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Outsourcing & Offshoring
Strategie di Innovazione dei Processi e Commercio ElettronicoFacoltà di Economia - Università degli Studi di Bergamo
Alberto Sportolettialberto.sportoletti@unibg.it
Outsourcing, Co-sourcing, In-sourcing, Off-shoring:Specializzazione e Riconfigurazione dell’Impresa
3Alberto Sportoletti – Strategie di Innovazione dei Processi
Consumers Selectively Trade Up and Down
Gro
wth
Historical Demand
Emerging Demand
Price Positioning
Source: Company Annual Reports; OneSource; Silverstein, Michael J. and Fiske, Neil, “Trading Up: The New American Luxury,” 2003
Consumers are trading both up and down within categories, demanding differentiated value from businesses
3-Year Sales CAGR 99/02
Consumers seek
“good enough”
quality at rock-
bottom prices
when they
perceive no
differentiated
value
Consumers are
willing to pay
large premiums
for “new luxury”
brands when
they deliver
differentiated
value
Autos
Apparel
Grocery
Kia 24.8%
TJX 10.9%
Costco 12.2%
Chrysler -4.1%
Limited -4.6%
Albertson’s -1.7%
Mercedes C Class 10.6%
French Connection 24.4%
Whole Foods 21.7%
4Alberto Sportoletti – Strategie di Innovazione dei Processi
In particular, the market is increasingly characterized by bifurcation between mass and targeted propositions
Polarization in the Consumer Marketplace
Competitive Spectrum
“Bell Curves”
“Well Curves”
Mass Targeted
Industry competitors must
have highly focused, relevant
value propositions to grow in a world
of extremes.
Mega-players are rapidly capturing dominant market share by
delivering “good enough ” value at very low prices.
Consumers are seeking to maximize their buying power for basic goods
with low emotional investment.
Differentiated specialists are building profitable, high-growth niches by
delivering unique, relevant value to targeted groups of consumers.
Consumers are seeking to maximize “personal value ” when purchasing
goods with high emotional importance.
Gro
wth
and
pe
rcei
ved
valu
e
5Alberto Sportoletti – Strategie di Innovazione dei Processi
Polarization consequencies
A clear positioning in one of the two areas will be crucial:
• in the “commodities” area, developing an efficiency/coststrategy
• in the “personal value” area, developing strategiesbased on brand and/or luxury segment for consumer products or based on innovation and/or niches forservices and B2B
6Alberto Sportoletti – Strategie di Innovazione dei Processi
The new strategic imperative
Western companies, due to market polarization and tough competition of emerging countries in costs/prices, have to understand that theircompetitive advantage can come mainly from theirinnovation capability (eventually sustained by de-localizations actions)
7Alberto Sportoletti – Strategie di Innovazione dei Processi
Innovation in the Value Chain/Business Architecture
Innovating the position/role in the Business Value Chain
or….
Innovating just the Supply Chain
or….
Innovating the Enterprise Architecture/Configuration Approach
The specialized “on demand” enterprise:A fundamental redesign of firms and industries
9Alberto Sportoletti – Strategie di Innovazione dei Processi
CEOs recognize that they must make simultaneous step-change performance increases across three key
imperatives
In a world with intensifying competition, companies must continuously innovate and provide differentiated offeringsto grow their business
Given increasingly uncertain and rapidly-changing markets, firms must become more adaptive to realize new opportunities and eliminate underperformance
Even with the progress made in recent years, leaders believe they must find additional ways to decrease costs and maximize productivity
Two-thirds of CEOs indicate that cost reduction will remain a major focus area , making it a not-too-distant second place to sales growth
CEOs find that growth can come by increasing the customer voice in product development while reducing cycle time
Over 64% of CEOs globally believe new products and services will lead their enterprise’s growth
Source: IBM “Global CEO Study 2004”, IBM Institute for Business Value
Responsiveness Efficiency
Implication
CEOPerspective
Differentiation
ImperativesCEOs need to make step-changing performance breakthroughs in three critical areas:
10Alberto Sportoletti – Strategie di Innovazione dei Processi
The need of Specialization of Enterprises
The Specialized Enterprise Supports the Business Imperatives
Source: IBM Institute for Business Value
Specialized enterprisesenhance market differentiation by focusing management time, talent and capital investment on the selected critical components that matter most to their specific strategies
Specialized enterprisesdynamically evolve their business models in response to changing market requirements by organizing as a network of internal and external loosely-coupled specialists
Specialized enterprisesbring together similar business activities from across their organizations as components in order to exploit economies of scale and expertise, and gain benefits from best-in-class partners in other areas
Responsive EfficientDifferentiated
Executive Summary #14
11Alberto Sportoletti – Strategie di Innovazione dei Processi
By 2010, the world’s most successful firms will be “specialized enterprises” focusing on a few critical components
Enterprise Optimized
Business Unit
Optimized
External SpecializationInternally Integrated Industry Networked
Inte
rnal
Spe
cial
izat
ion
Silo 1
ExternalPartnerSilo 2
Silo 3
Silo 1
Silo 2
Silo 3
Specialized EnterpriseComponentized Enterprise
Networked EnterpriseTraditional Enterprise
Business Functions Business Functions
Business Components Business Components
Source: IBM Institute for Business Value
12Alberto Sportoletti – Strategie di Innovazione dei Processi
The specialized enterprise leverages a flexible, networked design that is based on excellence in all parts of its business
Source: IBM Institute for Business Value
“Specialized Enterprise”A company organized into components that delivers b est-in-class performance
through internal excellence and external partnershi ps
� Components are individual business modules that play a specifically designed role within the enterprise ecosystem
� Each component contains people, activities and supporting technology
� The inputs and outputs of a components are largely standardized
� These components collaborate and integrate seamlessly with each other using agreed upon cost and service levels
� Each component may play a significant or subordinate role in differentiating the company’s strategy
Business Components
Executive Summary #5
13Alberto Sportoletti – Strategie di Innovazione dei Processi
A Global Connectivity Platform reduces transaction costs and serves as the foundation for internal and external specialization
Source: IBM Institute for Business Value
Overview
Fall in Transaction Costs
Rise of Specialization
Internal Specialization External SpecializationInternal specialists combine the advantages of
centralized function (economies of scale, standardization for improvement) with the benefits
of decentralization (flexibility, accountability)
Firms can profit from efficiencies and expertise of external specialists while focusing on
capabilities that make themselves external specialists in their area
CommunicationNetworks
InformationTechnology
OpenStandards
Improved connectivity via broadband / wireless
Enhanced IT functionality and speed with reduced cost
Modularized vendor products with fewer proprietary solutions
As a result of the fall in transaction costs, succe ssful enterprises are optimizing their businesses to include internal and external s pecialization of business activities
Emergence of a Global Connectivity Platform
The Global Connectivity Platform substantially reduces the transaction costs of interconnecting business activities as firms can search, contract and coordinate their operations with
increasing ease and lower costs
14Alberto Sportoletti – Strategie di Innovazione dei Processi
Over the last two decades, businesses have migrated the focus of their optimization efforts
Source: IBM Institute for Business Value
1970 1990 20001980 2010
Timeline of Internal Specialization
Stage 2: Processes Optimized
Stage 3: Enterprise Optimized
Stage 1: Functions Optimized� “Strategic Business Unit”, “Portfolio Management”� Business matrix� Product portfolio analysis� Best-in-class, end-to-end strategies
� “Business Process Reengineering”� New technology capabilities drive organizational change� Complex business systems such as SCM, ERP, CRM� Six Sigma, Total Quality Management (TQM)� Lean Manufacturing, ISO 9000
� Focus on strategic business capabilities� Centralization of back-office functions (e.g., procurement,
finance, IT and HR)� Adaptive organizations (Business Components, new
value chains)
On DemandEconomy
15Alberto Sportoletti – Strategie di Innovazione dei Processi
To make enterprise optimization practical, firms should embrace a design constructed of business components
“Componentized Enterprise”� A business design that aggregates business activiti es into cohesive and loosely-coupled
components that can be shared across a firm
� The design allows an organization to expand and evo lve without increasing complexity, while reducing risk, driving business performance, boosting productivity, controlling costs, and improving capital efficiency and financial pred ictability
Source: IBM Business Consulting Services
Business Components
Componentized Enterprise
“Business Component”
� An individual business module that contains similar activities supported by appropriate assets, such as people and technology
� The component serves a unique purpose and could, in principle, operate as an independent entity that may be internally or externally sourced
16Alberto Sportoletti – Strategie di Innovazione dei Processi
Early stage business designs do not permit optimization at the activity level and create complexity across the firm
Illustration of Internal Specialization
Stage 1:Business Unit Optimized
Stage 2:Process Optimized
Stage 3:Enterprise Optimized
Source: IBM Institute for Business Value
� Duplication of activities is minimized,key activities are virtually centralized into a discrete business area (i.e., a component)
� The enterprise focuses on the empowerment of strategic business capabilities (i.e.business components)
� The enterprise has evolved its structure by centralizing activities within process centers that perform standardized activities
� Similar centralization, often managed virtually, occurs opportunistically in other parts of the value chain
� Activities are owned and operated by three distinct business units within the same enterprise
� In the extreme case of business unit optimization, each unit performs the same activities with no coordination or knowledge sharing
Record & Verify Info Center
Business Components
Silo 1
Silo 2
Silo 3
Business Functions
Process Centers
Silo 1
Silo 2
Silo 3
17Alberto Sportoletti – Strategie di Innovazione dei Processi
Phase 3: Industry Networked
� The enterprise partners with many external players
� The industry value chain is largely disaggregated and operated by experts in those functions
Phase 1: Internally Integrated
� The firm integrates all functions of the industry value chain
� Business unit silos are the dominant organizational structure
Phase 2: Strategically Partnered
� The firm works closely with a few external providers that support key pieces of the industry value chain
Integration is no longer efficient – firms can create value by leveraging industry networks and focusing on competencies
Illustration of External Specialization
Source: IBM Institute for Business Value
ExternalPartner(s)
Standardized ConnectivityStandardized Connectivity
Silo 1
Silo 2
Silo 3
Proprietary Connectivity
Silo 1
Silo 2
Silo 3
ExternalPartner
Silo 1
Silo 2
Silo 3
ExternalPartner
Business Unit Silo 1
Business Unit Silo 2
Business Unit Silo 3
Hardwired ConnectivityHardwired Connectivity
18Alberto Sportoletti – Strategie di Innovazione dei Processi
The increasing acceptance of standards has enabled firms to specialize within the value chain and led to industry networks
1970 1990 20001980 2010
Timeline of External Specialization
Phase 1: Internally Integrated
� Ownership of adjacentareas of the value chain
� Emphasis on ensuring quality inputs and distribution
� Proprietary standards for manual and electronic communication within the enterprise (e.g., mainframe)
Phase 2:Strategically Partnered
� Initial specialization within the value chain
� Use of external partners to provide non-core activities
� Divestiture of non-core functional groups
� Emerging standards for intra-enterprise technology and communication (e.g., TCP/IP, Client Server)
Phase 3:Industry Networked
� Concentration on core activities and orchestrationof networked value chain
� Emergence of ecosystems around major players
� Niche players and value chain specialists emerge
� Open standards based on common technology and communications protocols (e.g., XML, Linux, JBOSS)
Source: IBM Institute for Business Value
On DemandEconomy
19Alberto Sportoletti – Strategie di Innovazione dei Processi
Most companies today have a blended process optimized and partnered model and now need to decide where to go
Enterprise Optimized
Process Optimized
Business Unit
Optimized
Strategically Partnered
Silo 1
ExternalPartner
ExternalPartnerSilo 2
Silo 3
Silo 1
Silo 2
Silo 3
Silo 1
Silo 2
Silo 3
Internally Integrated Industry Networked
Business Components Business Components
Specialized EnterpriseComponentized Enterprise
Networked EnterpriseTraditional Enterprise
Business Functions Business Functions
Executive Summary #11
External Specialization
Inte
rnal
Spe
cial
izat
ion
Source: IBM Institute for Business Value
Record & Verify Info CenterProcess
Centers
Silo 1
Silo 2
Silo 3
Most enterprisesare positioned
within this spaceand have modest
levels of internaland external
specialization
20Alberto Sportoletti – Strategie di Innovazione dei Processi
Every industry has been moving down the path of external specialization with several entering the networked phase
Industries Are in Different Phases of External Spec ialization
Source: IBM Institute for Business Value
Strategically Partnered Industry NetworkedInternally Integrated
Financial Services
Banking Banking *
Insurance Insurance
Financial Markets Financial Markets
CommunicationsTelecom Telecom
Media & Entertainment Media & Entertainment
Energy & Utilities Energy & Utilities
Consumer Products Consumer Products
DistributionRetail Retail
Life & Pharma Life & Pharma
Travel & Transp Travel & Transp
Public Sector
Industrial
Automotive Automotive *
Aerospace & Defense Aerospace & Defense
Chemical & Petrol Chemical & Petroleum
Electronics Electronics *
Forest & Paper Forest & Paper
Industrial ProductsIndustrial Products
Healthcare Healthcare
Profiled Industry
External Specialization Level - 1983External Specialization Level - 2003
*
KEY
21Alberto Sportoletti – Strategie di Innovazione dei Processi
Firms assess each component to determine where and how it should be managed
Source: IBM Institute for Business Value
SupportComponent
StrategicComponent
Manage to meet the needs of strategic
components
Example: Risk Management
Invest and expand to gain component
advantages
Example: Product Ideation
Use multiple specialists that have a low cost of
entry and service
Example: Payroll
Ensure that partners meet critical business
requirements
Example: Call Center
Decision Matrix of Business Components
ExternalSpecialization
Non-Differentiating Differentiating
� Seeks performance excellence in all four types of business components
� Optimizes management of internally managed components and partnerships with external business components
� By choosing to focus and invest in the truly strategic components, the specialized enterprise supports the business by leveraging industry networks of best-in-class specialists
� Forms a network of excellence with continually improving value propositions as partners grow and improve their specialization
Specialized Enterprise
Internal Specialization
UtilityComponent
PartnerComponent
Executive Summary #10
22Alberto Sportoletti – Strategie di Innovazione dei Processi
Over the next five years, firms will internally focus on strategic components by leveraging more external components
Initial Business Specialized Enterprise
Firms should evaluate component performance to determine where the greatest value is achieved
The decline in transaction costs increases the number of opportunities for external specialization
Simultaneously, external specialists build scale and further expand their absolute advantage
Absolute Advantage
Evolving the Composition of Business Components
Source: IBM Institute for Business Value
Support Strategic
Utility Partner
Support Strategic
Utility Partner
Executive Summary #12
ExternalSpecialization
Non-Differentiating Differentiating
Internal Specialization
ExternalSpecialization
Non-Differentiating Differentiating
Internal Specialization
Business Transformation:CBM approach(Component Business Modeling)
24Alberto Sportoletti – Strategie di Innovazione dei Processi
Strategy
Tactics
Execution
ConsumerRelationship
CustomerRelationship
Manufacturing Supply Chain &Distribution
BusinessAdministration
Category/Brand Strategy
Brand P&L Management
Matching Supply and Demand
Marketing Development & Effectiveness
Product Ideation
Marketing Execution
Product Directory
Category/Brand Planning
Assessing Customer Satisfaction
Customer Insights
Account Management
Value-Added Services
Customer Account Servicing
Retail Marketing Execution
Customer Directory
Manufacturing Strategy
Supplier Relationship Management
Production and Materials Planning
Manufacturing Oversight
Supplier Control
Make Products
Plant Inventory Management
Manufacturing Procurement
Assemble/Pkg. Products
Distribution Oversight
Distribution Center Operations
Transportation Resources
En route Inventory Management
In-bound Logistics
Corporate Strategy
Alliance Management
Line of Business Planning
Business Performance Management
External Market Analysis
Organization and Process Design
Legal and Regulatory Compliance
Treasury and Risk Management
Facilities and Equipment Management
IT Systems and Operations
HR Administration
Customer Relationship Strategy
Customer Relationship Planning
Supply Chain Strategy
Out-bound Logistics
Accounting and GL
Indirect Procurement
Corporate Planning
Concept/Product Testing
Product Management
Consumer ServiceIn-store Inventory Mgmt
First, create a componentized view of the business
Next, decide what’s differentiatingand what is simply operating
Then, analyze costs
Finally, prioritize your transformation initiatives
2
1
3
4
“CBM” Transformation Approach
25Alberto Sportoletti – Strategie di Innovazione dei Processi
CBM helps to respond to a number of business issues…
Strategy
Tactics
Execution
Illustrative CPG Company
ConsumerRelationship
CustomerRelationship
Manufacturing Supply Chain &Distribution
BusinessAdministration
Category/Brand Strategy
Brand P&L Management
Matching Supply and Demand
Marketing Development & Effectiveness
Product Ideation
Marketing Execution
Product Directory
Category/Brand Planning
Assessing Customer Satisfaction
Customer Insights
Account Management
Value-Added Services
Customer Account Servicing
Retail Marketing Execution
Customer Directory
Manufacturing Strategy
Supplier Relationship Management
Production and Materials Planning
Manufacturing Oversight
Supplier Control
Make Products
Plant Inventory Management
Manufacturing Procurement
Assemble/Pkg. Products
Distribution Oversight
Distribution Center Operations
Transportation Resources
En route Inventory Management
In-bound Logistics
Corporate Strategy
Alliance Management
Line of Business Planning
Business Performance Management
External Market Analysis
Organization and Process Design
Legal and Regulatory Compliance
Treasury and Risk Management
Facilities and Equipment Management
IT Systems and Operations
HR Administration
Customer Relationship Strategy
Customer Relationship Planning
Supply Chain Strategy
Supply Chain Planning
Out-bound Logistics
Accounting and GL
Indirect Procurement
Corporate Planning
Concept/Product Testing
Product Development
Product Management
Consumer ServiceIn-store Inventory Mgmt
The CBM can be used to identify which components in a business are strategic and enable outsourcing/ partnering conversations
Category/Brand Strategy
Brand P&L Management
Matching Supply and Demand
Marketing Development &Effectiveness
Product Ideation
Marketing Execution
Product Directory
Category/Brand Planning
Assessing Customer Satisfaction
Customer Insights
Account Management
Value-Added Services
Customer Account Servicing
Retail Marketing Execution
Customer Directory
Manufacturing Strategy
Supplier Relationship Management
Production and Materials Planning
Manufacturing Oversight
Supplier Control
Make Products
Plant Inventory Management
Manufacturing Procurement
Assemble/Pkg. Products
Distribution Oversight
Distribution Center Operations
Transportation Resources
En route Inventory Management
In-bound Logistics
Corporate Strategy
Alliance Management
Line of Business Planning
Business Performance Management
External Market Analysis
Organization and Process Design
Legal and Regulatory Compliance
Treasury and Risk Management
Facilities and Equipment Management
IT Systems and Operations
HR Administration
Customer Relationship Strategy
Customer Relationship Planning
Supply Chain Strategy
Supply Chain Planning
Out-bound Logistics
Accounting and GL
Indirect Procurement
Corporate Planning
Concept/Product Testing
Product Development
Product Management
Consumer ServiceIn-store Inventory Mgmt
Strategic differentiation
Strategic View
Competitive parity
Basic
Category/Brand Strategy
Brand P&L Management
Matching Supply and Demand
Marketing Development & Effectiveness
Product Ideation
Marketing Execution
Product Directory
Category/Brand Planning
Assessing Customer Satisfaction
Customer Insights
Account Management
Value-Added Services
Customer Account Servicing
Retail Marketing Execution
Customer Directory
Manufacturing Strategy
Supplier Relationship Management
Production and Materials Planning
Manufacturing Oversight
Supplier Control
Make Products
Plant Inventory Management
Manufacturing Procurement
Assemble/Pkg. Products
Distribution Oversight
Distribution Center Operations
Transportation Resources
En route Inventory Management
In-bound Logistics
Corporate Strategy
Alliance Management
Line of Business Planning
Business Performance Management
External Market Analysis
Organization and Process Design
Legal and Regulatory Compliance
Treasury and Risk Management
Facilities and Equipment Management
IT Systems and Operations
HR Administration
Customer Relationship Strategy
Customer Relationship Planning
Supply Chain Strategy
Supply Chain Planning
Out-boundLogistics
Accounting and GL
Indirect Procurement
Corporate Planning
Concept/Product Testing
Product Development
Product Management
Consumer ServiceIn-store Inventory Mgmt
High Capital Area
High Cost & Capital Area
Financial View
High Cost Area
The CBM can be used to identify high cost and capital areas are in the organization.Activity based costing exercises can allocate cost and capital, revenues can only be approximated
Category/Brand Strategy
Brand P&L Management
Matching Supply and Demand
Marketing Development & Effectiveness
Product Ideation
Marketing Execution
Product Directory
Category/Brand Planning
Assessing Customer Satisfaction
Customer Insights
Account Management
Value-Added Services
Customer Account Servicing
Retail Marketing Execution
Customer Directory
Manufacturing Strategy
Supplier Relationship Management
Production and Materials Planning
Manufacturing Oversight
Supplier Control
Make Products
Plant Inventory Management
Manufacturing Procurement
Assemble/Pkg. Products
Distribution Oversight
Distribution Center Operations
Transportation Resources
En route Inventory Management
In-bound Logistics
Corporate Strategy
Alliance Management
Line of Business Planning
Business Performance Management
External Market Analysis
Organization and Process Design
Legal and Regulatory Compliance
Treasury and Risk Management
Facilities and Equipment Management
IT Systems and Operations
HR Administration
Customer Relationship Strategy
Customer Relationship Planning
Supply Chain Strategy
Supply Chain Planning
Out-bound Logistics
Accounting and GL
Indirect Procurement
Corporate Planning
Concept/Product Testing
Product Development
Product Management
Consumer ServiceIn-store Inventory Mgmt
Immediate Priority
No Action
Transformational View
Medium Priority
The CBM can be used to help understand the linkage between components to create a prioritized portfolio of transformation initiatives
26Alberto Sportoletti – Strategie di Innovazione dei Processi
To address our clients’ business issues, we need to link business and technology
Integrated Response
Business Model
Technology
Business ProcessBusinessIssue
Component Business Model (CBM)
Solution Architecture View
Component Business Model (CBM)
Solution Architecture View (SAV)
CBM + Solution Architecture
27Alberto Sportoletti – Strategie di Innovazione dei Processi
Possible actions on selected business component
Degree of Company
Specificity
High
Low
INTERNALIZE
EXTERNALIZE
Optimize Differentiate
“Utilitize” Outsource
Manage internally to meet the needs of the business
Emphasize internally to gain comparative advantage
Use utility partners who provide standardized components with variable pricing
Develop specific contracts with partners who deliver against on demand imperatives
Decision Matrix
Strategic Differentiation
HighLow
28Alberto Sportoletti – Strategie di Innovazione dei Processi
Possible actions for “optimizing”
Possible Actions on Components
�Empower competencies
�Business Processes Improvement - Six Sigma Program
�Business Process Reengineering
�Costs reduction program
�Efficiency improvement program
�“Breakthrough Management” on some KPIs
�Change management
�………….
Manage internally to meet
the needs of the business
Optimize
29Alberto Sportoletti – Strategie di Innovazione dei Processi
Possible Actions for “Differentiating”
Possible Actions on components
�New products/services development
�Business Process Engineering
�Business Process Reengineering
�Breakthrough in some KPI
�Alliances development
�Insourcing
�…………
Differentiate
Emphasize internally to gain comparative advantage
30Alberto Sportoletti – Strategie di Innovazione dei Processi
Possible Actions for “Utilitizing”
Possible Actions on components
�Standardize service levels
�Costs / SLAs trade off analysis
�SLAs agreements
�Benchmarking analysis
�Integrate service providers
�Externalize and empower capabilities
�Develop service performance measurement
�………….
“Utilitize”
Use utility partners who provide standardized
components with variable pricing
31Alberto Sportoletti – Strategie di Innovazione dei Processi
Possible Actions for “Outsourcing”
Possible Actions on Components
�Integrate technologies
�IT/AMS Outsourcing
�Business Process Outsourcing
�Business Transformation Outsourcing
�Benchmarking analysis
�Cost / SLA trade off analysis
�SLA agreements
�Develop service performance measurement
�…….
Outsource
Develop specific contracts with partners who deliver
against on demand imperatives
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