Source of transformation

There are so many models of sourcing - from business process outsourcing to offshore; application service providers to supply chain management - that many decision-makers are unsure of the best way to move forward.

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There are so many models of sourcing - from business process outsourcing to offshore; application service providers to supply chain management - that many decision-makers are unsure of the best way to move forward.

It may be easier to hand the whole thing over to one trusted firm, but it may be more effective to mix providers to achieve best-in-class processing. Either way, business decision-makers need to understand what they are getting into as they push processes, products and functions into multi-sourced structures. 

That means aligning with providers that understand both the nuts and bolts of sourcing and the businesses they serve. 

Businesses adopting smart sourcing no longer see this as just a cost-saving project. They seek business efficiency. That means adopting sourcing strategies that deliver growth without increased investment. It means moving services offshore to release funds for investment onshore. It means shifting structures so that front-office services are delivered at the highest levels of effectiveness, and back-office processing at the lowest costs for efficiency.

Transforming business

But you cannot afford to deliver either ineffective back-office processing or inefficient front-office service. The two have to be both effective and integrated.

So businesses worldwide are looking to rationalise through business transformation sourcing (BTS). BTS moves us on from the business process outsourcing model - which covered everything from third-party administration to offshore call centres - into integrated and rationalised vertical market-focused sourcing structures and strategies.

As a hypothetical example of a BTS approach, let us take a fictional retail bank. It had originally taken the approach of "glass house" datacentre outsourcing in the early 1990s. It then extended outsourcing capabilities to cash transportation and other services during the mid-1990s.

Later in the decade it began trialling systems maintenance support in Mumbai, and soon shifted development, maintenance and call-centre operations to India. Seeking further cost efficiencies, it moved into a cheque-processing joint venture in 2002 which was its first experience of business process outsourcing.

Now it has shifted the closed book of life business to a joint venture firm, as well as its mortgage and loans processing.

The trouble is that all of this was performed piecemeal over 15 years. There was a rationale, but it was based on cost savings and efficiency. Now it realises that the mish-mash of sourcing providers is hampering growth. 

Market expertise

That is why the focus of sourcing today is moving to BTS. The process encourages businesses to both rationalise the number of sourcing providers they deal with, and to seek suppliers that provide global coverage with vertical market expertise - after all, there is no way you can transform a business if you do not have business understanding. 

Successful sourcing providers will be those with a global footprint and vertical market structures. They will continue to outperform the markets through significant growth. For example, Tower Group expects European banks to invest more than $55bn (£31.5bn) in outsourcing by 2007, at a compound annual growth rate (CAGR) of 9.1%, compared to 4.7% for general IT spend.

The critical point is that most of that sourcing budget is allocated to general outsourcing relationships, with only 30% dedicated to industry specialists. 

By the end of the decade, Europe's financial markets will narrow down their global sourcing partners to three or four leaders, and will spend over 70% of their budget on industry specialist BTS. Vertical market BTS is set to increase by 46% CAGR by the end of the decade.

So if you want to be a successful sourcing provider, learn the business of your target markets and create in-depth end-to-end process sourcing structures. If you want to be successful as a sourcing buyer, identify who can provide end-to-end process management in a flexible delivery structure with global coverage. 

The marriage of provider and buyer will become seamlessly integrated, so the message is make sure your marriage is one you can live with for the long term, not just a one-night stand.

Chris Skinner is an associate director of financial services research firm Tower Group and chief executive of Balatro

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