When we talk with clients about outsourcing, many executives feel they need to think about it differently but haven't had a suitable model to work from. Companies under labor cost pressure often apply a "me too" strategy, only to find out later that copying a competitor's sourcing strategy doesn't fit them.
What can a firm do when it's considering an outsourcing strategy? Should you care about your competitor's sourcing footprint? Neither question should be taken lightly. Both take significant experience in designing, building and executing a strategy. With our clients, we identify the right course of action through a series of strategic discussions with the management team.
What the discussions should identify
- All activities, processes and competencies, along with an inventory of skill sets
- Which processes and competencies are core and which are non core
- A feasible sourcing mix: on shore versus off shore
- Build versus buy
Start with a full inventory
While identifying competencies, a company shouldn't yet decide whether they are core or non core, or whether they belong on shore, near shore or off shore. The firm simply needs to identify all the work done as part of its offerings. It also helps to capture a solid inventory of the skill sets in the company alongside the competencies, so any gaps show up.
Separate core from non core
Once a company has a full inventory of competencies and skill sets, executives can decide which competencies and processes are core to the business. By definition, a core competency gives a company a competitive advantage. It is a source of distinction in the market, and it stays out of the sourcing decision. This exercise can take several rounds, since it involves active dialogue among the key executives, and it's important to secure buy in and agreement from all of them.
Decide where the work belongs
The next step answers where each competency should sit. An insurance broker may believe that certificate issuance and policy checking have significant client service and E&O implications, and needs to decide where those skills should be housed. That broker could, for example, sort certificates by complexity and learn that 80 percent are purely transactional. That lets them use lower cost labor off shore while the complex 20 percent are completed on shore. This mix, which we call Smart Sourcing, decides which competencies are done in which geography, and it can be a powerful sourcing strategy across an organization.
Build or partner
Finally, companies should decide whether it is cost competitive to build off shore capabilities themselves or to partner with an experienced provider. In our experience, building off shore capabilities can bring significant benefits and takes deep domain expertise to get started. Local regulations and tax laws are complex, and a company is often better off using an outsourcing partner to complement its sourcing strategy.
In closing
Outsourcing takes real preparation. Handing off the services and transactions that haven't worked well inside an organization is a poor substitute for a strategy. Arriving at the best sourcing blueprint for a company takes a lot of preparation, and mistakes are costly in missed opportunities and lost clients. Partnering with a firm that has years of experience helping companies reach their ROI on outsourcing initiatives is a very viable alternative.
To talk through a sourcing strategy for your firm, contact DBV Solutions.
Originally published as "Smart Sourcing: A Novel Approach to Outsourcing" by Erik K. Davison in The Insurance Research Letter (IRL), June 2016, Vol. 19 No. 6.