Point of View on Sourcing Strategies

Cover-Sector/Discipline/Alliance the way we see it

Point of view onsourcing strategy

Defining the right sourcing strategy for your organization

PoV_Sourcing_RZ 01.02.2008 13:01 Uhr Seite 1

UtrechtCapgemini Consulting Nederland BVJanuary 2008

© 2008 Capgemini. No part of this document may be modified, deleted or expanded by any process or meanswithout prior written approval from Capgemini

Point of view on sourcing strategy

Point of view on sourcing strategy 3

the way we see it


4

Besides the need for cost reductions and flexibility, does your company alsostruggle to decrease the time to market of your products or services andsimultaneously create value? Especially given the consequences of today’s volatileand rapidly transforming global markets? Increased competition, cost reductionopportunities and the agility to respond to globalization are just a few factors totake into consideration when preparing to define a sourcing strategy.

A clear and well defined sourcing strategy is the key to success in adynamic environment.

But what is a good sourcing strategy? What are the main trends and insights?How do you define the right sourcing strategy for your organization? Whichelements should be part of a compelling sourcing strategy? Which activities can beoutsourced and which should be kept in-house? How do you trade-off short andlong-term objectives?

The questions are many and varied. Sourcing encompasses all support functionsthat underpin an organization’s core business. These support processes includeFinance, Human Resources Management, Information Support Management andProcurement, but can also include processes that are more critical to your corebusiness.

Records show that most sourcing decisions fail to deliver the potential value. In most cases the reason for this failure is that few sourcing decisions are basedon an explicit strategy and/or are providing the guidance on how to successfullyexecute a chosen sourcing strategy.

This point of view from Capgemini will take you through the different sourcingoptions you have as a company. It also looks at the selection and validation of the appropriate sourcing mode and the different sourcing approaches that need tobe considered. This will give you an insight not only into the different theoriesbehind strategic sourcing, but also into an effective execution in combination witha concrete implementation plan.

Introduction

Increased competition

Agility to respondto globalisation

Political andenvironmental

challenges

Cost reductionand increasedtime to market


1. Sourcing strategies 061.1 Rationale behind sourcing strategies 061.2 Choosing the right sourcing strategy 071.2.1 Ownership 081.2.2 Rightshore: onshore, nearshore or offshore 081.2.3 Management: tight or light? 091.3 Approaches to implementation 091.4 The multi-tower question 09

2. Sourcing: trends and insights 102.1 Human Resources 102.2 Procurement 122.3 Finance & Accounting 132.4 IT Sourcing 142.5 The future of global sourcing of services 162.5.1 The utility model 162.5.2 SaaS: Software as a Service 17

3. Sourcing strategy approach 183.1 The closed loop sourcing strategy process 183.3 Why Capgemini 22

Table of contents

Authors: Stefan Westdijk, Mark Hofland, Johan Hiensch, Ton van Dolder,

Michel Borgers, Ron Broeren


There are numerous definitions of sourcing. Generally, sourcing can bedefined as delegating business functions to a separate business unit or thirdparty. A sourcing strategy encompasses all functions that underpin the corebusiness of an organization. By altering the management of these supportfunctions, organizations aim to optimize and improve their operating model.

The sourcing strategy is about defining what an organization wants to dowith the tasks, functions or processes that are not differentiating theorganization from its competitors. And the strategy does not only apply tothe non-critical processes but to every task, function or process that providesadded value to the organization.

1.1 Rationale behind sourcing strategies

Defining and implementing a sourcing strategy can have a major impact onseveral business functions and processes, including Finance & Accounting,Human Resource Management, Information Support Management, Procurement,Marketing and Sales and Logistics.

Porter’s value chain1 can be used to define the scope of the sourcingstrategy. The basis of the sourcing strategy is what to ‘make’ and whatto ‘buy’.

Every enterprise will have to identify whether a specific business function orsupporting process provides a strategic advantage over its competitors. Theprimary drivers for sourcing of functions or processes are:

■ Less ownership of infrastructure and resources, based on a desire to increaseflexibility

■ Increased agility and decreased time to market

■ Focus on core business and the need to become more cost effective

6

1 Sourcing strategies

1Competitive advantage: creating and sustaining superior performance, M.E. Porter, 1985

Sourcing is the delegation of business functions to aseparate business unit orthird party.

Non criticalprocesses

Criticalprocesses

Finance and Accounting

Human Resources Management

Information Support Management

Procurement

InboundLogistics &

SupplierRelations

OperationsOutboundLogistics

Marketingand

Sales Services

Margin

Margin

A sourcing strategy is the direction of theorganization regardingmanagement of functionsand elements of the directvalue chain in order tooptimize the operatingmodel of the organization


Uffshore

Onshore

Owned Not owned

Tight Touch

Light Touch

Point of view on sourcing strategy Sourcing strategies 7

the way we see it

Shared Support Organization(e.g. facility power house)

Captive offshored(e.g. offshored SSC)

Selective sourcing or multiplesourcing is a combination ofvarious sourcing options

Optimized in house solution(e.g. in house SSC, in sourcing or optimised processes)

Nearshoring

Spin off(e.g. new company)

Horizontally outsourced(e.g. BPO vendor)

Vertically outsourced(e.g. Managed Service Providers)

In house BPO Vendor

1.2 Choosing the right sourcing strategy

Outsourcing is often perceived as the next step after optimization of a sharedservice center. But is this really the right sourcing strategy for your organization?Capgemini has carried out basic research into the global sourcing of services. Aspart of this research, decision makers from a number of private and public sectororganizations were interviewed. We sought to define a comprehensive set ofglobal sourcing modes, understand the potential value of each global sourcingmode and how environmental characteristics influence an organization’s servicesourcing options. Finally, we wanted to understand the influence of collaborativecompetence on transactional risk to assess the relative value to be expected from aservice sourcing decision.

Selecting the right sourcing mode means finding the right combinationof ownership (owned or not owned), rightshore (onshore, nearshore or offshore) and management (tight touch or light touch) or governancemodel.

These three elements have been captured in a cube of sourcing options orsourcing modes. This cube is called the Global Sourcing Strategie cube®.

On the basis of interviews with several decision makers a decisionsupport tool model has been defined, called the GSS cube®. This cubewill allow organizations to assess the relative merits of each sourcingoption for their given circumstance.

Based on the GSS cube’s three dimensions, sourcing can take on different forms.The sourcing strategy with the least impact from the perspective of ownership,location change and intensity of management is a shared service center. Sharedservice centers are undoubtedly the best known sourcing option or mode. Theconcept of shared service centers emerged in the 1970s in North America and isnow widespread in Europe and Asia. Today companies either choose to optimizeexisting shared service centers or set up new shared service centers in competitivemarkets. By diagnosing existing shared service centers, it appears that outsourcingbecomes critical, including the transfer of business processes to offshore and near-shore locations. However, many companies in Western Europe have not yet embraced


8

the full potential of technology enablement and the extension of the EuropeanUnion. Evaluating the geographical scope and location strategy can be lucrative,whether this is outsourcing or cross-border shared services as potential sourcingstrategies. This could take the organization in the direction of the highest impactsourcing strategy from an ownership, location and management perspective: out-sourcing to an offshored third party where management attention is not critical.

1.2.1 Ownership

Increasingly, companies prefer to outsource work to different providers instead ofnegotiating one large contract. The most successful companies are using multiplesourcing as a strategic best practice, not just to save money but to increaseorganizational flexibility and time to market. Disciplined multi sourcing offers anew framework to help organizations gain control of their sourcing decisions andensure that their service relationships (whether insourced or outsourced) deliverlong-term value and support business strategies. The expected gains are bestachieved through proper coordination with internal systems and processes andnot by ad hoc attempts at blindly reducing costs.

Our experience clearly shows that the most successful companies are using thirdparties as a strategic best practice in order to increase organizational flexibility.The gains achieved by having no ownership of a specific function or process requireproper coordination with internal systems and processes.

1.2.2 Rightshore: onshore, nearshore or offshore

Cost saving remains the key criterion for most organizations in the process ofdefining the right sourcing strategy. But even in low-wage countries such as Indiaand China prices are rising quickly and margins are becoming tighter. The bordersbetween onshore versus offshore delivery of business process outsourcing servicesare beginning to blur.

Unsurprisingly, therefore, companies are increasingly focusing on the other benefitsof outsourcing, such as workforce flexibility, improved quality of processes orfunctions, faster time to market and the acquisition of additional hard-to-find skills.Still, labor savings can be enormous and gains in efficiency, productivity, quality,and revenues can be huge when fully leveraging offshore talent.

While the adoption of a shared service structure is viewed by many as an appro-priate strategy to pursue, most companies still struggle to devise optimal strategiesand to generate adequate returns on investments for their projects. This is becausenone of the approaches that are commonly adopted is recognized as universallyeffective.

Based on our experience, offshoring is an important part of the overall growthstrategy of many large organizations. The key driver for offshoring is not aboutlow wage prices but rather workforce flexibility, quicker time to market andgaining additional skills. When offshoring risks are too high (poor service quality,lack of cultural fit or loss of control) a captive model is applied. This captivemodel ensures that offshore components adhere strictly to corporate proceduresand rules.


Point of view on sourcing strategy Sourcing strategies 9

the way we see it

1.2.3 Management: Tight or light

Offshore outsourcing can deliver on its promises, but it takes a tremendous amountof detailed management on both the client and the supplier sides to realize expectedbenefits. Poorly managed cost-saving strategies can end up costing far more thanthe original savings planned. This has resulted in a number of companies pullingback from offshore activities. Such strategies must therefore be carefully plannedand implemented. A good alternative is to find an onshore service provider whomanages all offshore activities. From the initial sourcing strategy decision throughto managing a long-term sourcing relationship, enterprises must understand theimpact of relationship complexities and new business constructs in a changingworld. The key to a successful sourcing strategy is not about crafting the plan and finding the most appropriate partners but lies within the management of thedelivery or execution of the sourcing strategy.

Successful deals are those built for change. From the initial sourcing strategythrough managing the long-term relationship, organizations must understand theimpact of relationship complexities and new business conducts in a changingworld.

1.3 Approaches to implementation

As soon as the right and most beneficial sourcing mode has been selected, animplementation scenario needs to be defined. Organizations should assess internalservices, decide what they want to achieve, and determine how to get there. Thereare five implementation possibilities that might be considered:

1. No transformation: current processes and methodologies can be optimized.

2. Reengineer and move: transform the process and then outsource.

3. Move and reengineer: outsource the process and then transform.

4. Step by step: programmed transformation.

5. One big leap: lift and shift concept.

A business case can be made once the objectives of potential sourcing scenariosalong with the appropriate approach are clearly defined. This will result in aproper identification of the benefits, investments and potential risks andmitigations.

1.4 The multi-tower question

In paragraph 1.1 we discussed that, based on the competitive advantage generatedby your processes, a strategy needs to define which processes will remain core tothe organization and which ones need to be ‘sourced’. Regardless of your chosensourcing mode, a strategy for managing a ‘multi-tower’ approach is an option. In the case of outsourcing processes such as Finance & Accounting, HR and Pro-curement, this approach sees the processes being bundled and sourced to asingle service provider. In the case of keeping ownership of these processes in-house, this implies the setting up of a single shared service center where theprocesses will be executed on an integrated basis. Service suppliers are beginningto show synergies but as an organization you might not be utilizing the bestsupplier for each process or service.

In a multi-tower approachprocesses are handledand sourced to a singleservice provider


10

Sourcing strategies are not limited to an organization’s supportive functionsor processes. Capgemini believes that sourcing strategies should look atcorporate development through the lens of sourcing. This would requireelements of the direct value chain to be considered in order to optimize the operating model. In this way, the definition of a sourcing strategy willhelp organizations focus on where most value is added and it will supportdecisions on what an organization should ‘make’ or ‘buy’ in terms ofprocesses and functions. In Europe, Human Resources, Procurement andFinance & Accounting are the most mature processes currently beingsubjected to sourcing strategies from a supportive service perspective.

2.1 Human Resources

The offshore delivery of Human Resource services has increased rapidly in thepast few years, largely due to the fact that HR processes lend themselves well tooutsourcing. In 2005, the total enterprise spending in this area amounted to€ 23.6 billion, the highest spending of all BPO services2. Traditionally, payrollprocessing is the most popular choice when it comes to outsourcing HR-processes. Enterprises are now considering the outsourcing of recruitment,training and compensation and benefits administration.

Driven mainly by cost savings, organizations are increasingly looking at outsourcingend-to-end comprehensive HR processes instead of a single process. Among thesecomprehensive HR-processes are HR compliance and talent management. Multi-process outsourcing offers economies of scale. Besides reducing the costs of provi-ding HR services, several other benefits can be achieved, including improvingservice levels, enabling management to focus on core business activities and betteraccess to functional and technical experts.

Human Resources outsourcing is often presented as the next step after a HumanResource shared service center. HR outsourcing including the payroll function isoften part of larger transformational deals involving multiple disciplines such asInformation Technology or Finance & Accounting.

The potential scope for HR outsourcing is presented in the following diagram3.This shows that the more ‘critical’ elements of the Human Resources function, likeRecords management and recruiting, do not have a high priority because they areperceived as critical to the organization by the interviewees. Language problemsand legislative complexity are also key issues in HR BPO. In particular, (multi-)local organizations are affected by these issues. Most global players are able tocope with these problems and still manage to make a good business case for HRBPO. But rising labor costs around the world are pressuring profitability.

2 Sourcing: Trends and Insights

2 HR BPO Market to Grow to $32 Billion Worldwide by 2010, Gartner, 2006

3 Dataquest User Survey Analysis HR BPO, Gartner, 2006


Based on research, it is clear that organizations are reluctant tooutsource key elements of the Human Resource function.

In accordance with the GSS cube® presented earlier the potential scope for HRoutsourcing is shown in the next diagram:

Despite the reluctance, there are many possibilities for benefiting froman HR sourcing strategy.

Point of view on sourcing strategy Sourcing: Trends and Insights 11

the way we see it

Payroll

Benefitsadministration

Education and training

RecordsManagement

Recruiting andstuffing

Hringadministration

Other

10%0% 20% 30% 40% 50% 60% 70% 80% 90% 100%

■ Currently outsourcing ■ Considering outsourcing ■ Not outsourcing

- Absence management- HR information- Knowledge management- Performance management

- Labour relations- Organisational design

and governance- Re-organisations- HR projects- HR policy- Selection process- Introduction- Position management- Career Management- Talent Management

/Management development

- Involuntary exit- Decease

Owned processes, offshore =Proces optimizationdepending on client facing %of process.

Non client facing, (mature)Transactional processes

Leave and working hoursadministration PayrollCompensation and Benefit admin

Client facing,Transactionalprocesseswith light localregulations

RecordsManagementHR FilingVoluntary ExitRetirementadministration

Non client facing, Non transactional processes

Client facing, Non transactional processeswith tight local regulations

- Recruiting- Hiring- Expats & Impats- Education & Training

BenchmarkingEmployee Introduction (doc ’s)Onshore

Owned Not owned

Tight Touch

Light Touch

Offshore


2.2 Procurement

Most organizations are spending approximately between 40% (e.g. servicesindustry) and 75% (e.g. manufacturing) of their annual revenues on theprocurement of goods and services. Every Euro that doesn’t go to taxes,depreciation, or salaries goes either to pay suppliers or directly to the bottom line.Companies can therefore significantly improve their profit margin throughaggressively managing supplier relationships. A BPO Procurement service consistsof two main types of services (and the combination of these two is called fullservice BPO Procurement):

■ Purchase-to-Pay which is the provision of transaction processing support tomanage the administration involved in the ‘procure-to-pay cycle’ for indirectgoods and services or direct procurement;

■ Source-to-Contract includes strategic sourcing and the management of contracts.The spend managed by the BPO service provider creates a continuous leveragefor spend aggregation.

BPO Procurement is in a relatively embryonic stage. Early adopters can be foundin high-tech, manufacturing and financial services sectors. Most organizationsfocus on the outsourcing of indirect categories. Potentially, strong gains lie inenterprise-wide strategic BPO Procurement. Few companies have adopted thismodel, however. A more common sourcing strategy for the procurement functionis an offshored shared service center. These shared service centers are executing a subset of processes for global organization in order to:

■ Drive standardization of the processes

■ Reduce the cost of the supportive procurement processes

■ Leverage low-wage resources

The potential scope for BPO Procurement is presented in the following diagram4.If all the elements are (partly) outsourced, it can be referred to as full service BPOProcurement.

12

A 10% price reductionin goods and servicesprocured can have thesame impact oncorporate profits as a30% increase in sales!

“Increasing the quality ofour procurement servicesis the main reason foroutsourcing a significantpart of the procurementfunction.”

4 Strategies and Insights for Today’s CPO, Capgemini, 2006


A key element in BPO Procurement, and this is applicable to alloutsourcing deals, is the management of the split: processes executedin-house need to be fully aligned with the outsourced processes. A compelling governance model should therefore be defined andmanaged.

2.3 Finance & Accounting

During the first unpredictable years of the 21st century, the CFO had to focus onhis more traditional roles as ‘internal organizer’ and ‘compliance controller’ tocope with requirements such as the need to reduce costs during the recessionfollowing the internet-bubble and the need to regain control to comply with thenew IFRS and SOX-regulations in the aftermath of the accounting scandals.

Today, and confirmed by the recent Capgemini CFO survey5, the CFO is able torefocus again on transforming the finance function such that the function canexpand its role as ‘business partner’. In this role, the finance function shouldenable value creation and should be FIT for the future:

- by creating Focus on an efficient and effective finance infrastructure;

- by providing Insight to support your business in decision-making;

- by enhancing assurance to obtain Trust from stakeholders.

This requires a transformation to create an innovative and flexible finance function.


the way we see it

5 Source: Capgemini CFO-Agenda 2008, dimensions of a successful strategy. 239 CFOs and financial managers ofdifferent European organizations participated in this study on trends and developments in the finance function

6 FAO Market Update, Everest, 2006

“The simple and basicprinciples of deliveringboth short termprofitability and generatinglong term sustainablegrowth through innovationand investment.”

Project planning

Strategic Sourcing

SupplierManagement

Purchaseto Pay

ManagementReporting

In-house

Outsourcedofferings

• Strategicplanning

• Validation ofstrategy

• Purchasingstrategyrequirements

• Savingsidentification

• Definecommunication

• Commodityspecifications

• Supplierselection

• Negotiations• Contract

finalization

• Commodityprofiling

• Market research• Supplier research• Bid preparation

• Requisitions• PO approval

• Transactionprocessing andmanagement

• Compliancemonitoring

• Requisitionsupport

• Invoicesettlement

• Manageaccounts payable

• Managepayments tosuppliers

• Stockmanagement

• Managementreportingrequirements

• Monitoring andreporting oncompliance

• Exceptionmanagement

• P2P reporting• Spend

intelligence• Manage

inventory levels• Expedite

• Contractevaluations

• Suppliermeetings

• Define servicelevels

• Service levelreporting

• Preparedcontractevaluations

• Supplier adoption


14

Finance Transformation: towards a Low Cost, High Quality and AddedValue Finance Function

Focus on the internal efficiencies within the finance function is needed to achievea low-cost, high-quality and flexible organization. This could be reached byexploiting the rich utilization of low-cost talent resources through globalization,and achieving greater manageability of the finance function across business unitsand geographies6. These are the two critical elements of the F&A sourcing strategy.

In the past, bringing the F&A processes towards a Financial Shared Services Centerwas the way to achieve lower costs and greater manageability. It is still a provensolution for your sourcing question, but not the only one. Many businesses areexperiencing increasing skills scarcity and rising costs of finance talent where athird-party service provider can bridge this gap for many of their F&A processes.

In this emerging rapid-growth phase of F&A function or proces outsourcing (at a rate of 16.4%, outsourcing F&A shows the highest compound annual growthrate of all BPO services in Europe7) we see different adoption dynamics. Marketanalysis8 shows that in Energy & Utilities and Travel & Logistics outsourcing ofF&A is already common; however in Financial Services there is still a lot to gain.

However, most companies struggle to find their way in the jungle of sourcingterminology and to define their own sourcing strategy. Furthermore, there arerisks from a managerial and governance perspective, not only during the selectionphase but especially in the long term. Therefore, organizations need to identifyand prioritize the risks and should set up risk monitoring and risk mitigation.

Capgemini found that careful supervision (including periodic evaluation) is thekey to successfully executing the sourcing strategy. Successful in this case meanskeeping the gap between potential value and achieved value as small as possible.This requires the careful vetting of potential vendors, the development of clearperformance metrics and targets for which vendors will be held accountable, andthe monitoring of not only the quantitative performance of vendors but also thereaction of end users who are directly dependent on the vendors’ work.

“Outsourcing F&Aprocesses enables us tofocus our time andresources on our corebusiness areas, whichimpact our profitability andcompetitive advantage.” - Beth Summers, Chief Financial Officer at Hydro One

7 European Finance And Accounting BPO Spending Forecast, Forrester, 20068 FAO Market Update, Everest, 2006

STRATEGYDECISIONSUPPORT

CORPORATEPERFORMANCEMANAGEMENT

TRANSACTIONPROCESSING

People / Process / Technology

STRATEGYDECISIONSUPPORT

CORPORATEPERFORMANCEMANAGEMENT

TRANSACTIONPROCESSING

People / Process / Technology

STRATEGY & DECISION SUPPORTFinance Policy, Steering & Control Framework, Strategy &Decision Making, StrategicPlanning & Support, FinancialAnalysis & Treasury

CORPORATE PERFORMANCEMANAGEMENTPlanning, Budgeting and Reporting,Management, & Financial Reports,Financial Applications Management,Tax Planning

TRANSACTION PROCESSINGGeneral Accounting, AccountsReceivable, Accounts Payable,Fixed Assets, General Ledger, Billing,Credit & Collections, Travel &Expense, Standard Reporting, CostAccounting, Tax Accounting & Reporting

In-house

Sourced


the way we see it

2.4 IT Sourcing

The IT sourcing market is still growing: with 31,6% more spending predicted for2011 compared to 20079. The IT offshore market alone is growing with a com-pound annual growth rate of 16,5% in Western Europe and 14,4% in the US until2009. Companies still see the advantages of outsourcing IT to external partners.

The top three drivers for outsourcing and offshoring IT are still cost reduction,increased flexibility and increasing quality. At 82%, cost reduction is at the top ofthe list of drivers, with the others respectively at 46 and 43%.10 A key reason forthis is that the IT function is still inevitably perceived as a costly support function,instead of a possible business enabler.

Looking at the different IT delivery options, the most common is still nearshoring(outsourced to partner in the company’s own country or a country nearby). When companies want to use offshore delivery they invariably choose a distri-buted delivery approach and to a lesser extent opt for direct offshoring. Thosecompanies offshoring largely source Realization, followed by InfrastructureManagement, Application Management and Support.11

To make such decisions you have to design your own sourcing strategy. This is acomplex task characterized as non-routine and often with the use of incompleteinformation. In recent scientific research we have discovered that 110 differentvariables can influence the right sourcing mode.12 These variables are situationalfactors, risks, outsourcing drivers, etc.

In this process of defining the right sourcing mode there are two common pitfalls.The first is the large amount of management attention required for theoutsourcing partner meaning that there is much less for the standing organization.The retaining organization has to manage the outsourcing contracts and shouldtherefore transform to a demand management organization.

Secondly, companies are focusing on the sourcing strategy but forgetting that afterthe transformation the success of the sourcing has to be measured. During thedesign of the sourcing strategy you have to define when a sourcing strategy issuccessful and with which parameters you want to measure this success.

8

23

41

5

27

32

36

32

5

Step in the ITvalue chain

Share of totalIT budged

Strategy &Planning

Concep-tualization& design

Realization Test &Rollout

ApplicationManagement

Infra-structureManage-ment

Support

800

2502

49

3

41

0

4

39

3

4

43

3

4

39

2 Offshoring

Distributeddelivery

Near-shoring

IT budget allocation per IT value chain stepin percent


9 Gartner, June 200710 European CIO Survey 2006, Capgemini11 European CIO Survey 2006, Capgemini12 Thesis ‘Towards an ontology for designing successful outsourcing strategies and choosing aligned


16

2.5 The future of global sourcing of services

As the dynamic and competitive marketplace drives further commoditization,industrialization and globalization, players are pushed to compete not only onproduct innovation and cost but also on flexibility and the ability to interact withexternal partners.

Evolving sourcing models enable organizations to realize their strategicobjectives.

Primarily in the competitive financial services industry, given current develop-ments (European banking consolidation, SEPA) the pressure to reduce assetownership (people, technology and infrastructure) is driving the trend towardscomplex and innovative sourcing models.

2.5.1 The utility model

The challenge that organizations face is to balance control, compliance andflexibility in order to maintain a competitive edge while reducing cost and assetownership. On the supply side, vendors compete by offering flexible, trans-action-based pricing for both software and hardware. On the verge of emerging is the Solid Utility, bundling the technology, business process and support in acompetitive, price-per-transaction commercial offering.

Customer owns the function/assets Suppliers owns the assets Supplier and/or Customer ownsthe assets

BusinessOperations

AD AM IM

Inte

gra

tion

BusinessOperations

AD AM IMIn

teg

ratio

n

BusinessOperations

AD AM IM

Inte

gra

tion

BusinessOperations

AD AM IM

Inte

gra

tion

COTS

BusinessOperations

AD AM IM

Inte

gra

tion

In House - CSD

SP=Utility

SP=BPO

SP=SaaS

• The development of Utility Service Providers (SP) aredriven by consortia of vendors eager to leverage economiesof scales from different customer while eliminating the needfor asset (people and technology) ownership on thecustomer side.

IM IM IM

The future of globalsourcing of services isoften defined as ‘3GO’:third generation out-sourcing.



the way we see it

On the supply side, service will be delivered as utilities in terms ofmetered, scalable and standardized services.

2.5.2 SaaS: Software as a Service

While the ‘utility’ is likely to dominate in the highly transactional-based domains(such as payments, cards and possibly mortgages), the new emerging trend is theSaaS (software as a service) model. The attraction for SaaS lies in the ability topurchase transaction-based services without having to own the asset, while at thesame time maintaining a competitive edge in terms of performance.

The challenge that clients face today is to persuade the service providers to de-velop such solutions by taking over their current legacy (people and technology)and turning it into a service (offered via a SaaS model, for instance) that is highlytailored to them, as a foundation client.

Professional service providers acting as transformation partners and with a strongoperational capability are ideally positioned to develop such solutions due to theircurrent customer base, size and ability to create standard market solutions thatwill appeal to a large customer base.

Business Process Utility

Business Service 2 HR Services (Recruitment, Training, etc.)

Technology ServicesAM + IM

Integration Services(One Off)

Facility Management

Regulatory Compliance

Back Office Administration

Business Service 1

Business Service 4Business Service 3

Business Service 6Business Service 5

Opt: Business Service 8Opt: Business Service 7



Sta

ndar

d S

ervi

ces

Op

tiona

l Ser

vice

sIn

tern

alna

l Ser

vice

s

• WorkflowProcesses• Authorization• Regulatory Framework

• Best Practices• Demand estimation• Service Delivery

Management

UTILITY Core Components

• Billing and Settlement• CRM Interfaces• Risk Profile Setting

• Archiving and Scanning

• Information provisioning

UTILITY Core Interfaces

Vendor Consortium

Supply Side – Service Delivery as Utility:metered, scalable, standardized services

Demand SideThe FSI’s

Clie

nt 1

BU1

BU2

BU3D

eman

d

Clie

nt 2

BU1

BU2

BU3

Dem

and

Clie

nt 3

BU1

BU2

BU3

Dem

and

Subcontracted Services


The need for cost savings, increased efficiency or strategic orientation can triggerthinking about the right sourcing strategy. Because the elements that affect thesourcing strategy of an organization can change over time, the definition,implementation and execution of a sourcing strategy is considered as a closedloop process.

3.1 The closed loop sourcing strategy process

In this five-step closed loop process organizations should continuously go throughthe steps in order to (re-)define and execute the right sourcing strategy. The closedloop process is visualized in the figure below.

Not only is the efficiency of the outsourced function a driver forevaluating the sourcing strategy, but business dynamics may alsorequire a change of scope to ensure a more suitable sourcing mode.

18

3. Sourcing strategyapproach

Analysis andDefinition

Transition orMigration

Selection andPreparation

Delivery orOperations

ScenarioPlanning and

Business Case


Point of view on sourcing strategy Sourcing strategy approach 19

the way we see it

Step 1: Analysis and Definition

A scope for the sourcing strategy will be defined in the analysis and definitionstep. All various sourcing options need to be evaluated in order to come to theright sourcing mode, including the level of externalization of the processes orfunctions in scope. These evaluations should be based on three questions:

■ Is this process or function providing a competitive edge?

■ How interwoven is this process with other processes in the organization?

■ What is the sourcing savings potential of the process or function?

External knowledge, benchmark data and experience of the various sourcingoptions, such as outsourcing, will be used during the analysis. The organization’sreadiness and ability to source and the experience of other organizations will betaken into account to make the decision clear and objective.

Capgemini has developed a Global Sourcing Strategy model that takes intoaccount several dimensions and areas on which the organization is measured.These are then compared with benchmark data. The outcome of this model is a clear and objective overview of the different sourcing options.

During the analysis and definition step, a multidisciplinary team is required to challenge the multi-tower question and the potential integration of various processes and functions in scope. The analysis is of strategic importance to yourorganization and therefore corporate management should be involved during this step.

Step 2: Scenario Planning and Business Case

On the basis of the outcome of the Global Sourcing Strategy model severalscenarios or global sourcing modes have been identified. The most beneficialsourcing modes now need to be analyzed in more detail. Capgemini hasdeveloped deep dives to analyze and measure the effects of the different sourcingstrategies on the organization in more detail.

By means of the scenario planning and business case phase the sourcing strategynow needs to be translated at a tactical level. With our experience and expertisewe can support your organization on topics such as:

■ The advantages and disadvantages of centralization and/or decentralization

■ Which parts of the process should be part of sourcing strategy mode

■ Which parts of the process are beneficial for outsourcing and/or shared service operation

■ Which parts of the process should I keep in-house

■ How do I need to manage possible vendors of outsourcing services

■ How can I best build a business case reflecting all relevant benefits and costs

■ What is a best-practice ‘retained organization’

In this phase the standing organization needs to be analyzed and prepared for thenew situation. This implies the way of working between the standing organizationand the new sourced function. Finally a business case per scenario needs to bedeveloped to support the chosen sourcing mode and function.






Business Case






Business Case







Business Case






Business Case

20

Step 3: Selection and Preparation

Selection and preparation is essentially the execution of the ‘make’ or ‘buy’decisions. The organization should be prepared for the change as soon as thepreferred sourcing scenario is defined, aligned with the business strategy andvalidated.

When an external sourcing mode is chosen the selection of and negotiation withone or multiple service providers needs to be carried out. In general, this selectionprocess takes a lot of time and effort, because you need to make sure that theservice provider is capable of fulfilling the outsourced process or function with atleast the same (but preferably even higher) quality.

When an in-house sourcing mode is chosen, the organization needs to be pre-pared for the movement of workload within the organization. This might involvethe movement of workload from one department to another, or building a newshared service center to take over the workload.

Depending on the size of the change (based on the scope, the sourcing mode and the organization’s readiness) you will be setting the scene for the upcomingchange of the selected sourcing mode, whether this is in-house sourcing,outsourcing or all variances within this range.

Step 4: Transition or Migration

After the steps above in which the preparation for change is undertaken, a trans-formation or migration will take place. The migration with the highest impact willbe the sourcing of functions or processes to an external party offshore.

Before the actual migration or transition takes place, the standing organizationneeds to be prepared for the new situation. This implies defining the way ofworking between the standing organization and the new sourced function. Thissourced function can be an external party, a new division within theorganization, or one of the multiple options within this spectrum of sourcingpossibilities. The following elements need to be addressed in the standingorganization:

■ Definition and alignment of the governance model

■ Ensuring that the critical knowledge and experience is captured and remains within the organization

■ Process descriptions and gaining clear insight in the way of working with the third party (either external or internal)

■ Definition of service levels and key performance indicators

■ Training of employees in the standing organization


Point of view on sourcing strategy Sourcing strategy approach 21

the way we see it

The intensity of this step depends on the quality of the processes or functionsbefore changing. However, before taking further steps the quality of the standingorganization must be assured. Change management is therefore a key element inthis phase.

In general, this step is vital for ensuring the interaction between the standingorganization and the sourced functions or processes goes smoothly. The better thealignment of governance model, responsibilities, processes and ways of workingbetween the different parties, the better the processes or functions will operateonce in- or outsourced.

Step 5: Delivery or Operations

As soon as the delivery takes place, service levels need to be monitored and in thecase of a third party, innovation needs to be encouraged. Regardless of thesourcing mode, the sourced function or process needs to be monitored, controlledand managed. This applies to both the provider (i.e. owned or not owned) andthe demand organization. In an evolving business the following aspects need to befrequently evaluated:

■ Translating changing business needs to the organization that is executing thefunctions, tasks or processes in scope

■ Evaluating the scope of the tasks, functions or processes

■ Monitoring the contract and developing the vendor of the services

■ Evaluating the sourcing strategy in a continuous planning circle

Each element of the closed loop process is equally important for the successfuloutcome of the sourcing strategy, regardless of the sourcing mode chosen.






Business Case


22

3.2 Why Capgemini

Capgemini is one of the world’s foremost providers of Consulting, Technology andOutsourcing services. Capgemini is recognized as a global leader in outsourcingservices and has a global reach in Outsourcing, Consulting and TechnologyServices. Capgemini is perceived in the market as:

■ “Capgemini ranked as a Top 5 Outsourcer Worldwide” (IAOP, 2006)

■ “Capgemini ranked #1 in client satisfaction in a report that rates U.S. clients’satisfaction with their IT service providers” (Forrester, 2006)

■ “Capgemini showed well in its ability to implement sourcing deals and managetransformation in customer environments. Capgemini has a mature frameworkof methods and processes that support implementation capability...” (Forrester, 2006)

■ “Capgemini was fourth out of 18 organizations, most recognized by end-usersas F&A BPO providers.” (Gartner, 2007)

■ “Capgemini has the largest mega deal: a $5.5 billion contract with the UnitedKingdom's Inland Revenue in 2003, as well as the second-largest, a $3.5 billioncontract with TXU in 2004.“ (Gartner, 2004)

■ “Capgemini pursues full-scope, multi tower relationships, as well as smaller-scope, F&A-specific outsourcing engagements. Its flexibility is a plus in amarket where customer demand varies.” (Forrester, 2005)

Capgemini has a proven track record in offshoring, outsourcing, shared services,and other sourcing solutions all over the world. This track record includes de-livering outsourcing capability in the areas of Procurement, Finance & Accountingand Human Resource Management.


the way we see it

About Capgemini and the Collaborative Business Experience

Capgemini, one of the world’s foremost providers of Consulting, Technology andOutsourcing services, has a unique way of working with its clients, called theCollaborative Business Experience.

Backed by over three decades of industry and service experience, the CollaborativeBusiness Experience is designed to help our clients achieve better, faster, moresustainable results through seamless access to our network of world-leadingtechnology partners and collaboration-focused methods and tools. Through com-mitment to mutual success and the achievement of tangible value, we helpbusinesses implement growth strategies, leverage technology and thrive throughthe power of collaboration. Capgemini employs approximately 75,000 peopleworldwide and reported 2006 global revenues of 7,7 million euros.

The Capgemini Group is headquartered in Paris.

Capgemini,one ofthe world ’s foremost

providers of Consulting, Technologyand Out-sourcing services, enablesits clients to transform and performthrough technologies. Capgeminiprovides its clients with insights andcapabilities that boost their freedomto achieve superior results througha unique way of working,whichit calls the “Collaborative BusinessExperience”. Capgemini reported 2006global revenues of EUR 7.7 billion andemploys over 75,000 people worldwide.

Capgemini Consulting is the manage-ment consulting discipline of theCapgemini Group.Capgemini offerstransformational excellence throughunderstanding specific customerneeds in all business sectors. Basedon our strong functional expertiseand our ability to accelerate change,wecollaborate with customers todesign the best strategies and executethe transformation,impacting bothbusiness results and growth.Across theglobe,Capgemini Consulting has 5,000management consultants.

More information is available at:www.nl.capgemini.com.

About Capgemini and the Collaborative Business Experience


www.capgemini.com

Capgemini Nederland B.V. Stefan Westdijk Sourcing Strategies Leader Netherlands P.O. Box 2575 – 3500 GN Utrecht Tel. +31 30 689 7175 www.capgemini.com
