Principles and Practices for Orchestrating Digital Value Chains

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...

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...