From Tactical Outsourcing to Strategic Sourcing
Jos Schmitt, Partner, Capco & Suresh Gupta, Partner, Capco

1.Introduction

Until now, outsourcing has been considered by most companies, particularly in the financial services industry, as little more than a tactical form of reducing the cost of acquiring ancillary services. However, enlightened financial services providers have come to focus less on achieving incremental cost improvements (10% - 20%), and, instead, are evaluating all their capabilities to define a winning global sourcing strategy.

We define global sourcing as acquiring "the RIGHT competency, at the RIGHT cost, from the RIGHT source, from the RIGHT shore." Specifically, it stands for sourcing operational and technology activities (and resources) from global "competency" centers. For example, as part of its global sourcing strategy, a U.S. bank may turn to India for market research, Russia for derivatives processing and Ireland for customer service.

Sourcing needs to become a strategic process whereby companies accept the idea of unbundling their value-chain and focus on operating it in the most optimal way to achieve transformational cost savings (30% - 60%) and transformational revenue growth. For many organizations, this type of analysis will often lead to the adoption of an outsourcing strategy.

2.It's Control, not Ownership that Matters

The need to define a comprehensive sourcing strategy is rooted in relatively recent geopolitical, macroeconomic and technology developments. These developments have fundamentally changed the world by making business capabilities portable on a global basis. Leading organizations realize that what matters most isn't the ownership, but the control of business capabilities. Their approach: look at all the organization's capabilities and only keep captive those unique capabilities that offer competitive advantage and are critical to revenue growth. All other capabilities, as core as they may seem, can be considered for outsourcing.

The financial services industry has been at the forefront in taking advantage of the global sourcing opportunity. Led by pioneers such as GE Capital, Deutsche Bank, HSBC and Citigroup, almost every financial services firm is engaged either in using global sourcing or in planning for it actively. The high tech industry for years has exploited global sourcing for its manufactured processes. Led by giants such as Dell, Texas Instruments and Intel, the industry has begun to utilize globally dispersed locations for R&D, customer service and related business processes as well. Other industries increasingly taking advantage of global sourcing include retail, telecommunications and media.

3.Who's Insourcing?

The question then becomes who will "insource" all those capabilities that companies want to control, but don't need to own anymore? The answer is fairly straight forward: companies that specialize in commodity services within the value-chain and leverage critical mass in ways that allows them toprovide top quality service at costs that no vertically-integrated 'parent' company could ever dream of. These service providers can be newly formed companies or spin-offs from parent companies.

Indeed, in some cases, a company may decide to keep in-house capabilities that don't differentiate the organization from its competitors. This will happen when a company has reached a level of efficiency that allows it to successfully become itself an insourcer of these capabilities towards third-parties. This will be the case when capabilities can be provided at a high level of quality and below average industry cost. You will often see these types of in-sourcing initiatives lead to spin-off businesses as competitors will be more comfortable to outsource to an independent service provider rather than to one of their own.

For example, although American Express considered transaction processing as a strategic capability for its card business, the company realized how much of a commodity service it was becoming and did not hesitate in the early 90's to spin it off. This allowed AMEX to focus on the capabilities that differentiate them from their competitors -- i.e. risk management and marketing and sales -- while benefiting from the services of a company specialized in card processing. This led to considerable cost reductions and improved quality, as this newly formed company developed its business by providing other card issuers with processing services based on a successful "shoring" strategy.

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