Wednesday, 22 August 2012 01:14

The Sourcing Value Indicator

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The primary impetus for outsourcing has historically been the promise of cost savings, fueled by salary arbitrage. Based on this premise, Buyers have traditionally focused their energies on driving down the price of services to their lowest possible rates, while increasing their purchasing volumes as the principal lever for enhancing their savings. As the market continues to grow and mature, so does the expectations of the Buyers, who are becoming increasingly more interested in obtaining measurable business value, of which “Cost Savings” is only one component. Progressive Buyers are making great strides in quantifying the true business value of outsourcing, as a function of Productivity, Quality, Flexibility, and ultimately Cost.

Based on our analysis of a number of outsourced projects, Sylvan Advisory has developed an approach to normalizing the relevant attributes associated with a Baseline environment, as compared to an Outsourced environment. In doing so, Sylvan has established a proven process for assessing the true business value associated with any type of service-based outsourcing initiative, and representing it in the form of a single number (Sourcing Value Indicator). If you are interested in understanding more about the “Sourcing Value Indicator”, a descriptive whitepaper can be found attached to this article, below. 

Last modified on Friday, 24 August 2012 16:39

5 comments

  • Comment Link Mike Monday, 03 September 2012 10:49 posted by Mike

    We just dealt with a client where we went through hell and back just to get them to understand that straight labour arbitrage is not a good approximation of the value outsourcing does or does not bring. Having this whitepaper ready for sharing with them at the time would have saved me a lot of trouble.

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  • Comment Link Scott M. Drago Monday, 27 August 2012 16:42 posted by Scott M. Drago

    Excellent study and paper. As buyers look for enhanced productivity, quality and flexibility (as well as cost savings), short of establishing one's own captive, sourcing deals will become more like partnerships or JVs in the future. As a buyer places more of its core functions in scope, the more it is impacted, as a going concern, by all of the critical factors discussed in the paper. In addition, as the buyer and the provider will be more economically and legally intertwined, local taxes and economic incentives should be given particular attention when choosing a provider and the location where the services are to be rendered.

    Given the global economic environment, many local governments (especially in the US) should be eager to attract providers and their JV partners (i.e., buyers) through incentives and/or tax abatements. Jurisdictions with high tax burdens (and/or low economic incentives by way of credits or abatements) should be analyzed carefully. Moreover, some jurisdictions are beginning to analyze whether a buyer, through its relationship with a provider, can be considered doing business and subject to tax in the country where the provider is located. Jurisdictions with excessively high tax burdens or shifting tax regimes
    can adversely impact a sourcing relationship in unexpected ways. Short of being viewed as having a fatal flaw, these jurisdictions should be placed lower on the list of available choices.

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  • Comment Link Lynne Davidson Sunday, 26 August 2012 15:36 posted by Lynne Davidson

    Excellent article, at last a measurable way of proving what the enlightened in the industry have intuitively known for some time. It truly needs to about the “Value” you get and not the dollar per hour you pay. The beauty of this approach is that it provides meaningful data for the buyer that he can then analyze and move to an informed decision. I have personally spent years trying to get buyers to realize it is overall value of the deliverable and not the dollar rate that is the true measure that they should be focusing on. Would love to see more about this approach.

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  • Comment Link Brenna Sunday, 26 August 2012 14:11 posted by Brenna

    An insightful and valuable article for both outsourcing providers and buyers. While the industry has grown and matured, so have the nuances and the intangibles to be considered in making these decisions. Sylvan’s SVI approach provides some well-grounded objective measures which when combined with other subjective factors (e.g. change management required, cultural/brand impact) will enable leaders to weigh these factors in a more balanced and clear-minded manner to make the best decision for their business. This methodology has value beyond the go/no go decision for buyers, it can provide valuable input for providers to shore up their short-coming (provided they can control them), and it could influence a provider’s decision about why and where to expand their geographic foot print.

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  • Comment Link Carl Thursday, 23 August 2012 14:14 posted by Carl

    It appears that some terms are morphing into other meanings, "offshoring" seems to have gone away, "outsourcing" is being diluted and the difference between transferring a mission and resource to another firm (the original I think) and getting resource from another place is being mixed.

    Industry to industry and commodity to commodity, it is clearly different but that confounds writers who must describe lots of unique situations in general terms (sometimes too high level to really be descriptive)

    I've seen OS as driven from the top which gives it some "emperor's new clothes" immunity combined with a masterful business model that returns perceived savings based on commitment to volume which drive the lower levels to strive to make the volume rather than focus on the need for the work (buyers view).

    The SW Asia phenomenon in offshoring is a classic, very mature culture, excess capacity and growth potential to markets drowning in entrepreneurial small domestic businesses. I think if a medium to large domestic services provider was offered the volumes and consistency of utilization that the masters of offshoring offered, the may jump at it.

    As far as driving down rates, I'd expect you'll see that more from procurement folks with an experience in "direct spend" (carloads of coal) rather than those schooled/experienced in "indirect spend" (professional services, long term relationships, e.g. occupancy, supplies, services). A financial service firm for instance is all "indirect spend" so the other approaches really stand out and good sales teams are quick to take advantage of it to their benefit one feels like a missionary because the majority of the world of buyers seem to go to market as "direct" not realizing the subtle differences.

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