The IT Strategic Sourcing Four-Step

“An overwhelming majority of CIOs say their enterprises cannot handle their IT services alone and are willing to create partnerships with service providers. But few CIOs have strategies to work with external service providers or the skills to manage the relationship once it’s established (1).”

A firm may forgo ownership of its IT assets in an attempt to become more competitive. But long-term success in a sourcing scenario depends on the firms’ ability to make a deal that allows it to develop fitting, sustainable relationships with its sourcing partners. These relationships are not likely to occur unless the firm is able to implement a sourcing process that fits partners to its strategy. To increase the firm’s likelihood of establishing fitting and sustainable relationships, the sourcing manager can implement an IT strategic sourcing process that fits within the framework of The Conceptual Model of Alliance Development (1).

The following four steps provide a high level overview of the strategic sourcing process in which strategic/tactical and operational components are deployed. When implemented properly, this process guides the sourcing manager to realize the future objectives of both the parent firm and their partner and adapt the partnership to them. As a result, the alliance is in a better position to adapt to changes in the competitive environment.

Step 1: Understand the goals of the enterprise
It is very important that the sourcing manager understands the enterprise’s goals and the reasons they are outsourcing. This is the critical first step that allows for the development of the appropriate selection criteria. Throughout the development of these criteria, the manager considers possibilities for the future and imagines how a relationship with an external service provider will mesh with these possibilities. More specifically, the selection criteria should not focus on current problems or circumstances to the extent that the relationship will be unable to adapt to change. Rather, the appropriate criteria will give the enterprise the ability to take advantage of opportunities on the horizon.

Step 2: Evaluate potential providers and select a partner
Throughout the evaluation process, it is imperative that the sourcing manager has realistic expectations about benefits that can be acquired through the use of an external service provider. This allows the manager to establish a suitable degree of contract flexibility and cooperative decision making.

Step 3: Negotiate a suitable contract
Outsourcing deals are known for generating misunderstandings about cost. There are a few general explanations for these misunderstanding. On one side of the contract, the hiring enterprise looks at a deal as a way to gain expertise and resources to save money. They often fail to take into account the costs of managing the partnership when they create the deal. From the other side of the contract, the external service provider wants to bring in solid, long-term profits. They often bury surcharges into the later years of the deal (1).

Both parties need to be clear about what the other party can expect. A contract that is both realistic and effective can be created if the partners work together to define adequate performance measures. It may be advantageous for both parties to make use of a third-party that can help establish terms that are flexible and will withstand changes throughout course of the relationship (1).

Step 4: Manage the partnership
Because circumstances will inevitably change over the life of the agreement, ongoing management is a key element of the sourcing strategy (2). As soon as change is recognized, both parties should be actively involved in reassessing the deal. Effective communication is an extremely important part of maintaining an effective relationship. According to Dr. Handfield and Dr. Nichols, “The key to successfully deploying supply chain alliances is through joint problem solving, which occurs when each party trusts that the other party is committed to making the relationship work (2).”

References:

(1) Gartner White Paper. (2003). Strategic Sourcing. Gartner, Inc.

(2) Handfield, R and Nichols, E. (2002). Supply Chain Redesign: Transforming Supply Chains Into Integrated Value Systems. Upper Saddle River, NJ. 154-163