Since late 1980s there has been a surge in the global sourcing of products & services and lately a key management challenge has been assessing the viability of global sourcing of the firm’s key processes & operations. Among the various factors that have led the firms to source globally are the increasing differences in input costs among countries, improved communication technologies, and geographical skill specialization (Hausman et al. 2005).
The key challenges in global sourcing & it’s management are around relationship development, formulating sourcing contracts & service level agreements, risk management and facilitating effective communication as well as learning in context of cultural diversity & distributed work. Recent years have seen the emergence of a much greater array of options around the sourcing of key product components and services. Now businesses face key strategic decisions about which specific products/services are better provided in-house, and which might be better outsourced to an increasingly global and competitive marketplace of delivery specialists. Moreover, this new ecology of complex inter-organisational arrangements introduces a range of difficult management challenges.
For anyone tasked with addressing these challenges a better understanding of the key terminology used in global sourcing would definitely help.
“Sourcing is the act through which work is contracted or delegated to an external or internal entity that could be physically located anywhere. Sourcing encompasses various in-sourcing and outsourcing arrangements such as offshore outsourcing, captive offshoring, nearshoring and onshoring.”
Outsourcing is defined as… “Contracting with a third party for the completion of a certain amount of work, for a specified length of time, cost and quality.”
Offshoring refers to… to the relocation of organizational activities to a wholly owned subsidiary or an independent service provider in another country.
“Captive” model of service delivery: where the work is offshored to a centre that is owned by the organization
“Offshore outsourcing” model of service delivery: where the work is offshored to an independent third party.
“Nearshoring” is when organisational activities are relocated to a neighbouring country e.g. US organisations relocating the work to Canada or Mexico.
In addition, there are various common buzzwords such as best-sourcing or best-shoring, right-shoring and far-shoring (as opposed to near-shoring), usually coined and used by vendor companies. Finally, there is also backsourcing trend, which implies bringing work back in-house.
These definitions include various sourcing models e.g. staff augmentation, domestic and rural sourcing, crowd sourcing, cloud services, microsourcing, insourcing, bundled services, out-tasking and shared services. The major distinction among these models lies in whether the function is performed by a subsidiary business unit of the firm or an external vendor (or by both as a joint effort), and also whether the function is performed on the form’s premises (i.e. on-site) or off-site, which can be onshore, nearshore or in an offshore location.
The figure below shows the Compound Annual Growth Rate – CAGR i.e. the year-over-year growth rate of ITO & BPO over the last decade. There is an obvious slip at the time of the financial crisis (2008-2010) but the overall trend has been upwards.
Figure 1 – ITO and BPO Worldwide Growth Rates in U.S. Dollars, 2001-2012 (Source: Gartner Dec 2009)
In 2010 the market for IT Outsourcing worldwide was reported to be $270 billion and for BP Outsourcing it was around $165 billion. As well as the future trend as predicted in the figure below by Gartner shows that ITO growth will be 5 to 8 per cent per annum and BPO growth 8 to 12 per cent per annum, with the BPO market size worldwide overtaking the ITO market. In all probability outsourcing is here to stay and is going to become more and more relevant for the firms in future.
Global Sourcing footprint has been increasing with every passing year.
In the beginning there were 3 Is i.e III, India, Israel & Ireland
Then came BRIC, Brazil, Russia, India & China
Now there are over 120 emerging countries and specialist locations vying to attract outsourced IT and BP services. The choice of sourcing location reflects differing priorities. The sourcing vendor (the supplier) wants to be able to deliver their service to clients, to be able to scale up, satisfying demand, in as controlled and cost-effective a way as possible. To get the contract, keep the contract, to make a profit. In the first instance the client wants the service, doesn’t really care if it is insourced or outsourced. The service must meet/match or exceed their expectations along a variety of dimensions (quality, cost, time, scope, trust…). The distance between the supplier and clients shouldn’t matter (too much).
The Global Sourcing Trends 2010-2014 as sourced from Willcocks, Lacity, Griffiths and Kotlarsky 2009 highlight the growing importance of global sourcing as well the challenges that firms should address in order to stay ahead of competition.
•Trend 1: Spending will continue to rise in all global sourcing markets. But BPO will soon overtake ITO.
•Trend 2: The ITO and BPO outsourcing markets will continue to grow through what has always been the dominant trend, multiple supplier sourcing.
•Trend 3: Global clients will stop viewing India primarily as a destination to lower costs, but rather as a destination for excellence.
•Trend 4: China’s investment in ITO/BPO services signal promise, but Western clients will still be wary. Developing countries beyond India and China will become important players in the global business and IT services markets.
•Trend 5: Emerging country competition will accelerate.
•Trend 6: Firms will take a second look at ‘software as a service’
•Trend 7: Outsourcing will help insourcing. But backsourcing will be minimal. Outsourcing is here to stay.
•Trend 8: Nearshoring will be a strong trend.
•Trend 9: Knowledge Process Outsourcing (KPO) which is the outsourcing of knowledge-intensive processes such as business, market and industry research etc. will increase.
•Trend 10: Captives will continue to be built….. And sold
•Trend 11: Outsourcing will continue to have successes .. and disappointments.
•Trend 12: Global economic cycles will have mixed but deep impacts on these trends.
Global Sourcing is no longer a corporate buzzword and has slowly metamorphosed into the core corporate strategy at the forefront of boardroom discussions. It offers a number of benefits for a firm like cost advantage through creation of economies of scale, access of vendor skill sets and the reduction of overhead costs. Furthermore, global sourcing allows a firm to concentrate on core activities, organisational specializations, or focussing on key strategic objectives.
But the firms should also bear in mind that adopting sourcing strategies poses several disadvantages like loss of critical skills, overdependence on an outside organisation and security & confidentiality of data. Another concern is losing control over the timing and quality of outputs since these will be undertaken by an outside vendor.
In this era of interconnect world with vanishing boundaries, organizations quest for new ways to gain competitive advantage, the development of progressive global strategies & approaches becomes an absolute necessity. And weighing the pros & cons of integrated global sourcing it more than any other alternative strategy offers the panacea for major corporate ills and a shorter path towards accelerated growth.
References: Global Outsourcing And Offshoring 2nd Edition by Ilan Oshri, Julia Kotlarsky And Leslife P. Willcocks