Global Sourcing: Understanding the People and Organizational Capabilities needed for a Successful Transformational Journey.

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1 Global Sourcing: Understanding the People and Organizational Capabilities needed for a Successful Transformational Journey Steve Jeffries, Gary Hobson Overview The purpose of this paper is to raise awareness regarding the organizational and people changes that need to happen in order to optimize a global sourcing program. As companies increasingly leverage a global sourcing strategy, business and IT leadership need to consider how they manage their organization as they move from staff augmentation to a strategic partner approach. Three key aspects that impact how the organization should be managed include answering questions such as these - What are we doing, Why are we doing it, and How are we doing it? When implementing global sourcing, these aspects will change. The focus of IT and business leadership will shift more towards the What and Why and away from the How as the How is increasingly provided by the vendor. This paper addresses the evolution of client/vendor roles and responsibilities, changes in needed leadership competencies, and implications for the way an organization is managed throughout the journey. Key people and organizational challenges during the journey are highlighted, and the importance of utilizing a comprehensive organization transformation roadmap to accelerate and enable a successful journey is stressed. May 2008

2 Global Sourcing: A Transformational Journey A global retail organization currently outsourcing a small part of their ADM work wants to move the ADM staff s daily emphasis from tactical implementation to more of a strategic focus. According to the CIO, Freeing-up our ADM staff from the day-to-day managing of IT processes will allow them to focus more on business outcomes, strategic initiatives and service delivery. Using global sourcing as a key lever for change will enhance our competitive value in the marketplace. This is becoming a common scenario today. More and more companies are leveraging a global sourcing strategy to be able to increase focus on their core business, improve operational flexibility, share business risks with a strategic partner and access world-class talent at highly competitive rates through labor arbitrage. Although, when business and IT leaders opt for global sourcing, they need to consider what it takes to move from staff augmentation to a strategic partner approach. Global sourcing includes more than simply handing-off specific tasks, functions or roles to a vendor. As organizations and their sourcing partners embark on a newer way of running their IT and business processes together, they must be vigilant of the fact that people and organizational changes are bound to occur. Hence they should be ready to face these changes. Changing the way technology and business processes are delivered and changing the organization are both integral parts of the same global sourcing equation. The CIO in the example above had a good idea of the IT changes that needed to occur in his organization. However, for this CIO as well as many other business and IT leaders implementing a global sourcing strategy, the accompanying people and organizational changes that need to happen are not always as clear. On the organization side of the equation, technology and business leaders often seek answers to important albeit often elusive questions such as, How should I structure my retained organization for optimum performance? What work will remain the same and what will change? What skills and competencies will my staff require to successfully operate in the new sourcing environment? How do I identify and address potential risks during transition? What are the best practices for retaining, supporting and enabling my employees to make the transition successful? These practical questions highlight the fact that global sourcing is not just a destination arrived at when you have successfully handed-off your IT or business function to a vendor. Instead, moving from the as-is organization through the sourcing transition to the new steady-state should be viewed as a transformational journey. Understanding the critical organizational and people challenges and the changes that will need to occur along the way are essential for a successful journey. 2 Infosys View Point

3 The Global Sourcing Organization Maturity Model The graphic below depicts the evolution of an organization (from a people and organizational perspective) during the sourcing journey from staff augmentation (Managing Tasks and Processes) to a managed services (Managing Results) approach. Although there are three distinct stages in the maturity model (represented by the three triangles), an organization may exist anywhere on the continuum. You will notice that across the maturity continuum the technology or business process leader s span of responsibility does not change. However, as the organization outsources more, the way IT and business processes are delivered begins to change. It is this change in how work is accomplished which results in the need for accompanying changes in the organization. The three evolutionary stages depicted below have been compared to Generation 1, 2 and 3-type organizations. Let us take a closer look at each stage. How will client/vendor roles and responsibilities evolve? How will leadership competencies/skill sets change? What are the implications for the way an organization should be managed throughout the journey? Manage Tasks and Processes Initial Sourcing Model Manage Processes and Results Emerging Eco-system Manage Results Partnership Model Eco-system Span of Responsibility Span of Responsibility Span of Responsibility Legend Span of Direct Supervision Span of Indirect Supervision Generation 1 Sourcing Organization Maturity Model (Organizational Perspective) Sourcing Organization Most companies start their sourcing journey toward the left side of the maturity model which can be compared to a Generation 1 sourcing organization. This organization typically leverages vendors in a staff augmentation approach. As you can see by the yellow area in the triangle on the left, the organization s span of direct control (the work that is directly managed and done by the organization s employees) is very large. The organization retains complete control of day-today operations and business outcomes as well as directly supervising the vendor s work. In a staff augmentation approach the way in which technology is delivered does not significantly change from that of a completely insourced model. Therefore, job roles/responsibilities, staff competencies/skills, and how the organization is structured basically remain the same. The vendor primarily provides specific skills to augment the organization s staff. As an individual contributor, the vendor is focused on specific jobs or tasks requiring primarily functional and task-related competencies. Since the vendor takes on little risk or accountability beyond skill delivery, the organization usually does not expect the vendor to be involved in additional roles such as strategic or business leadership, optimization, and innovation. Generation 12 Sourcing Organization Often in an effort to further reduce costs, establish economies of scale and bring in needed processes and capabilities, organizations increasingly leverage vendors in a project outsourcing approach. As you can see by the smaller yellow area in the center triangle, the Gen 2 organization s span of direct control is decreasing. The organization now gives operational Infosys View Point 3

4 control of specific projects to the vendor while retaining control of business outcomes. Vendors not only provide skills, but they also manage projects and deliver process improvements. These changes in the way IT and business processes are delivered result in changes in roles and responsibilities. The vendor is now held accountable for the completion and success of projects vendor, changes in competencies and skills usually involving non-critical applications and/or business processes. Work is increasingly achieved through indirect control or supervision of the vendor. The organization s staff manages the completion of specific projects through the vendor rather than doing the project work themselves. At the project level, both organization staff and vendor usually are responsible for optimization and innovation. For organization staff and the vendor, changes in competencies and skills also are required. As vendors take responsibility for entire projects, the organization s staff will have increasing emphasis on managing results rather than day-to-day processes. Therefore, organization staff will need to build skills in managing work indirectly through the vendor. For example, vendors will be expected to be more involved in strategic, process and business leadership for assigned projects. This will require setting clear expectations for the vendor as well as on-going guidance and feedback from the organization. Changes in the way work is accomplished will have implications for the organization, too. For example, vendors may now work both on-site and off-site. The organization s structure may need to be updated to reflect these changes in reporting relationships, especially for long-term projects. In a project outsourcing approach, vendors often participate on organization teams and may contribute to training and development of the organization s staff. As a result, the way performance is measured also begins to change. The vendor s performance typically is measured on project completion using process-centric SLAs on longer term projects, while there is greater emphasis in measuring the organization s staff on results achieved. Generation 13 Sourcing Organization As organizations begin to realize significant benefits from outsourcing they shift away from project outsourcing and begin to leverage vendors as strategic partners in a managed services approach. As you can see by the very small yellow area in the triangle on the right side of the maturity model, the Gen 3 organization s span of direct control has diminished greatly. The organization gives the vendor a significant portion of an IT function(s) and/or business process to operate as a managed service. Consequently, the organization is now highly focused on the strategic and business impact of what is accomplished. As strategic partners, the vendor and organization are jointly responsible for the sourcing operation and business outcomes. This major change in the way technology and business processes are delivered result in a further evolution of roles and responsibilities. The organization now leverages their sourcing partner to manage a significant portfolio, often including critical applications and/or business processes. The partner is accountable for the delivery of day-to-day technology and business processes. Therefore, organization staff will focus more on strategic initiatives and business/end-user interface roles as well as take responsibility for managing results through their sourcing partner. Within the scope of the sourcing partnership, the organization looks to their sourcing partner to increasingly optimize and innovate at the project, managed service and enterprise level, while the technology and business leaders look more to business impact. For example, as a large US-based photo film and imaging company moved from Gen 2 to Gen 3, they worked with their sourcing partner to go beyond SLAs to implement a 6-Sigma program and contribute significantly to IT innovation. As roles and responsibilities continue to evolve, there are also additional changes in needed competencies and skills. Strategic and business leadership skills are now required of both the organization s staff and the sourcing partner. Managing and achieving results indirectly through the sourcing partner are essential skills for the organization s staff. Since partner teams are usually situated both on and off-site, the ability to work with and leverage distributed teams also becomes important. These unique global sourcing work requirements translate to an increasing emphasis on strong relationship management and crosscultural sensitivity and communication skills. The managed services approach to global sourcing has significant implications for the organization. To realize the cost reduction objectives for global sourcing, the sourcing partner will use a global delivery model with a combination of on-site, off-site, nearshore and offshore locations. In this global sourcing approach, a Retained Organization and Joint Governance Body are established to manage and enable a successful sourcing initiative. The need for teamwork expands with multiple locations, different time zones and cross-cultural requirements. Innovation and optimization often are enabled through the formation of Shared Services and Centers of Excellence (CoE) organizational structures. 4 Infosys View Point

5 As a result of these changes, the organization will need to be redesigned to reflect the complex reporting relationships between the retained organization, joint governance body, on/off-site and offshore delivery units, and other strategic shared service or center of excellence structures. Finally, performance of both the vendor and the organization s staff are measured on results achieved. The sourcing partner s performance is not only measured with process-centric SLAs, but also with additional business-centric SLAs to assess business impact. Frequent People and Organizational Challenges As discussed above, the global sourcing journey involves an evolution of client /vendor roles and responsibilities, changes in needed competencies/skills, and implications for the way an organization is managed throughout the journey. Understanding these organizational and people changes that occur along the way is essential since they often present significant challenges that need to be addressed in order for a transformational journey to be successful. The following is a summary of the typical organizational and people challenges that occur when moving from staff augmentation to a strategic partner approach: The organization s staff will need to evolve from managing processes to managing results. Technology and/or business leaders will continue to be responsible for all work activities, but will now have a different resource pool; the retained organization and the sourcing partner s employees. The sourcing partner will be managing day-today technology and business processes, and your retained staff will be focused more on achieving results through the sourcing partner. The challenge will be to shift your operational emphasis from technology as a process to technology as a business enabler. New competencies and skills will be required. Changes in the way work is done and in the way technology and business processes are delivered will require new roles and greater emphasis on some existing roles. As you can see in the graphic below, as the focus shifts from managing people/projects to managing outcomes, roles in the retained organization will need to be defined with additional emphasis on strategy and leadership. Depending upon what work, functions, processes and roles are globally sourced, your retained team may be challenged with a significantly different set of needed competencies and skills. Typically, in a global sourcing initiative these new requirements revolve around such skills as managing results indirectly through others, strategic thinking, relationship management, leveraging distributed work teams, and cross-cultural sensitivity and communication. IT Business Alignment Partner Performance 10% 15% Technology visioning, Archi tecture direction Relationship metrics, Value monitoring and management 35% IT Business Alignment Business Liaison 25% Business value monitoring and management 30% Partner Performance IT Project 50% Day-to-day monitoring of project progress 25% Business Liaison 10% IT Project Initial Stages of Sourcing Maturity Advanced Levels of Sourcing Maturity *Percentages shown are indicative Role Changes in the Retained Organization as Sourcing Maturity Evolves Infosys View Point 5

6 It will be critical to place the right people in the right roles/jobs. It is important to keep in mind that your top performers of today may not be the top performers of the new sourcing organization. It is all about acquiring and/ or building the right competencies. There will need to be less emphasis on technical (know how) competencies and more emphasis on business (know what) and strategic (know why) competencies. This translates to the challenge of selecting people who are flexible and can migrate from doers to managers and from managing processes to managing results. The retained organization will need to be defined and transformed to optimize performance. Your new structure should align the global sourcing organization with your strategic business objectives. The new span of indirect control and subsequent reporting relationships, especially between your retained organization and your sourcing partner, must be transparent. The organization structure also should reflect your strategic intents such as shared services and CoE initiatives. Strategies to retain critical staff will need to be determined. It is essential to identify staff to-be-retained (and to-bereleased, if any) and develop retention strategies to minimize potential flight risks. Excessive attrition may challenge the organization s ability to transfer mission-critical knowledge to the sourcing partner and to maintain business continuity through the transition period. One IT Director asserted, We will have jobs for everyone. No one will be laid-off. So, attrition is not an issue for us. What he didn t take into consideration was the possibility that an employee who has done (and enjoys) coding for the last 10 years may not be interested in learning a different job. That employee may be a flight risk. Remember to keep in mind the often ignored challenge of re-recruiting key SMEs you intend to retain to assure their interest in the new job opportunities in steady state. In a complex global sourcing initiative you will need a plan to manage organizational change and potential risks. The challenge is how to identify people and organizational risks, determine mitigation strategies, and engage, motivate and support your employees through transition to steady state. Typically, employee attrition is a worry of many IT leaders initiating a major change like global sourcing. What if I lose some key people with critical knowledge/skills? This is a frequently asked question. It is not the risks that are the issue; it is the inability to plan for the impact of those risks. The components of an effective organizational change management plan are shown in the figure below. Migrate Retained Organization Identify and Mitigate Risks Establish Retention Strategies Complete Stakeholder Analysis and Communication Plan Manage the Change Process Integrate Client and Sourcing Partner Work Teams Key Components of an Effective Organizational Change Plan Meeting the Challenges: The Value of an Organization Transformation Roadmap When implementing a global sourcing program, technology and business leaders expect to develop a service delivery transition plan. As we have asserted in this paper, organizational transformation is the other side of the global sourcing equation. Anticipating and addressing the organizational and people challenges are essential for a successful journey. Therefore, you also need to develop an organization transformation roadmap that can provide direction for the journey, enable your change process, accelerate the transition, and help you track your progress and make adjustments along the way. An effective organization transformation roadmap, at a minimum, should guide you in: Assessing your sourcing maturity level; Clarifying your vision and business objectives for global sourcing; Determining your organizational readiness; Analyzing people and organizational risks and developing mitigation strategies; Identifying needed competencies/skills in the new global sourcing environment, and assessing skill gaps in your retained organization; Establishing effective retention strategies and program communications; Optimizing your retained organization; and, Managing the organizational and people changes that will occur 6 Infosys View Point

7 Don t start your journey without it! About the Authors: Steve Jeffries is the Head of Infosys Global HR/OCM Solutions. The HR/OCM Solutions Team is responsible for developing best-in-class employee transition and organization transformation roadmaps, methodologies and practices to enable successful global sourcing programs. With more than 20 years of global merger and acquisition and business startup experience, Steve has led the development of Infosys HR/OCM Solutions efforts and has led HR and organizational change activities across the US, Europe and Asia. Steve holds a BA from Indiana University and an MBA in International Business from the Advanced Program at Michigan State University. He can be reached at steven_jeffries@infosys.com Gary Hobson is a Principal within Infosys Strategic Global Sourcing HR/OCM Solutions Group. In his more than 20 years experience as an internal practitioner and external management consultant, Gary has focused on global acquisition integration initiatives, organization transformation and effectiveness and performance optimization. Gary holds a PhD in Organizational Behavior from Union Institute and University, has held adjunct professor appointments in industrial and organizational psychology within the State University System of New York, and has several professional publications to his credit. He can be reached at gary_hobson@infosys.com.