Principles and Practices for Orchestrating Digital Value Chains

The current market conditions present to companies considering outsourcing both specific opportunities and threats. First the positive news. The United States remain the largest market for suppliers, measured in total contract value, but it is also the country hardest hit by the crisis. The huge drop in demand combined with a devaluating US$$ against emerging economies, causes major concerns in boardrooms of suppliers that operate from India, the Philippines, China, South-Africa and other developing countries. (see also this report from FSO Knowledge Xchange on the Indian rupee, login required) Currency fluctuations can be covered in a contract, but the dependency of the United States forces offishore suppliers to double their efforts to penetrate the continental European market. For those European organizations that dare to outsource now this can have positive consequences. In order to obtain their first customers, suppliers are more likely to buy their way in by offering favourable ...

One of the effects that are a direct consequence of the financial turbulence is an increase in organizations that sell shared service centers (SSCs) in other countries (so-called ´captives´) to wealthy (Indian) suppliers. This instrument to quickly improve the liquidity position was used by among others Citigroup. Here Wipro took over Citigroup’s Indian software development captive for $ 100 million and Tata Consultancy Group (TCS) acquired a captive containing several financial back office processes. This was a transaction of $ 505 million in exchange for a nine-year service contract with a value of $ 2.5 billion. Because only the wealthiest suppliers can finance this type of transaction, it is likely that the frequency of these transactions will remain limited as most suppliers (like any other company) have to rely on banks to finance large acquisitions. Other sales limiting factors are the relatively low financial value of the transaction because due to the low book value and low ma...

One of the returning topics when I talk with people about ‘outsourcing’ is what the difference is with ‘purchasing’. The short answer is that the typical purchase officer a) focuses to much on $$$ and b) lacks the required knowledge and skills that sets outsourcing apart from buying pencils and the light bulbs.My search for a more comprehensive answer resulted at first in the following quotes: Procurement : ‘obtaining from external sources all goods, services, capabilities and knowledge necessary for running, the company’s primary and support activities (Weele, 1995) Outsourcing : ‘refers to the process whereby activities traditionally carried out inside the firm are contracted out to other organisations’ (Domberger, 1998). Sourcing : ‘finding sources of supply, guaranteeing continuity of supply, ensuring alternative sources of supply, and gathering knowledge of procurable resources’ (Vollman et al, 1984). I don’t know about you, but it did not help me all that much. It is still too mu...

My first experiences with sourcing dates some eight years or so back when a large telecom operator bought way overpriced 3G licences and had to sell off non-core activities to evade a chapter 11 situation. One day Joe was a colleague of John and the next day John was suddenly the ‘client’ which did not even offer Joe a cup of coffee anymore unless Joe (now suddenly ‘one of the many suppliers we can pick from’) would agree to a 20% price cut for the same services they delivered the day before. This example of ‘outsourcing’ (‘throw-over-the-fense’ describes it better) was one of the first I was involved in (as a non-executive) and learned me a thing or two about how not to do it. The funny thing in this example is however that the activities that were then considered non-core are now being considered core. Even worse, the same telecom provider has an active acquisition strategy in the area it outsourced less then ten years ago. In other words, is outsourcing just another business cycle? ...

The Chinese word for risk is Fung Hem (don’t know whether it is Cantonese or Mandarin) and the same word means also opportunity. Fung Hem (风险) is to me very much true for anything that has to do with outsourcing, shared services, joint ventures and any other delivery model where internal activities are ‘rationalised’ by centralising them and/or changes in ownership. I used to share my experiences in this area by writing articles and lecturing but my wife started a blog recently to write about her experiences of being a ‘legal alien’ here in The Netherlands, and this triggered me to share some of my thoughts about sourcing the same way. This also means that my English is far from native… My aim of this blog is to provide on one hand my thoughts and idea’s about the risks and opportunities embedded within the decision to use external sources of supply and link to interesting articles and views I encounter while ‘grazing’ on the internet and in my inbox. From my side it would be great to ...