CIO Sweden’s Global Sourcing DayStockholm, Grand Hôtel ,May 24, 2011

Risk-Return Tradeoffs in Strategic Global Sourcing

Professor Bent Petersen

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Motivation & Purpose of My Presentation

Strategic global sourcing is increasingly a race for talent. Where is your company in this race? Hopefully first in line!

Strategic global sourcing yields high returns, but is also associated with high risks and needs for organizational changes.

Strategic global sourcing may be outside your firm’s “comfort zone” – a composite of managers’ risk preferences, organizational knowledge transferability, structural inertia, and managers’ ability to mitigate global sourcing risks.

The purpose of my presentation is to feature an analytical framework that may assist Swedish managers in achieving the benefits of strategic global sourcing within their company’s comfort zone.

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EXPLORATION

SPECIALIZATION REVEALINGStrategic global sourcing

EXPLOITATION

REPLICATION

Conventional global sourcing

CONCEALING

Conventional versus Strategic Global Sourcing

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Global Sourcing: Your Company’s Comfort Zone

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Organizational risk propensity

+ Knowledge transferability

___________________________

Discomfort zone

+ Organizational flexibility

= Comfort zone

Comfort zone

+ Risk reducing measures

…is a composite of:

Narrow versus Extended Comfort Zones

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THE NARROW COMFORT ZONE: THE EXTENDED COMFORT ZONE:

Risk aversion

Tacit knowledge

Risk willingness

Codified knowledge

The extended comfort zone

Structural inertia Structural flexibility

The narrowcomfort zone

No risk-reducing measures Effective risk-reducing measures

Discomfort zone

Risk-Return Pay-offs of Strategic Global Sourcing

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Strategic global sourcing

Comfort zone

RETURN: AUGMENTED COMPARATIVE ADVANTAGE OF LOCAL OPERATORRISK: SLIPPAGE OF STRATEGIC KNOWLEDGE. HOLD-UP

RETURN: ECONOMIES OF SPECIALIZATIONRISK: SUPPLY UNCERTAINTY. INTERFACE PROBLEMS

RETURN: IMPROVED INNOVATION THROUGH LOCAL PARTNER RISK: ”WHITE ELEPHANT” INNOVATION

MEASURES TO REDUCE RISK OF ”WHITE ELEPHANT” INNOVATION:B-O-T INTERNALIZATION, EXPOSURE TO CUSTOMERS,

AND SALES PERFORMANCE REMUNERATION OF LOCAL PARTNER

HQ discomfort zone MEASURES TO REDUCE INTERFACE PROBLEMS

AND SUPPLY UNCERTAINTY:B-O-T INTERNALIZATION, AND MODULARIZATION

OF LOCAL ACTIVITY

MEASURES TO REDUCE RISKS OF KNOWLEDGE SLIPPAGE AND HOLD-UP:KEEPING COMPLEMENTARY ASSETS. B-O-T INTERNALIZATION AND SOCIAL-IZATION OF LOCAL PARTNER

Strategic global sourcing

HQ comfort zone

Risk-Reducing Measures

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Case: SimCorp’s Global Sourcing in Ukraine

• SimCorp is a Danish-based developer and marketer/licensor of asset management systems software. Most of the business is conducted outside Denmark. SimCorp is currently present in 16 countries and has around 1,100 employees worldwide, of which 140 are in Kiev. In 2010 the company generated revenue of EUR 180m and profit after tax of EUR 27m.

• The business model is based on three elements: sales of software licenses, maintenance income, and fees from professional services.

• The product: SimCorp Dimension, the sole company product since 2007, is a comprehensive software solution for professional investment managers. The programming language of SimCorp Dimension is APL/W is highly specialized and rarely used. As such, it is difficult to find APL programmers.

• Market and customers: Around 60 financial organisations, mainly European (but since 2010 also HSBC), have chosen to base their investment management activities on the SimCorp Dimension© software platform.

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SimCorp’s “Stepping Stones” from Outsourced to Captive Global Sourcing

2005: SIMCORP ENTERS OFFSHORE OUTSOURCING CONTRACT

CONVENTIONAL GLOBAL SOURCING STRATEGIC GLOBAL SOURCING

2008: SIMCORP COMPLETES TRANSITION TO CAPTIVE OFFSHORING

2005:STARTING SOCIALIZATION PROCESS

2006:INTRODUCING REWARDS OF

INDIDUALS (QUASI-INTEGRATION)

2007: NEGOTIATING JOINT VENTURE

OPTION (NOT EXERCISED)

2007-2008: GREENFIELD SUBSIDIARY.

OPTIONS FOR PERSONNEL TRANSFER

2008: EXERCISING REAL OPTIONS FOR

TRANSFER OF PERSONNEL

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RISKS:SUPPLY UNCERTAINTY, INTERFACE PROBLEMS

RISK: ’WHITE ELEPHANT’ INNOVATION

RISK: HOLD-UP,KNOWLEDGE SLIPPAGE

SimCorp’s Initial Comfort Zone (2005)

COMFORT ZONE

RISKS: SUPPLY UNCERTAINTY, INTERFACE PROBLEMS

RISK-REDUCING MEASURES:B-O-T INTERNALIZATION

RISK:HOLD-UP,KNOWLEDGE SLIPPAGE

RISK-REDUCING MEASURES:SOCIALIZATION, QUASI-INTEGRATION, JV OPTIONB-O-T INTERNALIZATION

RISK: ’WHITE ELEPHANT’ INNOVATIONRISK-REDUCING MEASURES: B-O-T INTERNALIZATION

COMFORT ZONE

SimCorp’s Extended Comfort Zone of Today

Managerial Recommendations/Take Aways If your company’s comfort zone allows it, go for strategic global sourcing -

and a “pole position” in the global race for talent! Try to extend your company’s comfort zone if it effectively exclude global

sourcing as a strategic option. There are 4 ways to comfort zone expansion:1. Make the organization less risk averse (by recruiting more risk-willing

individuals at management level)2. Combat organizational resistance (by creating a sense of urgency)3. Make organizational knowledge transferable (by standardizing operational

routines and codifying knowledge needed by the partner)4. Put in place risk-mitigating measures, such as modularization, sales-based

remuneration, and socialization. Do always strive to put in place risk-mitigating measures! Step-wise taking-over of assets held by the local partner may sometimes be

an effective risk-mitigating measure. If so, entering a B-O-T (Build-Operate-Transfer) outsourcing contract may be

a good idea.

Thank you for your attention!

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