Sourcing Models

So you have decided to outsource, so the next decision needs to be taken. Do you go with a partner, do you setup your own, do you get resources or specific services. A decision to source leaves many open questions, some which can be fundamental for your success.

Often different companies use different names for their setup, but overall we consider that 3 models cover 90% of all setups.

  1. Augmented Sourcing: A setup where you add external staff to your pool of resources, could be compared to hiring of external consultants.
  2. Service Sourcing: A setup where you acquire specific and defined services, such as system operation or specific project deliveries.
  3. Captive Sourcing: Your own where you operate a setup in a different market, often due to cost and access to skills.

We have said it before, but will gladly repeat it:

1. Learn from those who have tried it before, if you go to e.g. Bulgaria, it is a very different market and often cannot be compared with your current home market.
2. Make the setup accountable, delegate management and deliver responsibilities, keep them accountable and measure by relevant SLA’s.
3. Use local expertise and influence, go with a partner, who knows the market and has the connections.
4. Involve your own organization, avoid the resistance by open communication, tell about your objectives, target and consequences.

While there may be many different models, there may not be a “One size fits all”, but for sure there are a lot of experiences on already tried models, some which have become successful, some which have failed, so make sure you copy the ones who have succeeded.

SUGGESTION

Overall my suggestion is to start with a staff augmentation model, and then within one year move towards services sourcing. For me it is essential that to reduce the impact of the home organization the responsibilities needs to be transferred to the sourcing setup, freeing the resources at home, allowing for reallocation and possible reduction. Focus on the transition, so you don’t end up caught in the model, but instead focus on the deliveries and benefits, as per your objectives and targets.

As the world become more international and companies work more and more across borders, it also means that many governments become more aware of taxation on worldwide income. The complexity in the setup, the need for arms length concept and avoidance of Permanent Establishment is something that is important to evaluate in the decision of the model, and not to forget the data protection regulations, so investigate and make your decision up-front as it may be difficult to change later.

The majority of setups today are service sourcing, utilizing a local vendor and own liaison and vendor management functions in the setup.

Below I have outlined my personal view on the different types of setup.

STAFF AUGMENTATION/ OFF-SHORING

The customer has the full responsibility for deliveries, utilization and efficiency. Often the customer manage the setup from the home market, supported by local presence in terms of a vendor management organization. The vendor provides the resources as per the customer definition, perform general HR and career development.

Pros
Use of your own and well known models and processes
You are in control with who does what
Easier for the home organization to accept as it has less impact, as ownership remains in current organization
Vendor is responsible for recruitment, HR and career development
Con
Management by distance is a task only few managers master (actually I am still looking for the perfect way of doing it, but in general, “if you want it to work, you can make it work” attitude is a must)
Too many of your own resources are used managing the sourcing setup, binding resources from doing other tasks and/or possible reductions
The vendor makes profit on sale of hours, not on deliveries and efficiency
Miss out on the synergies available within the vendor organization, as own processes and tools are used
Advise
Ensure that the vendor actively supports improvement of efficiency, maybe with a bonus model behind it
Even with an augmented model ensure that you delegate responsibilities to local management, and keep them accountable
Ensure the setup is self-sufficient in respect to on-boarding and knowledge transfer, releasing your home resources
The augmented model is often used during a transition period, while skills and knowhow is transferred. Most vendors won’t support the model in the long run, as they can’t utilized best practices
Ensure vendor remains fully responsible, and accountable for recruitment, HR and career development, this is what you pay them for.

SERVICE SOURCING/DELIVERY SOURCING

This is today the most used model. In this model the customer defines a set of requirements, maintenance activities, new developments and other activities as required. An agreement is made between the customer and vendor, often outlined in respect to customer participation, deliverables, cost and schedule. From this point the vendor is fully responsible for the agreed and will be tracked by the agreed measures.

Pros
Reduced impact on customer organization, freeing resources for other activities or cost reduction
Utilization of vendor processes and tools, providing increased efficiency by using large scale synergies and best practices
Clear roles and responsibility
Vendor is accountable
Utilization of local knowhow in managing the deliveries and setup

Con
Increased effort in definition of firm requirements
Lack of control
Reduced in-house knowledge on the long run, requiring vendors mitigation plans
Risk of dispute in respect to requirements vs. deliveries

Advise
Ensure your basic documentation is in place, as it will be the base for your negotiation and take over. Most vendors will require a phase to upgrade the level of documentation, and even translation into English
Ensure a relation were issues are resolved outside the courtroom. Cases can often stretch as long as 5-10 years in Bulgaria, and remember who has the biggest influence in the market.

CAPTIVE SOURCING

A captive sourcing model, is a model where you alone operate an entity in a foreign market. To reduce the risk of Permanent Establishment most companies will operate the captive center as a wholly owned subsidiary. The full responsibility lies with you, all processes, models etc., are your own, as well as all the risk. Recruitment, HR and career development falls within your own responsibility, but parts are often sourced to specialist companies.
Pros
You have full control, including management, recruitment, career development, delivery responsibility, efficiency and utilization
Your own and known processes, tools and methods are utilized

Con
Risk of Permanent Establishment
Risk of heavy overhead due to the many and cumbersome processes, legislation, rules and regulations
Risk of losing focus with shift from deliveries to that of recruitment, HR, reporting, administration and career development

Lack of attractiveness as a company, due to unknown brand in the sourcing market, which may lead to demand for higher salaries and increased costs
• Lack of a well known organization in dealings with authorities
• Having to deal with HR matters

Advise

As suggested by one of the larger consultancy companies I would not recommend a captive center for setup below 100 employees. The risk of increased overhead but also the required focus on non value creating activities (administration, reporting and HR) may cause increased costs and lack of focus
Even as a captive center I suggest using outside companies to support areas such as recruitment, HR administration, legal expertise, taxation
Ensure arms length and reduction of risk on Permanent Establishment