Do You Need a Sourcing Strategy Health Check?

By Dogan Razon

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The enterprise will go through changes over time that affects the way the business, and IT, functions and delivers service. This becomes particularly evident in enterprises mired in mergers and acquisitions, divestitures, expansions into new geographies and significant reorganization.

While each of these transformational events is subject to examination and analysis at the enterprise-strategy level, the reality is, over time, the cumulative effects of these changes will be different from what was planned.

Unless the sourcing strategy is reviewed and service-aligned, these cumulative changes will negatively impact an organization's ability to optimally deliver services via outsourced providers.

Many businesses fail to realize their sourcing agreements no longer meet their needs and opportunities for optimization exist. Rather than being carefully planned and executed, sourcing strategy often resembles a patchwork of agreements based on historical data or as continuation of existing contracts.

This leads to situations where an incremental change may have made sense, the overall sourcing strategy and implementation needs an overhaul at the enterprise level to address excessive costs and suboptimal service delivery.

If the answer to any of the following questions is "Yes" then a sourcing strategy health check and evaluation of your sourcing capabilities could lead to significant opportunities for optimization:

Has there been an enterprise transformation that affected the sourcing function? By aligning sourcing needs with strategic goals, making provision for change and implementing service management capabilities, organizations evolve to meet business challenges and opportunities.

However, often, a large-scale business change, such as a merger or aggressive business expansion, will bring alternative service delivery methods that cannot be easily integrated into the existing environment.

Similarly, a requirement for rapid growth inevitably involves implementing “quick-fixes” outside of existing operating boundaries. Over time, activities that were originally exceptions to the rule become numerous and result in a loss of strategic direction and management control.

Is there a clearly defined sourcing function?

Sourcing for services has become increasingly complex over time. Components of IT sourcing for example can include contract staff, data center management, applications development and maintenance, infrastructure management, desktop services management and help desk capabilities to name but a few.

In turn, each of these can have domestic and offshore components. In addition, each of these services can be provided by different providers. Another layer of complexity is added when global firms source services from different providers in different locations.

No matter how the enterprise grew to the size it is today, it is likely there is some inefficiency in place as a result of historical agreements, regional interests, personal preferences and lack of consolidation.

These make the structure of the function not only hard to understand, but they also hide inefficiencies within their own organizations and over the enterprise as a whole as synergies are not realized that could bring overall improvement and efficiency to service delivery.

Can you easily identify your vendors and the services they provide? Because of the range of services covered by sourcing agreements, it is not unusual to have a large number of vendors providing those services. This becomes further complicated when the firm has global coverage.

Generally speaking, the large vendors are easy to identify and the services they provide are usually well defined. In many firms however, there is often a collection of niche players who fill specific technical needs, or provide services in select geographies that the larger firms don’t support.

Because these smaller players can, in the aggregate, represent a significant piece of a firm’s sourcing budget, it’s important to evaluate and rationalize the services they provide in terms of the overall sourcing function.

Can you easily attribute and monitor IT sourcing costs? In many enterprises, costs attributed to sourcing agreements are the largest component of the IT budget. Yet those same enterprises have never implemented management and control procedures to clearly understand what they are paying for and how the costs are attributed back to the business.

In many cases, the nature and value of the services provided under multi-million dollar contracts have changed dramatically over time, yet there is little understanding of the cumulative affect of these changes and whether or not the firm is still receiving value for money.

Do your vendors hold all the cards? In the development of their sourcing programs many firms fail to take steps to control and future direction of the outsourced activities. The “out of sight, out of mind” approach which drove many agreements has resulted in situations where the vendor effectively controls the process due to a lack of retained knowledge and expertise. Excessive vendor knowledge of the firms’ processes and strategy can lead to an unhealthy reliance on the vendor.

If you’ve asked yourself these questions and find the answer to be yes or difficult to respond to, it would be beneficial to undertake a structured review of your sourcing strategy to gain insight into how these services are really being delivered and if your firm is getting the value it should while retaining control over strategic activities.

Managing an outsourced activity effectively and reviewing the overall strategy over time can help you avoid excessive costs and less-than-optimal delivery. Implementing a flexible operational framework with an effective governance process will allow organizations to regain control of a patchwork sourcing environment and better prepared for future growth.

Principal consultants Robert Gossage and Dogan Razon both work in PA Consulting Group's IT Infrastructure Practice.