Most companies today externally source some element of the capabilities for their Center of Excellence. At the very beginning of the sourcing journey, the rationale behind external sourcing was straight-forward: lower labor cost. Today, a more robust sourcing strategy is necessary to ensure effective use of corporate resources. Last week, Angelle Jenkins, a SAP IT Service Architect with SAP’s IT Planning organization discussed best practices and strategies when using outside service providers in the seventh installment of the ASUG CoE Webcast series.
It is a Bit Different than Before
When it seems so easy that anyone can do it, there is probably more to it than meets the eye. In the early days of external sourcing, labor arbitrage ruled the day. It was all soooo easy: find a location where labor was cheap; issue a request for proposal to provide services, and start saving money. The only problem was it wasn’t that simple to execute. Many a company was disappointed when these sourcing arrangements did not quite work out as planned. With higher than expected costs, unstable labor supply, and immature processes, tangible cost savings and efficiencies were not always achieved. As some of this became visible, it became apparent a thorough sourcing strategy is needed.
The formal sourcing strategy is one thing Ms. Jenkins pointed out was really important. In fact, it is the most important item to have when looking at sourcing externally. A sourcing strategy always defines the ‘What’ and the ‘How’ as it relates to sourcing. A good sourcing strategy articulates the organization’s objectives related to sourcing, highlights the benefits of sourcing, defines what should be sourced, describes the sourcing model, and defines the measurements for sourcing effectiveness. As is common with other things, the success of a sourcing strategy lies in its ability to align with the overall business and IT objectives and strategies. There are 5 main pillars that comprise an effective sourcing strategy. They are:
- Vision – what does the ideal view of the sourcing strategy look like? How will the sourcing strategy fit into the overall organization and what it provides to its customers?
- Objectives – what specific objectives will the sourcing strategy achieve? These objectives should be clearly aligned with the overall business objectives. Clear alignment means that by achieving these objectives there is positive impact on the business objectives
- Staffing Criteria – outlines the specific criteria against which a sourcing request will be compared and used in the decision-making process
- Capability Build Strategy – defines the capabilities required and the strategy to build the capability (either through internal growth, external sourcing, or a combination of both)
- Governance – it is more than just management of the activities. Governance is the foundation underpinning all of sourcing. It includes governance and oversight of the people, the processes, and the tools used
The picture of this construct is shown at the right. Yes, sourcing is different than before. Each of the items above are necessary to have an effective strategy when it comes to sourcing. Companies incorporating all of these elements are able to source service providers to perform work most efficiently, effectively, with the highest quality and the lowest cost.
The Process Won’t Manage Itself
One of the things Ms. Jenkins pointed out is that companies that do sourcing well have a specifically defined role to oversee and manage the entire sourcing process. You might be able to make a case where everyone might manage their piece of the sourcing process. However, this is likely to accelerate everything becoming a giant mess because when “everyone owns something, no one owns anything.”
A supplier management role is critical for overseeing the process. It is important for this role to be part of the Center of Excellence rather than part of the business. My experience has also seen a supplier management role as part of the procurement organization. I agree with Ms. Jenkins this also is not ideal. When the responsibility for managing the process is outside the Center of Excellence, the emphasis of the relationship becomes the formal contract and its terms. The quality of the work performed and the relationships being built as part of the work are viewed through the lens of the contract rather than through the work being performed. The Supplier Manager acts as the leader of the governance activities between the provider and the customer as well as acting as part of the quality review of the services provided. While this role is at the center of these activities, other CoE roles must be consulted to ensure all of the details behind the story are properly captured. This likely involves Development Managers, Solution Architects, Basis Managers, and the like. Key responsibilities of the Supplier Manager role would include:
- Establishing and managing the operational relationship with all internal and external providers
- Managing all aspects of spend with the service provider
- Conducting regular service reviews, managing and auditing provider performance and productivity
- Overseeing the management of the relationship with the supplier
When considering the total amount of money normally spent in external sourcing, the supplier management role is a small concession to make in order to mitigate risk, build relationships, and ensure productivity of the service.
Don’t Outsource Junk
The third area of outsource interest is the processes used by the service provider. Oftentimes, a company will externally source a process which is not considered a core capability. Unfortunately, this often translates into a process that is out of control or is poorly executed. Ms. Jenkins’ key point was clear,
“Don’t expect the service provider to clean up your processes”
“Don’t expect the service provider to clean up your processes.” This is a common challenge faced by companies that outsource a process. The process is either poorly defined, immature, or inefficient, or all of the above. Yet, there is an expectation the service provider will fix the issues because “they are experts in this area.” Although they may be experts, it is virtually impossible for someone on the outside to fix poor processes. If anything, the new relationship highlights all of the shortcomings of the process because it is what must be used. The inevitable outcome of outsourcing poor processes is a mismatch of expectations. There is disappointment in the vendor’s performance and the fact that business benefits were not realized. The service provider is frustrated because of the constraints placed upon them by the process. Each side starts to look at the contract in order to begin the assignment of blame and to figure out who owes what as a result. In the end, no one is satisfied. All of this could have been avoided if consistent, documented, and repeatable processes were in place. At a minimum, standardized and mature process should be in place for a) on-boarding new resources; b) for project and support methodology; and c) for knowledge transfer. Focus on these will help improve the overall benefits of external sourcing.
Sourcing is defined as “finding and obtaining services or goods from a supplier, regardless it the supplier is internal or external.” When making sourcing decisions, it is better to focus on capability rather than cost. Key elements that should be in place to source effectively are:
- Develop a sourcing strategy indicating when to source externally or grow internally
- Create an internal role – inside of the Center of Excellence – to manage and govern the supplier management process
- Focus on outsourcing standardized, mature processes
If you missed this webcast, the replay can be found here. If you are interested in learning more about this topic, the final webcast in the eight-part series is scheduled for Wednesday, May 04 at 12:00p EDT. The topic will be: ‘Putting Your Center of Excellence in the Driver’s Seat with CCoE Certification.’ Also, please do not forget the ASUG CoE Pre-Conference Seminar being held on May 16, in Orlando, Florida prior to the SAP SAPPHIRE / ASUG Annual Conference. This is a one-day session focusing exclusively on issues specific to Centers of Excellence. An impressive lineup of customer are slated to explain what they have done and what they have learned along the way on their CoE journey.