Principles and Practices for Orchestrating Digital Value Chains

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...

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 want to provide an overview of typical subjects I expect management teams of global operating vendors are looking into these days. I discuss the topic in two different posts as there are several items that the typical senior manager is busy with these days. Low margins A combination of the economic situation, new entrants in the market and over capacity results in a permanent pressure on vendors’ margins, especially in the area of ‘standard’ services and products. I expect this to result in a consolidation wave among Tier 2 and 3 players as soon as capital becomes less expensive to come by (so in 1-2 years). This should enable these smaller players to achieve economies of scale similar to the Tier 1 players. A combination of consolidation and a broad service portfolio is how these players earn their living. Above average margins may be achieved only by innovation, customisation of services or serving niche markets. An in-dept understanding of the client's business an...

One of the key deliverables of the project aiming to get into a relationship with a 3rd party is the contract. A contract typically consists of a Master Agreement and exhibits/schedules. Together they are the legal ‘translation’ of all intentions, obligations and requirements of the relationship. Many of the requirements are related to price, quality, governance, intellectual property, exit and a dozen of other topics. The topics I would like to explore in this post is the difference between compliance and legal risk. The reason I think this is relevant is the different departments that typically deal with both types of risk. Not having a clear distinction might thus result in two departments managing and mitigating the same risk or not managing certain risks are all as both assume the other department takes care of it. In more general terms are the following risk categories the most relevant to an outsource relationship (I leave out financial risk, as that is to me the result of any o...

This posting is a follow up on this post and this post and describes at a very high level how the operational cost related to managing outsource risk can be reduced. Not just by decreasing all budgets by 10%, but by a targeted effort. I came up with this approach during my work for a large international bank (more elaborately described in some articles) and it aims to rationalise the way risk managers/officers should approach their work. The core of the approach requires (senior) risk officers (e.g. operational, compliance) to approach assurance and monitoring more from a financial perspective. The typical risk officer is not used to incorporate the (in)direct costs (operational cost) and potential lost in revenue (opportunity cost) into their considerations when proposing new controls. This results often in expensive assurance mechanisms, like using SAS 70 type II reports for area’s of low risk. By defining a more balanced control strategy which aligns the control requirements with ...

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...

A recent article from the economist indicates that it is more than just a hype and that even though the term may become passé, the cloud itself is here to stay and to grow. Cloud computing accordingly to Wikipedia is ‘a style of computing in which dynamically scalable and often virtualized resources are provided as a service over the Internet. Users need not have knowledge of, expertise in, or control over the technology infrastructure "in the cloud" that supports them’. This makes cloud computing to me not so different compared to other hypes like Software as a Service (SaaS), ASP or any other service delivery models where application functionalities are made accessible over the network/internet from a third parties location. I thus wonder whether the buzz word ‘cloud computing’ will be replaced by another flashy term in the near term if it does not show the return predicted by the marketeers….(I for example hardly hear anybody talk anymore about ‘utility based computing’....

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 ...