keeping the lights on and the costs contained.  And it’s exposing many middle and upper managers as being legacy-thinkers and legacy-operators – unable to grasp new ideals, new ways of doing business and letting go the inefficient, cost-bloated ways of the past.

Suddenly managers, whether they sit in IT, finance, procurement, marketing and so on, are expected to be transformation experts, constantly innovating and aligning their focus areas with the objectives of the business.  If they are incapable of driving value beyond maintaining the status quo, they become walking bloated costs waiting to be exposed, analyzed, and eventually removed or replaced.  I cannot count on both hands how many conversations I have had over the last few months with executives who have found themselves moved out of their firms because they were not seen as “transformational” enough in their approach.  Most were not bad at their job – it fact, some are very capable, but the common thread is simply that they had found themselves overseeing a static operational function and no longer could prove their value beyond keeping the lights on.

The Onset of Sourcing 2.0:  Embedding third-party services into the broader Business Operations Value Chain

You only have to analyze the prime motivations of enterprises – and how they are shifting – to understand the new challenges facing middle and upper managers, as their business leaders seek to manage their operations in their entirety across outsourced, shared services and inhouse elements.  Suddenly, we need managers who understand processes, how they are enabled by technology, and how they can be best delivered by their own staff in tandem the workers contracted to their outsourcing partners.

We’ve taken the data from our 2011 State of Outsourcing Study and compared it with the same study we ran earlier this year to see where the motivations are shifting across delivery frameworks, whether they be predominantly outsourced, predominantly inhouse, predominantly shared services, or predominantly a hybrid approach:

Click to Enlarge

Externalization of internal capability still remains a significant objective of most organizations. HfS Research analysis (see above) of several hundred major organizations’ outsourcing behaviors, over the last three years, shows that 45% of companies in 2013 are decreasing reliance on in-house operations, up from 35% in 2011. While interest in pure outsourcing has slid from 70% in 2011 to 59% in 2013, 62% of companies in 2013 are looking to build hybrid shared services and outsourcing operating models. This clearly tells that, while externalization of operations is increasing, enterprises desire operating models that encourage inter-company collaboration across the base of external partners.

The Six Tenets of Sourcing 2.0

So how can today’s middle and upper managers approach sourcing in today’s environment to find new thresholds of value?

1)    Value is created by collaborating with multiple providers

The first major shift with Sourcing 2.0 is that value can no longer be generated solely by a single company. In fact, value in the future must be leveraged by an extended value chain of services provided across marketing, human resources, finance and the business units. Successful companies of the future must actively collaborate to identify mutual sources of value.

2)   Innovative services are inspired by some providers’ creativity and investments

The second major shift is that a company’s providers have an onus to innovate on behalf of their clients in order to win their business. Today’s enterprises simply cannot create every innovation for every function, process and technology. They are becoming increasingly reliant on their providers’ investments and creativity to drive value for them. The challenge, of course, is on the enterprise executives to build the right alliances that encourage their providers to deliver innovation in the areas they need it most. Today, the vast majority of companies are failing miserably at communicating their strategic needs and encouraging their partners, or potential partners, to meet them. When it comes to funding, few enterprises are willing to invest in either their internal or external resources to improve their provider relationships. Instead, their managers persist in grinding their providers’ prices lower and lower. How can companies expect to achieve innovation from their providers when the benefits are not shared or funded?

3)    The flow of data across the operations value chain creates invaluable IP with which providers can arm their clients

The third major shift is the massive amounts of data and IP embedded into processes that is increasingly transferred outside of enterprises, or even owned by providers. With increasingly large networks of providers, data flows across an enterprises’ entire operational environment is becoming increasingly complex to manage. Highly proprietary data frequntly flows through shared services centers, internal business units and across the various interfaces of the externalized operations being managed by the service providers. The question of intellectual property ownership is increasingly being tested as providers’ inventions are used to drive client value.  Moreover, enterprises need to develop capabilities that create a visibility of processes to manage risk and compliance across their internal and external operational partners.

4)    Enterprises must treat their providers as strategic partners and judge them on capability, as opposed to merely being low-cost

Providers have become integral to the success of the smart enterprise.  They need to play a major role in driving the capability and productivity of the people that remain in their clients.  They need to have a meaningful impact on the operational effectiveness of their clients’ business, but their clients have to treat them fairly and engage them as an extension of their own enterprise, as opposed to the “master/slave” model of Sourcing 1.0.  Successful enterprise managers view alliance-building as more than a contractual document and more powerful than cross-functional team facilitation. Pulling together a disparate set of executives across various internal and external entities and encouraging them to team together to improve the competitive nature of their enterprises is a critical capability for the successful operations leader.

5)    Operations executives must align themselves with the front office of the enterprise. The need for creative thinkers, who can act as peers to senior stakeholders and can understand and influence their businesses’ needs, is a pre-requisite for today’s workplace. Operations executives must be more commercially-orientated to the business needs in a way that better achieves corporate objectives.  This is already happening in IT, for example, where many CIOs are being put in revenue-generating roles where they need to talk to customers and be much more aligned with their product marketing and sales teams.  Many “old-school” CIOs are finding themselves quickly being cast aside as their companies look for innovators leading their business functions, as opposed to “operators”.

6)    Enterprises must shift their negotiation focus to collaborative deal-making. Collaborative deal-making must over-ride the ability to grind every last penny out of providers in negotiations. The Sourcing 2.0 skillset requires a shift of focus toward maximizing the size of the entire pie to the benefit of all participants.  Smart operations leaders need to learn the capabilities of their providers better in order to create contracts that inspire co-investment an co-learning from both parties.  For example, helping providers develop technology and IP that can leveraged across their client base is a smart way for many enterprises to benefit from innovation investments without paying exorbitant consulting fees.   On the flip-side, if the provider only really operates with a low-cost, standard-value model, then the buying organizations needs to make a strategic decision whether cost trumps long term value for the services in questions.

The Bottom-line:  Executives ignoring the Tenets of Sourcing 2.0 run the risk of Extinction

Lets not make any bones about it – there is an increasingly large number of former middle and upper management entering the job market today realizing that the 30 year career job is fast becoming a thing of the past.  The last 20 years if outsourcing has essentially created a culture of externalizing staff where possible, as companies simply do not want to employ hundred upon thousands of people to turn widgets, write code, scan documents, cleanse data, run reports etc.   Now many of those tasks have been externalized, the onus has shifted to the next layer of staff upwards to prove they do more than run operational tasks, that can easily be replaced by others for half the wage (or even less).  Operations executives running business functions have to get smarter about how they source their work and drive value into their businesses.  In most cases, there won’t be a rule book published entitled “Steps to get more valuable in your organization”, you just have to figure it out for yourself!

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7 Comments

  1. Posted July 1, 2013 at 12:46 am | Permalink

    A lot of companies are using a combination of tech and outsourced hr / peo services like G&A Partners to achieve lower overhead, lower risk and higher rates of return in the market place.

    I think collaboration is more important than ever.

  2. Jenny Naidoo
    Posted July 2, 2013 at 9:20 am | Permalink

    An excellent article. The cliché that “managers are leaders” and therefore don’t need to know the business operations, was true for managers in the legacy era. Legacy managers are of old school and do not make any difference to the business unit. They hold on to old ways of running organisations and therefore do not embrace nor introduce best practices. Outsourcing certain tasks to the right people will enable a platform for growth of small businesses. The trend of emerging businesses providing specialised services will not only improve service delivery but will also be cost effective for organisations. This trend is also in keeping with the global intention of encouraging young entrepreneurs instead of job seekers.

  3. John Gibson
    Posted July 5, 2013 at 9:50 am | Permalink

    Phil,

    A very well thought out article. We’ve moved to a time where managers who simply “delegate” the operations are becoming caricatures of the past – they become exposed when the transactional work is outsourced and their value beyond “managing” is questioned. Quite simply, their companies can replace them with managers at much lower wages who are “closer” to the operations (i.e. $100k as opposed to $200K).

    Executive management on big salaries are left trying to find new ways to add value to justify their costs – and many simply to not have the skills or experience to broaden their focus,

    John Gibson

  4. Paul McDonough
    Posted July 5, 2013 at 11:23 am | Permalink

    Phil,

    As outsourcing relationships mature, the more the provider becomes an extension of the operations. The skills requirement shifts from managing a contract to managing an operation, which is when many of the legacy managers get cut,

    Paul

  5. Posted July 5, 2013 at 11:27 am | Permalink

    It’s becoming very clear that in order to retain long standing contracts, vendors like us need to show that we’re doing the thinking for our clients. We are the ones that must make sure our propositions add new value each time round, and those providers who don’t will perish (or worse, get utterly commoditised).

    I guess it’s called innovation, and to institutionalise it is really, really hard.

  6. Posted July 5, 2013 at 1:56 pm | Permalink

    Absolutely right… and the reason why Systems In Motion is doing so well, with an onshore core delivery model and agile Development, which are critical components of effective Sourcing 2.0

    Debashish

  7. Samit Singh
    Posted July 7, 2013 at 1:28 am | Permalink

    This message is as much important for buyers as for sellers…..if not more. These winds of change can only start when

    1. Buyers are well integrated internally (Front office with Back office; Ops with IT,HR, Finance etc)

    2. Buyers are well integrated externally (with their partners/vendors – both offshore and onshore)

    3. Buyers force change on sellers to ensure that sellers invest in change and transformation capabilities and reward their staff accordingly.

    Needless to say, this millennium is all about opening doors and collaborating (without losing your niche).

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