Point of View on Sourcing Strategies

PoV_Sourcing_RZ 01.02.2008 13:01 Uhr Seite 1

Cover-Sector/Discipline/Alliance the way we see it

Point of view on
sourcing strategy
Defining the right sourcing strategy
for your organization


the way we see it

Point of view
on sourcing strategy

Utrecht
Capgemini Consulting Nederland BV
January 2008

© 2008 Capgemini. No part of this document may be modified, deleted or expanded by any process or means
without prior written approval from Capgemini

Point of view on sourcing strategy 3


Introduction

Besides the need for cost reductions and flexibility, does your company also
struggle to decrease the time to market of your products or services and
simultaneously create value? Especially given the consequences of today’s volatile
and rapidly transforming global markets? Increased competition, cost reduction
opportunities and the agility to respond to globalization are just a few factors to
take into consideration when preparing to define a sourcing strategy.

Increased
competition

Political and Cost reduction
environmental and increased
challenges time to market

Agility to respond
to globalisation

A clear and well defined sourcing strategy is the key to success in a
dynamic environment.

But what is a good sourcing strategy? What are the main trends and insights?
How do you define the right sourcing strategy for your organization? Which
elements should be part of a compelling sourcing strategy? Which activities can be
outsourced and which should be kept in-house? How do you trade-off short and
long-term objectives?

The questions are many and varied. Sourcing encompasses all support functions
that underpin an organization’s core business. These support processes include
Finance, Human Resources Management, Information Support Management and
Procurement, but can also include processes that are more critical to your core
business.

Records show that most sourcing decisions fail to deliver the potential value.
In most cases the reason for this failure is that few sourcing decisions are based
on an explicit strategy and/or are providing the guidance on how to successfully
execute a chosen sourcing strategy.

This point of view from Capgemini will take you through the different sourcing
options you have as a company. It also looks at the selection and validation of
the appropriate sourcing mode and the different sourcing approaches that need to
be considered. This will give you an insight not only into the different theories
behind strategic sourcing, but also into an effective execution in combination with
a concrete implementation plan.

4


Table of contents

1. Sourcing strategies 06
1.1 Rationale behind sourcing strategies 06
1.2 Choosing the right sourcing strategy 07
1.2.1 Ownership 08
1.2.2 Rightshore: onshore, nearshore or offshore 08
1.2.3 Management: tight or light? 09
1.3 Approaches to implementation 09
1.4 The multi-tower question 09

2. Sourcing: trends and insights 10
2.1 Human Resources 10
2.2 Procurement 12
2.3 Finance & Accounting 13
2.4 IT Sourcing 14
2.5 The future of global sourcing of services 16
2.5.1 The utility model 16
2.5.2 SaaS: Software as a Service 17

3. Sourcing strategy approach 18
3.1 The closed loop sourcing strategy process 18
3.3 Why Capgemini 22

Authors: Stefan Westdijk, Mark Hofland, Johan Hiensch, Ton van Dolder,
Michel Borgers, Ron Broeren


1 Sourcing strategies

Sourcing is the delegation There are numerous definitions of sourcing. Generally, sourcing can be
of business functions to a defined as delegating business functions to a separate business unit or third
separate business unit or party. A sourcing strategy encompasses all functions that underpin the core
third party. business of an organization. By altering the management of these support
functions, organizations aim to optimize and improve their operating model.

The sourcing strategy is about defining what an organization wants to do
with the tasks, functions or processes that are not differentiating the
organization from its competitors. And the strategy does not only apply to
the non-critical processes but to every task, function or process that provides
added value to the organization.

A sourcing strategy is 1.1 Rationale behind sourcing strategies
the direction of the
organization regarding Defining and implementing a sourcing strategy can have a major impact on
management of functions several business functions and processes, including Finance & Accounting,
and elements of the direct Human Resource Management, Information Support Management, Procurement,
value chain in order to Marketing and Sales and Logistics.
optimize the operating
model of the organization
Finance and Accounting
Non critical
processes Human Resources Management
Mar

Information Support Management
gin

Procurement

Critical
processes
Inbound Marketing
Mar

Logistics & Outbound and
Operations Services
gin

Supplier Logistics Sales
Relations

Porter’s value chain1 can be used to define the scope of the sourcing
strategy. The basis of the sourcing strategy is what to ‘make’ and what
to ‘buy’.

Every enterprise will have to identify whether a specific business function or
supporting process provides a strategic advantage over its competitors. The
primary drivers for sourcing of functions or processes are:
s Less ownership of infrastructure and resources, based on a desire to increase
flexibility
s Increased agility and decreased time to market
s Focus on core business and the need to become more cost effective

1Competitive advantage: creating and sustaining superior performance, M.E. Porter, 1985

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the way we see it

1.2 Choosing the right sourcing strategy

Outsourcing is often perceived as the next step after optimization of a shared
service center. But is this really the right sourcing strategy for your organization?
Capgemini has carried out basic research into the global sourcing of services. As
part of this research, decision makers from a number of private and public sector
organizations were interviewed. We sought to define a comprehensive set of
global sourcing modes, understand the potential value of each global sourcing
mode and how environmental characteristics influence an organization’s service
sourcing options. Finally, we wanted to understand the influence of collaborative
competence on transactional risk to assess the relative value to be expected from a
service sourcing decision.

Selecting the right sourcing mode means finding the right combination
of ownership (owned or not owned), rightshore (onshore, nearshore
or offshore) and management (tight touch or light touch) or governance
model.

These three elements have been captured in a cube of sourcing options or
sourcing modes. This cube is called the Global Sourcing Strategie cube®.

Shared Support Organization Nearshoring
(e.g. facility power house)
Spin off
(e.g. new company)

Captive offshored
(e.g. offshored SSC)
Horizontally outsourced
(e.g. BPO vendor)

Uffshore
Selective sourcing or multiple Vertically outsourced
sourcing is a combination of (e.g. Managed Service Providers)
various sourcing options

Light
Onshore Touch
In house BPO Vendor
Tight
Touch
Owned Not owned

Optimized in house solution
(e.g. in house SSC, in sourcing or optimised processes)

On the basis of interviews with several decision makers a decision
support tool model has been defined, called the GSS cube®. This cube
will allow organizations to assess the relative merits of each sourcing
option for their given circumstance.

Based on the GSS cube’s three dimensions, sourcing can take on different forms.
The sourcing strategy with the least impact from the perspective of ownership,
location change and intensity of management is a shared service center. Shared
service centers are undoubtedly the best known sourcing option or mode. The
concept of shared service centers emerged in the 1970s in North America and is
now widespread in Europe and Asia. Today companies either choose to optimize
existing shared service centers or set up new shared service centers in competitive
markets. By diagnosing existing shared service centers, it appears that outsourcing
becomes critical, including the transfer of business processes to offshore and near-
shore locations. However, many companies in Western Europe have not yet embraced

Point of view on sourcing strategy Sourcing strategies 7


the full potential of technology enablement and the extension of the European
Union. Evaluating the geographical scope and location strategy can be lucrative,
whether this is outsourcing or cross-border shared services as potential sourcing
strategies. This could take the organization in the direction of the highest impact
sourcing strategy from an ownership, location and management perspective: out-
sourcing to an offshored third party where management attention is not critical.

1.2.1 Ownership

Increasingly, companies prefer to outsource work to different providers instead of
negotiating one large contract. The most successful companies are using multiple
sourcing as a strategic best practice, not just to save money but to increase
organizational flexibility and time to market. Disciplined multi sourcing offers a
new framework to help organizations gain control of their sourcing decisions and
ensure that their service relationships (whether insourced or outsourced) deliver
long-term value and support business strategies. The expected gains are best
achieved through proper coordination with internal systems and processes and
not by ad hoc attempts at blindly reducing costs.

Our experience clearly shows that the most successful companies are using third
parties as a strategic best practice in order to increase organizational flexibility.
The gains achieved by having no ownership of a specific function or process require
proper coordination with internal systems and processes.

1.2.2 Rightshore: onshore, nearshore or offshore

Cost saving remains the key criterion for most organizations in the process of
defining the right sourcing strategy. But even in low-wage countries such as India
and China prices are rising quickly and margins are becoming tighter. The borders
between onshore versus offshore delivery of business process outsourcing services
are beginning to blur.

Unsurprisingly, therefore, companies are increasingly focusing on the other benefits
of outsourcing, such as workforce flexibility, improved quality of processes or
functions, faster time to market and the acquisition of additional hard-to-find skills.
Still, labor savings can be enormous and gains in efficiency, productivity, quality,
and revenues can be huge when fully leveraging offshore talent.

While the adoption of a shared service structure is viewed by many as an appro-
priate strategy to pursue, most companies still struggle to devise optimal strategies
and to generate adequate returns on investments for their projects. This is because
none of the approaches that are commonly adopted is recognized as universally
effective.

Based on our experience, offshoring is an important part of the overall growth
strategy of many large organizations. The key driver for offshoring is not about
low wage prices but rather workforce flexibility, quicker time to market and
gaining additional skills. When offshoring risks are too high (poor service quality,
lack of cultural fit or loss of control) a captive model is applied. This captive
model ensures that offshore components adhere strictly to corporate procedures
and rules.

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the way we see it

1.2.3 Management: Tight or light

Offshore outsourcing can deliver on its promises, but it takes a tremendous amount
of detailed management on both the client and the supplier sides to realize expected
benefits. Poorly managed cost-saving strategies can end up costing far more than
the original savings planned. This has resulted in a number of companies pulling
back from offshore activities. Such strategies must therefore be carefully planned
and implemented. A good alternative is to find an onshore service provider who
manages all offshore activities. From the initial sourcing strategy decision through
to managing a long-term sourcing relationship, enterprises must understand the
impact of relationship complexities and new business constructs in a changing
world. The key to a successful sourcing strategy is not about crafting the plan
and finding the most appropriate partners but lies within the management of the
delivery or execution of the sourcing strategy.

Successful deals are those built for change. From the initial sourcing strategy
through managing the long-term relationship, organizations must understand the
impact of relationship complexities and new business conducts in a changing
world.

1.3 Approaches to implementation

As soon as the right and most beneficial sourcing mode has been selected, an
implementation scenario needs to be defined. Organizations should assess internal
services, decide what they want to achieve, and determine how to get there. There
are five implementation possibilities that might be considered:
1. No transformation: current processes and methodologies can be optimized.
2. Reengineer and move: transform the process and then outsource.
3. Move and reengineer: outsource the process and then transform.
4. Step by step: programmed transformation.
5. One big leap: lift and shift concept.
A business case can be made once the objectives of potential sourcing scenarios
along with the appropriate approach are clearly defined. This will result in a
proper identification of the benefits, investments and potential risks and
mitigations.

1.4 The multi-tower question

In a multi-tower approach In paragraph 1.1 we discussed that, based on the competitive advantage generated
processes are handled by your processes, a strategy needs to define which processes will remain core to
and sourced to a single the organization and which ones need to be ‘sourced’. Regardless of your chosen
service provider sourcing mode, a strategy for managing a ‘multi-tower’ approach is an option.
In the case of outsourcing processes such as Finance & Accounting, HR and Pro-
curement, this approach sees the processes being bundled and sourced to a
single service provider. In the case of keeping ownership of these processes in-
house, this implies the setting up of a single shared service center where the
processes will be executed on an integrated basis. Service suppliers are beginning
to show synergies but as an organization you might not be utilizing the best
supplier for each process or service.

Point of view on sourcing strategy Sourcing strategies 9


2 Sourcing:
Trends and Insights

Sourcing strategies are not limited to an organization’s supportive functions
or processes. Capgemini believes that sourcing strategies should look at
corporate development through the lens of sourcing. This would require
elements of the direct value chain to be considered in order to optimize
the operating model. In this way, the definition of a sourcing strategy will
help organizations focus on where most value is added and it will support
decisions on what an organization should ‘make’ or ‘buy’ in terms of
processes and functions. In Europe, Human Resources, Procurement and
Finance & Accounting are the most mature processes currently being
subjected to sourcing strategies from a supportive service perspective.

2.1 Human Resources

The offshore delivery of Human Resource services has increased rapidly in the
past few years, largely due to the fact that HR processes lend themselves well to
outsourcing. In 2005, the total enterprise spending in this area amounted to
€ 23.6 billion, the highest spending of all BPO services2. Traditionally, payroll
processing is the most popular choice when it comes to outsourcing HR-
processes. Enterprises are now considering the outsourcing of recruitment,
training and compensation and benefits administration.

Driven mainly by cost savings, organizations are increasingly looking at outsourcing
end-to-end comprehensive HR processes instead of a single process. Among these
comprehensive HR-processes are HR compliance and talent management. Multi-
process outsourcing offers economies of scale. Besides reducing the costs of provi-
ding HR services, several other benefits can be achieved, including improving
service levels, enabling management to focus on core business activities and better
access to functional and technical experts.

Human Resources outsourcing is often presented as the next step after a Human
Resource shared service center. HR outsourcing including the payroll function is
often part of larger transformational deals involving multiple disciplines such as
Information Technology or Finance & Accounting.

The potential scope for HR outsourcing is presented in the following diagram3.
This shows that the more ‘critical’ elements of the Human Resources function, like
Records management and recruiting, do not have a high priority because they are
perceived as critical to the organization by the interviewees. Language problems
and legislative complexity are also key issues in HR BPO. In particular, (multi-)
local organizations are affected by these issues. Most global players are able to
cope with these problems and still manage to make a good business case for HR
BPO. But rising labor costs around the world are pressuring profitability.

2 HR BPO Market to Grow to $32 Billion Worldwide by 2010, Gartner, 2006

3 Dataquest User Survey Analysis HR BPO, Gartner, 2006

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the way we see it

Payroll

Benefits
administration

Education
and training

Records
Management

Recruiting and
stuffing

Hring
administration

Other

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

s Currently outsourcing s Considering outsourcing s Not outsourcing

Based on research, it is clear that organizations are reluctant to
outsource key elements of the Human Resource function.

In accordance with the GSS cube® presented earlier the potential scope for HR
outsourcing is shown in the next diagram:

Leave and working hours
administration
Payroll
Compensation
and Benefit admin
Owned processes, offshore =
- Absence management Proces optimization Non client facing, (mature)
- HR information depending on client facing % Transactional processes
- Knowledge management of process.
- Performance management
Client facing,
Transactional
processes
with light local Records
regulations Management
HR Filing
Voluntary Exit
Offshore
Retirement
administration

- Labour relations Non client facing,
- Organisational design Non transactional processes
Light
and governance Touch
- Re-organisations
- HR projects Tight Benchmarking
Onshore Touch
- HR policy Employee Introduction (doc ’s)
Owned Not owned
- Selection process
- Introduction
- Position management
- Career Management Client facing, Non transactional processes
- Talent Management with tight local regulations
/Management
development - Recruiting
- Involuntary exit - Hiring
- Decease - Expats & Impats
- Education & Training

Despite the reluctance, there are many possibilities for benefiting from
an HR sourcing strategy.

Point of view on sourcing strategy Sourcing: Trends and Insights 11


2.2 Procurement

A 10% price reduction Most organizations are spending approximately between 40% (e.g. services
in goods and services industry) and 75% (e.g. manufacturing) of their annual revenues on the
procured can have the procurement of goods and services. Every Euro that doesn’t go to taxes,
same impact on depreciation, or salaries goes either to pay suppliers or directly to the bottom line.
corporate profits as a Companies can therefore significantly improve their profit margin through
30% increase in sales! aggressively managing supplier relationships. A BPO Procurement service consists
of two main types of services (and the combination of these two is called full
service BPO Procurement):
s Purchase-to-Pay which is the provision of transaction processing support to
manage the administration involved in the ‘procure-to-pay cycle’ for indirect
goods and services or direct procurement;
s Source-to-Contract includes strategic sourcing and the management of contracts.
The spend managed by the BPO service provider creates a continuous leverage
for spend aggregation.
“Increasing the quality of BPO Procurement is in a relatively embryonic stage. Early adopters can be found
our procurement services in high-tech, manufacturing and financial services sectors. Most organizations
is the main reason for focus on the outsourcing of indirect categories. Potentially, strong gains lie in
outsourcing a significant enterprise-wide strategic BPO Procurement. Few companies have adopted this
part of the procurement model, however. A more common sourcing strategy for the procurement function
function.” is an offshored shared service center. These shared service centers are executing
a subset of processes for global organization in order to:
s Drive standardization of the processes
s Reduce the cost of the supportive procurement processes
s Leverage low-wage resources
The potential scope for BPO Procurement is presented in the following diagram4.
If all the elements are (partly) outsourced, it can be referred to as full service BPO
Procurement.

4 Strategies and Insights for Today’s CPO, Capgemini, 2006

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the way we see it

Project Strategic Supplier Purchase Management
planning Sourcing Management to Pay Reporting

• Commodity
specifications
• Strategic • Supplier
planning selection • Contract
• Validation of • Negotiations evaluations
In-house • Management
strategy • Contract • Supplier
reporting
finalization meetings
requirements
• Requisitions
• PO approval

• Purchasing • Transaction
processing and • Monitoring and
strategy • Commodity • Define service
management reporting on
requirements profiling levels
• Compliance compliance
• Savings • Market research • Service level
monitoring • Exception
identification • Supplier research reporting
• Requisition management
• Define • Bid preparation • Prepared
support • P2P reporting
Outsourced communication contract
• Invoice • Spend
offerings evaluations
settlement intelligence
• Supplier adoption
• Manage • Manage
accounts payable inventory levels
• Manage • Expedite
payments to
suppliers
• Stock
management

A key element in BPO Procurement, and this is applicable to all
outsourcing deals, is the management of the split: processes executed
in-house need to be fully aligned with the outsourced processes.
A compelling governance model should therefore be defined and
managed.

2.3 Finance & Accounting

During the first unpredictable years of the 21st century, the CFO had to focus on
his more traditional roles as ‘internal organizer’ and ‘compliance controller’ to
cope with requirements such as the need to reduce costs during the recession
following the internet-bubble and the need to regain control to comply with the
new IFRS and SOX-regulations in the aftermath of the accounting scandals.

Today, and confirmed by the recent Capgemini CFO survey5, the CFO is able to
refocus again on transforming the finance function such that the function can
expand its role as ‘business partner’. In this role, the finance function should
“The simple and basic enable value creation and should be FIT for the future:
principles of delivering
- by creating Focus on an efficient and effective finance infrastructure;
both short term
profitability and generating - by providing Insight to support your business in decision-making;
long term sustainable
- by enhancing assurance to obtain Trust from stakeholders.
growth through innovation
and investment.” This requires a transformation to create an innovative and flexible finance function.

5 Source: Capgemini CFO-Agenda 2008, dimensions of a successful strategy. 239 CFOs and financial managers of
different European organizations participated in this study on trends and developments in the finance function
6 FAO Market Update, Everest, 2006



STRATEGY & DECISION SUPPORT
Finance Policy, Steering &
Control Framework, Strategy &
Decision Making, Strategic
Planning & Support, Financial
Analysis & Treasury In-house STRATEGY
DECISION
CORPORATE PERFORMANCE SUPPORT
MANAGEMENT STRATEGY
Planning, Budgeting and Reporting, DECISION
Management, & Financial Reports, SUPPORT
Financial Applications Management, CORPORATE
Tax Planning Sourced PERFORMANCE
MANAGEMENT
CORPORATE
TRANSACTION PROCESSING
PERFORMANCE
General Accounting, Accounts MANAGEMENT
Receivable, Accounts Payable,
Fixed Assets, General Ledger, Billing, TRANSACTION
Credit & Collections, Travel & PROCESSING TRANSACTION
Expense, Standard Reporting, Cost PROCESSING
Accounting, Tax Accounting &
Reporting
People / Process / Technology People / Process / Technology

Finance Transformation: towards a Low Cost, High Quality and Added
Value Finance Function

Focus on the internal efficiencies within the finance function is needed to achieve
a low-cost, high-quality and flexible organization. This could be reached by
exploiting the rich utilization of low-cost talent resources through globalization,
and achieving greater manageability of the finance function across business units
and geographies6. These are the two critical elements of the F&A sourcing strategy.

“Outsourcing F&A In the past, bringing the F&A processes towards a Financial Shared Services Center
processes enables us to was the way to achieve lower costs and greater manageability. It is still a proven
focus our time and solution for your sourcing question, but not the only one. Many businesses are
resources on our core experiencing increasing skills scarcity and rising costs of finance talent where a
business areas, which third-party service provider can bridge this gap for many of their F&A processes.
impact our profitability and
competitive advantage.” - In this emerging rapid-growth phase of F&A function or proces outsourcing
Beth Summers, (at a rate of 16.4%, outsourcing F&A shows the highest compound annual growth
Chief Financial Officer rate of all BPO services in Europe7) we see different adoption dynamics. Market
at analysis8 shows that in Energy & Utilities and Travel & Logistics outsourcing of
Hydro One F&A is already common; however in Financial Services there is still a lot to gain.

However, most companies struggle to find their way in the jungle of sourcing
terminology and to define their own sourcing strategy. Furthermore, there are
risks from a managerial and governance perspective, not only during the selection
phase but especially in the long term. Therefore, organizations need to identify
and prioritize the risks and should set up risk monitoring and risk mitigation.

Capgemini found that careful supervision (including periodic evaluation) is the
key to successfully executing the sourcing strategy. Successful in this case means
keeping the gap between potential value and achieved value as small as possible.
This requires the careful vetting of potential vendors, the development of clear
performance metrics and targets for which vendors will be held accountable, and
the monitoring of not only the quantitative performance of vendors but also the
reaction of end users who are directly dependent on the vendors’ work.

7 European Finance And Accounting BPO Spending Forecast, Forrester, 2006
8 FAO Market Update, Everest, 2006

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the way we see it

2.4 IT Sourcing

The IT sourcing market is still growing: with 31,6% more spending predicted for
2011 compared to 20079. The IT offshore market alone is growing with a com-
pound annual growth rate of 16,5% in Western Europe and 14,4% in the US until
2009. Companies still see the advantages of outsourcing IT to external partners.

The top three drivers for outsourcing and offshoring IT are still cost reduction,
increased flexibility and increasing quality. At 82%, cost reduction is at the top of
the list of drivers, with the others respectively at 46 and 43%.10 A key reason for
this is that the IT function is still inevitably perceived as a costly support function,
instead of a possible business enabler.

IT budget allocation per IT value chain step
in percent 49
3
43
5
39 3 39
41 4 2 Offshoring
3
Share of total 41 Distributed
4 36 5
IT budged 0 delivery
25 4 32 32
0
2 27
23
Near-
8 shoring
0
0

8

Concep- Infra-
Strategy & Test & Application structure
Step in the IT Planning tualization Realization
Rollout Management Manage-
Support
value chain & design ment

Looking at the different IT delivery options, the most common is still nearshoring
(outsourced to partner in the company’s own country or a country nearby).
When companies want to use offshore delivery they invariably choose a distri-
buted delivery approach and to a lesser extent opt for direct offshoring. Those
companies offshoring largely source Realization, followed by Infrastructure
Management, Application Management and Support.11

To make such decisions you have to design your own sourcing strategy. This is a
complex task characterized as non-routine and often with the use of incomplete
information. In recent scientific research we have discovered that 110 different
variables can influence the right sourcing mode.12 These variables are situational
factors, risks, outsourcing drivers, etc.

In this process of defining the right sourcing mode there are two common pitfalls.
The first is the large amount of management attention required for the
outsourcing partner meaning that there is much less for the standing organization.
The retaining organization has to manage the outsourcing contracts and should
therefore transform to a demand management organization.

Secondly, companies are focusing on the sourcing strategy but forgetting that after
the transformation the success of the sourcing has to be measured. During the
design of the sourcing strategy you have to define when a sourcing strategy is
successful and with which parameters you want to measure this success.
9 Gartner, June 2007
10 European CIO Survey 2006, Capgemini
11 European CIO Survey 2006, Capgemini
12 Thesis ‘Towards an ontology for designing successful outsourcing strategies and choosing aligned



2.5 The future of global sourcing of services

The future of global As the dynamic and competitive marketplace drives further commoditization,
sourcing of services is industrialization and globalization, players are pushed to compete not only on
often defined as ‘3GO’: product innovation and cost but also on flexibility and the ability to interact with
third generation out- external partners.
sourcing.

SP=Utility
Business

Integration
Operations

AD AM IM

SP=BPO
Business

Integration
Operations

AD AM IM

SP=SaaS
Business

Integration
Operations

AD AM IM

COTS
Business
Integration

Operations

AD AM IM

In House - CSD
• The development of Utility Service Providers (SP) are
Business driven by consortia of vendors eager to leverage economies
Integration

Operations
of scales from different customer while eliminating the need
for asset (people and technology) ownership on the
AD AM IM
customer side.

IM Customer owns the function/assets IM Suppliers owns the assets IM Supplier and/or Customer owns
the assets

Evolving sourcing models enable organizations to realize their strategic
objectives.

Primarily in the competitive financial services industry, given current develop-
ments (European banking consolidation, SEPA) the pressure to reduce asset
ownership (people, technology and infrastructure) is driving the trend towards
complex and innovative sourcing models.

2.5.1 The utility model

The challenge that organizations face is to balance control, compliance and
flexibility in order to maintain a competitive edge while reducing cost and asset
ownership. On the supply side, vendors compete by offering flexible, trans-
action-based pricing for both software and hardware. On the verge of emerging
is the Solid Utility, bundling the technology, business process and support in a
competitive, price-per-transaction commercial offering.

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the way we see it

Demand Side Supply Side – Service Delivery as Utility: Subcontracted
The FSI’s metered, scalable, standardized services Services

Business Process Utility Vendor Consortium

Business Service 1 Business Service 2 HR Services

Standard Services
BU1 (Recruitment, Training, etc.)

Demand
Client 1

BU2
Business Service 3 Business Service 4
BU3 Technology Services
AM + IM

Business Service 5 Business Service 6
BU1
Demand
Client 2

BU2 Integration Services
(One Off)
Opt: Business Service 7 Opt: Business Service 8
BU3
Optional Services

BU1 Facility Management
Opt: Business Service 9 Opt: Business Service 10
Demand
Client 3

BU2

BU3
Opt: Business Service 11 Opt: Business Service 12 Regulatory Compliance

UTILITY Core Components
• WorkflowProcesses • Best Practices
Internalnal Services

• Authorization • Demand estimation
• Regulatory Framework • Service Delivery
Management
Back Office Administration
UTILITY Core Interfaces
• Billing and Settlement • Archiving and
• CRM Interfaces Scanning
• Risk Profile Setting • Information
provisioning

On the supply side, service will be delivered as utilities in terms of
metered, scalable and standardized services.

2.5.2 SaaS: Software as a Service

While the ‘utility’ is likely to dominate in the highly transactional-based domains
(such as payments, cards and possibly mortgages), the new emerging trend is the
SaaS (software as a service) model. The attraction for SaaS lies in the ability to
purchase transaction-based services without having to own the asset, while at the
same time maintaining a competitive edge in terms of performance.

The challenge that clients face today is to persuade the service providers to de-
velop such solutions by taking over their current legacy (people and technology)
and turning it into a service (offered via a SaaS model, for instance) that is highly
tailored to them, as a foundation client.

Professional service providers acting as transformation partners and with a strong
operational capability are ideally positioned to develop such solutions due to their
current customer base, size and ability to create standard market solutions that
will appeal to a large customer base.



3. Sourcing strategy
approach

The need for cost savings, increased efficiency or strategic orientation can trigger
thinking about the right sourcing strategy. Because the elements that affect the
sourcing strategy of an organization can change over time, the definition,
implementation and execution of a sourcing strategy is considered as a closed
loop process.

3.1 The closed loop sourcing strategy process

In this five-step closed loop process organizations should continuously go through
the steps in order to (re-)define and execute the right sourcing strategy. The closed
loop process is visualized in the figure below.

Analysis and
Definition

Scenario
Delivery or Planning and
Operations Business Case

Transition or Selection and
Migration Preparation

Not only is the efficiency of the outsourced function a driver for
evaluating the sourcing strategy, but business dynamics may also
require a change of scope to ensure a more suitable sourcing mode.

18


the way we see it

Step 1: Analysis and Definition

A scope for the sourcing strategy will be defined in the analysis and definition
Analysis and
Definition step. All various sourcing options need to be evaluated in order to come to the
Scenario
right sourcing mode, including the level of externalization of the processes or
Planning and
Delivery or
Operations Business Case functions in scope. These evaluations should be based on three questions:
s Is this process or function providing a competitive edge?
s How interwoven is this process with other processes in the organization?
s What is the sourcing savings potential of the process or function?
External knowledge, benchmark data and experience of the various sourcing
options, such as outsourcing, will be used during the analysis. The organization’s
readiness and ability to source and the experience of other organizations will be
taken into account to make the decision clear and objective.

Capgemini has developed a Global Sourcing Strategy model that takes into
account several dimensions and areas on which the organization is measured.
These are then compared with benchmark data. The outcome of this model
is a clear and objective overview of the different sourcing options.

During the analysis and definition step, a multidisciplinary team is required
to challenge the multi-tower question and the potential integration of various
processes and functions in scope. The analysis is of strategic importance to your
organization and therefore corporate management should be involved during
this step.

Step 2: Scenario Planning and Business Case

Analysis and
Definition
On the basis of the outcome of the Global Sourcing Strategy model several
scenarios or global sourcing modes have been identified. The most beneficial
Delivery or
Operations
Scenario
Planning and
Business Case
sourcing modes now need to be analyzed in more detail. Capgemini has
developed deep dives to analyze and measure the effects of the different sourcing
strategies on the organization in more detail.

By means of the scenario planning and business case phase the sourcing strategy
now needs to be translated at a tactical level. With our experience and expertise
we can support your organization on topics such as:
s The advantages and disadvantages of centralization and/or decentralization
s Which parts of the process should be part of sourcing strategy mode
s Which parts of the process are beneficial for outsourcing
and/or shared service operation
s Which parts of the process should I keep in-house
s How do I need to manage possible vendors of outsourcing services
s How can I best build a business case reflecting all relevant benefits and costs
s What is a best-practice ‘retained organization’
In this phase the standing organization needs to be analyzed and prepared for the
new situation. This implies the way of working between the standing organization
and the new sourced function. Finally a business case per scenario needs to be
developed to support the chosen sourcing mode and function.

Point of view on sourcing strategy Sourcing strategy approach 19


Step 3: Selection and Preparation

Analysis and
Definition
Selection and preparation is essentially the execution of the ‘make’ or ‘buy’
decisions. The organization should be prepared for the change as soon as the
Delivery or
Operations
Scenario
Planning and
Business Case
preferred sourcing scenario is defined, aligned with the business strategy and
validated.
When an external sourcing mode is chosen the selection of and negotiation with
one or multiple service providers needs to be carried out. In general, this selection
process takes a lot of time and effort, because you need to make sure that the
service provider is capable of fulfilling the outsourced process or function with at
least the same (but preferably even higher) quality.

When an in-house sourcing mode is chosen, the organization needs to be pre-
pared for the movement of workload within the organization. This might involve
the movement of workload from one department to another, or building a new
shared service center to take over the workload.

Depending on the size of the change (based on the scope, the sourcing mode
and the organization’s readiness) you will be setting the scene for the upcoming
change of the selected sourcing mode, whether this is in-house sourcing,
outsourcing or all variances within this range.

Step 4: Transition or Migration

Analysis and
Definition
After the steps above in which the preparation for change is undertaken, a trans-
formation or migration will take place. The migration with the highest impact will
Delivery or
Operations
Scenario
Planning and
Business Case
be the sourcing of functions or processes to an external party offshore.

Before the actual migration or transition takes place, the standing organization
Selection and
Transition or
Migration Preparation needs to be prepared for the new situation. This implies defining the way of
working between the standing organization and the new sourced function. This
sourced function can be an external party, a new division within the
organization, or one of the multiple options within this spectrum of sourcing
possibilities. The following elements need to be addressed in the standing
organization:
s Definition and alignment of the governance model
s Ensuring that the critical knowledge and experience is captured
and remains within the organization
s Process descriptions and gaining clear insight in the way of working
with the third party (either external or internal)
s Definition of service levels and key performance indicators
s Training of employees in the standing organization

20


the way we see it

The intensity of this step depends on the quality of the processes or functions
before changing. However, before taking further steps the quality of the standing
organization must be assured. Change management is therefore a key element in
this phase.

In general, this step is vital for ensuring the interaction between the standing
organization and the sourced functions or processes goes smoothly. The better the
alignment of governance model, responsibilities, processes and ways of working
between the different parties, the better the processes or functions will operate
once in- or outsourced.

Step 5: Delivery or Operations

Analysis and
Definition
As soon as the delivery takes place, service levels need to be monitored and in the
case of a third party, innovation needs to be encouraged. Regardless of the
Delivery or
Operations
Scenario
Planning and
Business Case
sourcing mode, the sourced function or process needs to be monitored, controlled
and managed. This applies to both the provider (i.e. owned or not owned) and
the demand organization. In an evolving business the following aspects need to be
Transition or
Migration
Selection and
Preparation frequently evaluated:

s Translating changing business needs to the organization that is executing the
functions, tasks or processes in scope
s Evaluating the scope of the tasks, functions or processes
s Monitoring the contract and developing the vendor of the services
s Evaluating the sourcing strategy in a continuous planning circle
Each element of the closed loop process is equally important for the successful
outcome of the sourcing strategy, regardless of the sourcing mode chosen.

Point of view on sourcing strategy Sourcing strategy approach 21

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