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Capability sourcing

Companies should consider outsourcing their 'weaker' business processes.

Read time 3min 30sec

In the previous Industry Insight in this series, I touched on the issue of the capability sourcing model. Now I will examine the topic in depth.

To recap, capability sourcing is an approach to business whereby an organisation seeks to be best-in-class at each business process and function. The organisation takes the view that competitive advantage is conferred by indisputable excellence at each business process; and if the organisation can honestly say it is not able to improve to the point of being best in class, it should consider outsourcing the function.

This makes good sense. Overall excellence is a consequence of many small things done well; similarly, a weakness in one area of an organisation can let down excellence in others.

As can be seen with organisations such as Nike and 7-Eleven, just about any business activity can be outsourced, from IT to call centres, from manufacturing to the supply chain. So the question to ask then is: "Which business activities can my organisation do better than someone else? And if we can't do it better than a third-party outsourcer, how do we either improve the process to the point that we are better, or do we outsource it?"

A number of factors have converged to create a market rife for capability sourcing:

* The global telecoms revolution, which has not ended, and has boosted bandwidth while lowering costs. This revolution is finally reaching our shores too, with market deregulation and the arrival of high-capacity cables on both east and west coasts.
* The evolution and maturity of systems integrators, which can take on and fulfil tasks of great complexity.
* Geopolitical changes, such as the rise of India as a services destination, and the readmission of South Africa to the global stage.
* Intense investment in IT and ERP systems, which has created a relatively homogenous business environment globally, and made it easy for skills to be relocated.

In considering capability sourcing, there are four approaches:

* Maintain the status quo: this is where management needs direct control of a function, and it enjoys the best returns through retaining ownership.
* Outsource to a local service provider: The business case offers compelling business process improvement and cost savings, and management does not have to be in direct control.
* Create a dedicated facility offshore: Here, the business case is one of major cost savings, but management needs direct control.
* Outsource offshore: The business case is major cost savings, with direct control not a factor.

Just about any business activity can be outsourced, from IT to call centres, from manufacturing to the supply chain

Andrew Holden is MD of Bytes Outsource Services.

Once an organisation has decided on an approach, there are a number of questions to ask:

1. Is the capability standardised or customised. If customised, it is not ideal for outsourcing.
2. Is it vital in terms of strategy? If so, it is not ideal for outsourcing.
3. Does the company's transaction processing require local and real-time service? If so, local rather than offshore outsourcing might be the right model.
4. Does the function involve critical, proprietary data? If so, it should be retained in-house.
5. Does the function involve many people? For instance, will there be a large call centre, with potentially hundreds of agents and relatively standard and predictable call flows and scripts? Then this can be a candidate for outsourcing.

Carnegie-Mellon's capability maturity model is another good way of assessing the ability of the organisation to deliver against the requirements and specification of the function, to identify the current and ideal state, to perform a gap analysis in terms of requirements and then to arrive at the set of actions that can inform whether the function should be performed in-house or outsourced.

* In the next Industry Insight, I'll look in detail at a few examples of companies that have benefited from capability sourcing.

* Andrew Holden is MD of Bytes Outsource Services.

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