Principles and Practices for Orchestrating Digital Value Chains

The post will be less valid to American readers and I guess also readers from the U.K. and several Asian countries as it will be a little rant against all the IT process models which are smothering the average Dutch IT organization. Readers from counties which also have a ‘consensus’ culture might however find some common ground in the text below. My country (The Netherlands) is both blessed and cursed with a culture where everybody wants to talk about every decision. This is totally unlike for example the American style where the department head decides and the rest executes. This approach has as a site effect that potential lower in the organization remains untapped, but it also enhances focus and speed.We have a large (IT) service industry and this combined with our consensus culture created an ideal feeding ground for process models like ITIL (infra support), ASL (application support), and BiSL (information management). For process models to be effective they require part of t...

Usually sustainability is thought of as cutting down CO2 emissions and planting more trees. But sustainability is more than just acquiring a green image. It is another way to look at your own company, the external environment and thus also your sourcing strategy. Organizations can actually profit from better financial results by a smart application of the modern aspects of this theme. A large oil and gas company outsourced a part of its BPO activities to Asian supplier. This supplier had contracted another co-supplier for data-entry activities who used illegal under aged employees. A non-governmental organization found this out by accident which resulted in a lot of negative press for the oil and gas company. In order to outperform the competition they outsourced several activities, but this backfired due to severe image damage. Several clients which outsourced part of their IT activities to a Tier 3 vendor indicated that they needed more insight in their carbon footprint as part o...

A recent survey by Colemen Parks shows that 90% of senior decision makers believe that the business cycles remain very volatile in the coming years and 80% believe that their organizations should become more flexible in their approach of business and technology. Business agility and common sourcing practices in IT are two words which are drifting apart. And the gap between both worlds increases only with the current pressures on cost (see also this post ). The CIO is now still able to sell its traditional sourcing decisions to the business as having no other choice due to the economic situation. But signing a five year outsourcing contract for the whole infrastructure or application portfolio puts both IT and business in a straight jacket with limited ability to maneuver. The economy will be picking up soon and that means that business are looking forward again and beyond short term cost cutting. The organization as a whole will have to shape up and make sure it has adequate long t...

The use of financial business cases to guide sourcing decisions is common practice. And with the current pressure on lowering cost, needs even the smallest investment to be accompanied with a business case showing a solid financial return. The effectiveness of the typical financial business case can be further improved in two key area’s. These are: Monitoring whether the expected return and investment envisioned in the business case materialize and,  The limitations of the standard Discounted Cash Flow (DCF) methods as it ignores the required flexibility required to define, execute and manage investments. In this post I explore how Real Options can help to overcome these drawbacks. The typical DCF calculation assumes a static scenario, ignoring the financial value represented by the flexibility to change course during an (outsource) project. In real life people learn during a project, and want to adjust their decisions accordingly, effecting the business case. Think of a manag...

In the first part of this post I stated that the continuous drive to reduce IT cost by standardization will come to a point where the reduced IT cost are outstripped by the ‘damage’ it causes to the business. The drive for standardisation is further increased by the commonly used method to scope outsourcing contracts. In this post I provide an scoping approach which I believe will gain substantially in the coming years: selective sourcing contracts with a scope derived from differentiated business demands. The importance of accountability towards the Business regarding the quantitative and qualitative added value of IT will only increase more and more. The Business demands to know how IT supports the opportunities and risks the Business faces due to increasing complexity, competition, globalization and other trends. It is up to the Business to provide insight in the opportunities and risks it faces, while the IT organization is responsible to translate them into IT value and ris...

As pointed out in the post below this one is the scope of IT outsourcing contracts typically driven by the IT internal focus to cut cost. Cutting cost can be achieved by economies of scale and standardization of similar activities and assets. This means that the scope of typically outsource contracts is defined in terms of infrastructure support, network support, datacenter facility management, application development or application support. This ‘horizontal’ orientation his however not aligned with the requirements of the business processes (see illustration). Their needs cut through the horizontal IT service and process stacks. Business managers which see themselves confronted with a supply that does not match their needs triggers unhappy faces towards the IT department and the start of a creative process to get the IT services they want. The result is that business managers will work their way around the standard service catalogue by hiring their own IT staff or getting (additiona...

IT-organisations are more than ever before under pressure to cut their cost. Many business managers see IT as a cost centre which adds limited value. And activities with a limited perceived value are the ones which get the highest cost reduction targets. In reality does IT add a lot of value, but the typical IT organisation is not able to sell that message. It starts with the subjects IT talks about with the business. In 9 out of 10 cases is IT uses to automate manual activities resulting in a cheaper and faster business process. So using IT using to reduce cost. The IT organisation increases this perception by organising itself into functional silo’s in an attempt to increase internal efficiency. So all network engineers in one department and all application developers in another. To improve standardisation and efficiency even further best practises and models like Cobit (IT governance), BiSL (information management), ASL (development), CMMi (development), ITIL (operations) an...

Procurement as a business discipline has matured over the past few decades. The times are over of procurement as an intermediary functions that records agreements with suppliers and supervises their fulfilment. That is too limited a view in today’s business environment, where management is confronted with a multitude of issues impacting on the role and responsibilities of procurement.   It has been recognised that an effective and efficient procurement function can significantly contribute to business’ bottom line: competitive financial result. What’s more, many organisations feel the need to improve their relationships with suppliers in order to be better able to reduce costs, improve quality, increase flexibility and boost innovation in order to survive. Especially in these challenging economic times where outsourcing is used as a means to cut cost quickly is it necessary to move away from the traditional role of procurement as an intermediary functions that records agreement...

"Restoring American Competitiveness" is an article from Gary Pisano and Willy Shih in the juli/august issue of Harvard Business Review. The article points out that, against the general consensus, American companies will be unable to develop the next generation high tech products due to underestimating the impact of sending their manufacturing offshore. If this is true, can similar effects be expected for the service industry? In other words: will Western countries not only have to fight an uphill battle in manufacturing, but soon also in services? The article in HBR uses the value chain of personal computers and laptops as an example. Where American companies like HP, Dell and Compaq outsourced initially only their manufacturing to low cost offshore destinations, is now almost the whole industry based in Asia. Every laptop sold by an American brand, with the exception of Apple, is today designed, developed and manufactured outside the U.S.. The same applies to most phones a...

In the previous post related to this topic I wrote some of my thoughts on CMMi for acquisitions and ISO/IEC 12207.These two plus ISPL are models which can be used to structure an outsourcing process. The aim of these models in a nutshell is providing the client organisation with: the right service/product, for the best price, at the desired quality levels, from the best vendor, at or within the risk appetite of the company. The three models mentioned in these posts scratch only the surface of (proprietary) models which can be used to structure an outsource process. For those situations where these models are too complex, ISO 9001:2008 could be of help as purchasing is one of the processes addressed. The purchase process described consists of three sub-processes: supplier evaluation (section 7.4.1), purchase orders (section 7.4.2) and goods receipts checks (7.4.3). CMMi for acquisitions and ISO/IEC 12207 were addressed in the previous post, but not ISPL. ISPL stands for Information Serv...

In this post I wrote on the rise of the Chinese IT service providers which could be the new kids on the block and give established Indian service providers a run for their money. Here I want to provide some insights on the Chinese supplier market of IT services. Feel free to add any comments if you feel that I missed out some vital information. One way established service providers deal with the Chinese ‘treat’ is partnering with them, like Yucheng Technologies and Convergys. Yucheng is a China-based IT solution provider and Convergys a U.S. based provider of customer and employee relationship management solutions. As per the agreement, Yucheng Technologies will sell Convergys' Intervoice Edify Voice Interaction Platform (EVIP) and Convergys Dynamic Decisioning Solutions in the Chinese market. I wonder however whether this is a smart move in the long term. Like with the car industry did Chinese companies learn how to make cars by partnering with Western car manufacturers. Especiall...

This post is the third in a row in which I write on a methodology I created to improve the effectiveness and efficiency of managing regulatory risk when outsourcing. The first two posts are here and here . Below I write on translating the risk/value ratio’s of the outsource contracts into the optimum control strategy. The starting point is the contract portfolio in which the value and compliance risk of the outsource contracts are plotted. The position drives among others the resources spend by the compliance function on monitoring a contract. The control and monitor activities are typically described in a so called Compliance Program which is the overarching framework that encompasses the different activities and responsibilities performed by the compliance function. Compliance cost can be reduced further by applying only a ´golden´ control and monitoring approach when it is really necessary (for example at high risk and value) and select a ´silver´ or ´bronze´ approach elsewhere (se...

One of the key issues of the financial crisis was banks not knowing the value of their assets. This lack of insight has numerous reasons, but to me the main ones are: too much focus on short term profit, not being able to understand your own financial products anymore and inadequate control over your back-end business partners. In this post I want to put some of my thoughts on this last topic: the importance of monitoring the ‘health’ of the other financial institutions the bank does business with. Banks got hit by Madoff and Leman Brothers because they did not appreciate the risk they ‘imported’ by extending their value chain beyond their own borders. This issue was broad to my attention again in n a recent interview of Z24 (Dutch internet news channel) with the Chief Risk Officer of Fortis Bank Netherlands (3 billion revenue 2008, 184 billion in assets. In this interview the risk management practises of the bank were discussed and the CRO stated that the board is closely involved wi...

In the previous post on this topic I wrote that the control framework created by compliance functions within financial institutions for outsource contracts are often inadequate and too expensive. The main reasons for these observations are that compliance officers often do not understand enough the scope and dynamics of the contract in order to create a lean but adequate compliance chart. By requiring all regulations to be in-scope they hope not to miss out on anything. Furthermore are compliance officers not trained well enough in translating an internal control framework into an external one. This often results in either requiring the vendor to copy the internal control framework of the bank (very expensive option as the bank does not leverage on the best practises of the vendor) or they just resort to letting the vendor sign a yearly ‘in contol’ statement (too simple as the vendor mostly does not know what it signs for). My third reason for the initial statement was that compliance...

There are several best practises, standards and other types of models & methodologies around aiming to structure complex acquisition and outsourcing engagements. Others are useful when thinking of designing the contract management/ sourcing governance framework. A couple of the models which are out there in the field: CMMi for acquisitions (Carnegie Mellon University) ISO/IEC 12207 (International Standards Organisation) Information Services Procurement Library (European Community) e-Sourcing Capability Model (Carnegie Mellon University) ISlite (Gartner) CMMi for acquisitions, ISO/IEC 12207 and ISPL were created to provide a structured approach to get: the right service/product, for the best price, at the desired quality levels, from the best vendor, at or within the risk appetite of the company In other words, these standards/methodologies provide companies insight in procuring/acquiring/sourcing products and/or services from an external vendor. The two other models are related to ...

This post continues my views on the long term damage which might result from sourcing decisions which are based on emotions than rational decisions (‘Behavioural Sourcing’). In the previous post I looked at the subject from the client perspective while I use this one to provide my thoughts on the supplier perspective). Supplier perspective As mentioned in this post do I expect that some service providers will not make it through this economic winter as their shrinking revenue and margin are not matched by the amount and speed they can loose redundant employees and get fresh capital. That service providers are signing contracts in order to get some new revenue in (the gain), which most likely cannot be made profitable during the contract term (the loss) is reflected by the Dutch IT entrepreneur (owner of SME service provider Centric) Gerard Sanderink. In an interview with the Financial Dagblad (Dutch financial newspaper, article here ), he states that some large scale layoffs can be exp...

This post provides some of my thoughts on the effects the economic situation has on the (ir)rationality behind sourcing decisions, also known as ‘Behavioural Sourcing’. In other words, one expects that (like with Behavioural Finance) sourcing decisions are made by rational people which have complete information about alternatives, unlimited capabilities to process information, been driven by individualism and are without emotions in their decision making. The Behavioural Finance theory teaches however that in reality people are inconsistent, subject to cognitive illusions, and often biased in their judgements (example: if the competitor outsources process XYZ, it must also work for the own company). In my experience, and especially when under pressure like now, are people not always rational in their decisions to outsource. As the aim of this post is not to provide a lot of detail regarding the background of Behavioural Sourcing, just some key points. Behavioural Sourcing aims to: unde...

In this post I mentioned that vendors are in a tight spot as both revenue and margins are hit by the current economic situation (like almost any other company with the exception those who can capitalise on the Mexican flu). In this post I provide my thoughts on the health of the vendor market and how clients can protect them agains a vendor which goes into a Chapter 11 situation. To start of first some recent figures related to the financial results of some BPO en ITO vendors: Getronics, provider of IT services, announced Q2 2009 revenues were down 1.3% to €531 million; Manpower, provider of human resource BPO services, announced Q2 2009 revenues down 35.7% to $3,796.6 million; Tech Mahindra, provider of IT services, announced fiscal Q1 2010 revenues down 16.3% to $228 million; Altran, an R&D and IT service provider announced Q2 2009 revenues were down 17.2% to €349.7 million; Transcom, provider of customer management services, announced Q2 revenues down 14.6% to 135.7 million; TCS...

This post is a follow up on this post in which I describe the rough outlines of an approach to reduce the expenses one has to include in the business case related to ensuring regulatory compliance. This post is not meant for the average company which has to worry about SOX and standard privacy laws. This post is based on my experiences of working for a large international bank which did a lot of outsourcing, but did not know well how to translate the large amount of national and international laws and regulations into a manageable and cost effective control and monitor framework. What does regulatory compliance cost? A study of the Work Bank in 2005 shows that in the Netherlands, the United Kingdom, Belgium, Sweden and Norway on average 8 to 11% van the total expenditures by the government goes towards regulation of the business. Figures from the United States over 2004 indicate that there a total of 14.9% of the Gross National Income is spent on laws and regulation (11.2% on national...