Principles and Practices for Orchestrating Digital Value Chains

The value of outsourcing to an organization has a tangible and intangible component. The tangible dimension is largely monetary of nature and can be expressed in for example return on investment (ROI), Net Present Value (NPV) or Internal Rate of Return (IRR). Examples of potential intangible benefits from outsourcing are improved quality, access to a larger knowledge pool and flexibility of service mix. But even these intangible benefits should result in an improved financial bottom line even though their Euro value might be difficult to predict. The value of the outsourced service portfolio is determined on its discounted future cashflows (see this post ), and value is created only when the return on the capital invested in the portfolio exceeds the risk-adjusted cost of capital. Implemented properly value based management helps to align the overall outsourcing aspirations, analytical techniques and management processes to help the company maximize its value by focusing management dec...

A risk category that is not unique to outsourcing, but nonetheless relevant, is project risk. The selection of a suitable vendor, contracting and transition of the service from the own organization to the vendor is typically managed as a project. Some of the standard project risk categories are: Business risk: Is the business reasoning behind the decision to buy sound, independent from emotions and ‘me too’ rational? Organizational risk: Are the relevant stakeholders (e.g. business, senior decision makers, workers counsel) willing to support decision to outsource and able to make the transition from making to buying the service? Execution risk: Can the outsourcing and disentanglement be done on budget and on time? Can the project handle the complexity of outsourcing both business process and IT (hybrid contract) or should it be done in separate projects? Result risk: Will the outsourcing project deliver the business the anticipated results (e.g. services, quality, products)? Which gen...