Sourcing Strategy. Evaluation and Selection Phase 2. Sourcing Management. Developing and Negotiating Deals

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1 Key Issues, C. Dreyfuss, F. Karamouzis Research Note 17 October 2002 A Sourcing Strategy Is Essential for Business Effectiveness A sourcing strategy is necessary for survival in today's changing business environment. Enterprises must ask the right questions and answer them in the context of their specific sourcing needs. Core Topic Sourcing: Sourcing Strategies Key Issues What are the fundamental elements of a successful sourcing strategy? What are the latest innovations in strategic What are the risks and opportunities of external The need for enterprises to have a sourcing strategy becomes more urgent as IS organizations become leaner and more agile so they can respond to threats and opportunities in a changing business environment. They are achieving this by maintaining a core of in-house strategic competencies and sourcing the remaining competencies from external service providers (ESPs). Sourcing is becoming the rule, rather than the exception. The rate of progress varies, but enterprises in all industries are using ESPs more for IT services. The result is a multisourced environment that is characterized by a mixture of services provided internally and externally. The key to managing a multisourced environment is having a sourcing strategy, which is the first of the four essential phases in Gartner's Sourcing Life Cycle (see Figure 1). Figure 1 Gartner's Sourcing Life Cycle Sourcing Strategy 1 Evaluation and Selection 2 Sourcing Management 4 Source: Gartner Research 3 Developing and Negotiating Deals When developing a sourcing strategy, each enterprise needs to address the following three Key Issues: Gartner Entire contents 2002 Gartner, Inc. All rights reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.

2 Key Issue: What are the fundamental elements of a successful sourcing strategy? The growing use of ESPs to provide some (maybe all) of an enterprise's IT services brings many new opportunities, but also creates new risks (one of which is a dependency on ESPs). Thus, there is a need to address sourcing issues strategically. A strategy is a vision that an enterprise creates in response to the opportunities and threats from the external business environment. Gartner defines sourcing strategy as "a set of scenarios, plans, directives and decisions that dynamically define and integrate the internal and external resources and services required to continuously fulfill an enterprise's business objectives." These scenarios, plans, directives and decisions must address the following key elements. Continuous Alignment With Business and IT Strategy The goal of a sourcing strategy is to help enterprises achieve their business objectives. This means that a sourcing strategy, together with IT strategy and architecture, must be continuously aligned with business objectives. (Gartner increasingly views IT strategy and architecture as integral components of the business strategy and architecture.) The sourcing strategy must reflect, in its domain, business objectives such as excellence, agility, flexibility and innovation. Continuous Alignment With Internal and External Resource Markets To be successful, a sourcing strategy must be aligned with the internal and external resource markets that the enterprise operates in (for external resources, the market is increasingly global). Decisions on whether to make, buy or partner depend on the resource markets, and will define the competencies that must be kept or developed internally. However, the need for in-house competencies must be continually reviewed in light of continuously evolving resource markets. Broad Time Horizon The time horizon of a sourcing strategy must mirror that of business planning. The business planning time horizon influences decisions made today about specific services, directives that affect resource allocations in the current budget cycle and plans for deploying resources to continually support changing business objectives. Distinctive Management Approach 17 October

3 Managing a multisourced environment is not only more complex than managing an in-house environment with the occasional use of external services, it is completely different. The sourcing strategy must address new management concerns, ensuring that appropriate governance and metrics are in place. New management concerns include: People: Managing people from different sources, with different backgrounds, culture and skills, and harnessing their talents effectively to achieve service objectives. Innovation: Finding and deploying external resources to introduce innovation in products, services and processes that will surprise clients and the market. Knowledge: Bringing in new knowledge from different sources, organizing and structuring it, and ensuring that it is appropriately shared and ultimately protected. Change: Addressing change issues and implementing change management by definition, a multisourced environment is in a continuous state of change. Key Issue: What are the risks and opportunities of external A sourcing strategy is critical for ensuring that an enterprise has a set of guiding principles and a decision framework to apply in a repeatable, consistent manner as it deals with business changes in an iterative manner across a broad time horizon. As a result, the risks and opportunities facing an enterprise encompass the development of the sourcing strategy through to the execution and continuing management of the sourcing plan. Risks The risks associated with an enterprise's sourcing strategy generally fall into three main areas. Agility. One of the most-prevalent risks of using ESPs is reducing an enterprise's agility to act proactively or reactively. Sourcing solutions must enhance the capacity of the enterprise to respond to business, economic, political and IT volatility in the external environment, as well as to internal enterprisewide strategy changes, course corrections or potential new business models. However, retaining and improving agility doesn't happen by chance, but by design hence the need for a sourcing strategy. Scalability (up or down). Tactical sourcing decisions made in the absence of a sourcing strategy increase the risk of not being able to scale critical resources people, connectivity and assets (for example, software or hardware) in a time 17 October

4 scale that matches changing business needs. An example would be the need to respond quickly to growing or diminishing business volumes. Scaling may also have financial implications (for example, long-term leases), market effects (for example, an inability to service customers) or legal effects (for example, being locked in to a contract for a fixed level of service). Measurement and monitoring. The lack of a comprehensive and thorough sourcing strategy exposes the enterprise to the risk of not having a meaningful gauge of its ESP relationships, including successes, failures and most importantly the root causes of both. In turn, this increases the risk of unrealistic end-user expectations and of not being able to demonstrate ESP performance in terms that are credible to end users. Opportunities The opportunities arising from external sourcing also generally fall into three areas. Predictability. One of the most-attractive opportunities of using ESPs is predictability in terms of cost, service levels and expected customer satisfaction. Focus on core competencies. The use of ESPs enables an enterprise to focus its personnel, skills, training and growth on its core competencies. It can, therefore, focus on activities concerned with ensuring the stability and growth of the business, while ESPs concentrate on delivering noncore competencies. Innovation. External sourcing provides the opportunity to introduce and infuse new concepts, ideas and best practices from outside the enterprise and from other industries into products, services and processes. The enterprise will benefit, at the very least, from increased efficiency or effectiveness or from both. However, the critical objective for innovation is to increase the competitiveness of products and services, which is increasingly associated with IT-enabled innovation. Key Issue: What are the latest innovations in strategic The origins of strategic sourcing lie in the provision of IT services to meet the individual needs of enterprises. However, there are no barriers that limit strategic sourcing to IT services or to a single enterprise. We see two important trends in strategic sourcing: Sourcing Moves Beyond IT Services 17 October

5 Extending sourcing beyond the provision of IT services is a natural progression that is evident in the evolution of the services offered by ESPs. Their services have expanded from providing basic IT operations to providing services of increasing complexity, such as developing and operating portals and Web services. There are already examples of large enterprises that outsource much of their core business operations as well as their IT. Pharmaceutical conglomerates outsource not only medical visits, but also core processes such as research and clinical trials, in addition to their IT services and infrastructure. Nike, the sportswear giant that sells thousands of different products worldwide, outsources all of its manufacturing. These examples are precursors of a business model that will become increasingly common in the future. Businesses will be small endeavors, dedicated to managing their brands and the critical flows of money and knowledge. This new model is beginning to influence sourcing strategies and will do so increasingly in the future. The Rise of the Business Service Value Network Enterprises are increasingly interconnecting their business processes, creating a complex pattern of process-step ownership (see "Sharing Power and IT Architecture in Business Processes"). The business environment of the future will be characterized by a network of shared business processes, and the trend toward extensive use of ESPs will continue in that environment. It follows that enterprise-esp relationships will be a lot more complex, because multiple enterprises will seek possibly multiple ESPs to support their shared business processes. Despite the difficulty and time-consuming nature of multilateral negotiations, a single ESP may become the preferred solution for defining the architecture and hosting a complete process with complex ownership patterns. Each enterprise sharing this sourcing arrangement will need to expand the scope of its sourcing strategy, relying heavily in relationship management and political negotiations. The ability to design, develop and execute a sourcing strategy is a necessary precondition for business success and for acquiring the overall resources needed to compete in the changing business environment. Strategic sourcing is not just about outsourcing established business processes or IT services it is the critical competency that will determine business value and differentiation. 17 October