2nd Generation of Global Sourcing
Has your global sourcing grown exponentially? More than 500 offshore resources?
Leverage the expertise of R3P to define the 2nd Generation Global Sourcing Model.
By Grant Geminiuc
Many large enterprise clients have established and grown “Global Sourcing” over the past 5 years, especially the large Financial Institutions. The Global Sourcing function is largely a staff augmentation of resources using offshore firms to receive the benefit of labor arbitrage. In some organizations the model has become very successful with hundreds, if not thousands of offshore resources at 30-40% lower rates than local staff augmentation.
2nd Generation Global Sourcing Model Needs to Go Beyond Gross Resource Price. It Needs to Consider …
1. Productivity Improvement – these Global Sourcing arrangements typically have no productivity metrics other than timesheets. It is often unclear if the offshore resource has maintained onshore productivity or dropped by 50% which negates the Price improvement. The productivity KPIs are essential 2nd Gen. Does your organization have formalized rules for allowable billable hours? What is the average turn-over at that global location? Who pays for resource training, cross-training, sick days, vacation and GR team meetings?
2. Performance Improvement – likewise, these arrangements are not measuring the output of individual resources or a group of resources. Thus, not knowing if the same output, turn-around and quality is been maintained. The Performance KPIs are essential in the 2nd Gen. Lack of performance can also degrade or negate Price Improvements.
3. Risk Shifting to Providers – most Global Sourcing arrangements are purely staff augmentation and all the risk remains with the client. A portion of a large staff augmentation is a group of individuals performing co-dependent work that can be more effectively done via a managed IT service where a provider can more holistically manage the risk and optimize the service.
R3P ratio of Risk : Price : Performance : Productivity
R3P works on behalf of our clients to obtain the best fit solution and provider at the Best Realized Price for our clients. We use our R3P Ratio to determine the most likely Realized Price. A Realized Price provides a True-Baseline-Unit-Cost that can be used to compare vendors, compare before-after and to manage client expectations.
A simple example:
Your current provider pricing is $55, and a new provider has provided a quote of $40 across 1,000 GR resources. It seems like great savings. However, we need to compare apples to apples. To do that we need to calculate the Realized Price that accounts for not only Price, but Performance, Productivity and Risk.
NEW: A new Global Sourcing provider quoted a blended rate of $40 per hour. To arrive at the Realized Price of $60.60, we applied the R3P Ratio. Risk – estimate 20%; Price – $40; Performance – 110%; Productivity – 75%
Risk raises the Price from $40 to $50
Performance at 110% lowers the Price from $50 to $45.45
Productivity at only 75% then raises the Price from $45.45 to $60.60
Thus, the Realized Price is actually $60.60 per hour for the new provider quote.
CURRENT: The current Realized Baseline Price is $61.11 by calculating:
Gross Price = $55; Risk is 0%; Performance = 100% ; Productivity = 90%
Baseline Realized Price = $55*100%/90% = $61.11 per hour
CONCLUSION: In this example the quoted price of the new provider looked better on the surface. After considering the important factors of risk, performance and productivity the Realized Price was neutral with the incumbent and not worth the effort of changing providers.
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R3P Approach
Develop a 2nd Generation Global sourcing strategy and business case with further 30-40% savings, more measureable value via KPIs, and 2 service options: Staff Aug and Managed Service. Execute one-time project leveraging R3P methodology, toolsets and collective experience to transform to the new model for the current client base. Grow adoption of the service within the client via client marketing and R3P decision matrix.
Step 1 – Increase Output: Unit Price via R3P Ratio, Metrics & Tool-Set
a) Staff Aug Offshore – Baseline the Global Sourcing output using the R3P ratio and R3P metrics. Use a tool-set to both baseline and implement process improvements to increase output 20-30% per unit price
b) Consolidate GR Providers – if required to improve price and reduce the numbers of providers to implement enhanced operational governance of performance & productivity measures
Step 2 – Create a Lower Risk Managed Services Option for Global Sourcing
a) Managed Service – transform a portion of the staff augmentation to a Managed Service to shift risk, improve quality and output for price. Need to evaluate the portfolio for a good 1st candidate.
Step 3 – Grow Adoption of Global Sourcing at Client
a) Client Marketing Campaign – With the more measurable results and choice of Staff Aug or Managed Service, launch a renewed campaign to increase scope of Global Sourcing with existing and new clients
b) Client Decision Matrix – R3P will customize their decision matrix for internal client’s to differentiate between: GR Staff Aug & GR Managed Service within Global Sourcing vs local Staff Aug and Employee options. This is often the barrier to global sourcing adoption.
About R3P
R3P IT Consulting enables our enterprise clients to develop compelling strategies and execute transformational programs to achieve significant cost savings, service improvements and risk mitigation. These ambitious outcomes are achieved by leveraging R3P’s tool-sets, methodology and collective experience in outsourcing arrangements, vendor optimization and process improvements. R3P does more than strategy: we thrive at Transformation Management, if fact we wrote and deliver the CORE Transition & Transformation curriculum. Contact us to discuss how we can help you crystalize a vision and approach on a timeline that will achieve your organizational goals.
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