A Strategic Framework for Global Sourcing

Introduction

Several alternatives exist as to the method and location for performing business processes. Subject to certain constraints, these processes may be located anywhere in the world, and can be performed internally by the company or by other organizations. Simply put, business processes do not have to be performed by the company in the United States.

Global sourcing is a term that describes how goods and services may be obtained anywhere in the world, and also expands on the type of services that may be procured. JWRA has developed a succinct strategic framework that can be used to illustrate the alternatives for global sourcing.

Sourcing Types – In-House, Contract, Outsource

One dimension to consider is to identify who performs the work. The main alternatives include in-house, contract, or outsource. These sourcing types form the columns in the strategic framework.

In-House

Contract

Outsource

 

In-House

In-house is the traditional, do-it-yourself work. The company maintains complete expertise in all parts of this work; the people working in the area or process are full-time or part-time employees. These employees may have a full range of benefits, including pension plans. The assets used for in-house activities may be owned by the company. Alternatively, the assets may be rented or leased. Assets that are owned must be on the balance sheet, which means that they must be financed. All standard metrics are impacted, including the analysts’ use of return-on-investment, sales per employee, assets per employee, etc.

Contract

For some businesses, contracting is an alternative. For example, many companies hire temporary workers as 1099 contractors. These contractors may include U.S. citizens, permanent residents or H1-B visa workers. In any case a company is buying labor capacity. The company is still responsible for the management and direction of the contractor's efforts. In many cases, a company may still have provisioning expenses such as personal computers and telephones.

Outsource

Another alternative is to outsource. Outsourcing can be structured in a number of ways with the objective of having an external party take responsibility, not just for the required tasks but also for results. Depending on the agreement, outsourcers are generally self-managed and use their own assets to perform the work. This is the area where the greatest possibility exists for cost savings.

Sourcing Locations – Onshore, Nearshore and Offshore

At one time, most manufacturing by U.S. companies was done in the U.S. That changed as Mexico, Japan, Taiwan and other countries increased their abilities to manufacture based on pre-set specifications more consistently, and as U.S.-based businesses could manage those third party relationships more effectively. Now, manufacturing is performed worldwide to take advantage of lower labor costs, proximity to markets, and other factors. Business processes, like manufacturing, now can also be performed anywhere in the world due to advances in enabling technologies.

We segment geographic locations into three categories relative to the U.S.: onshore, nearshore and offshore. These geographic locations form the rows in the strategic framework.

Onshore

Nearshore

Offshore

 

Onshore

Onshore refers to locations in the U.S. using domestic resources.

Nearshore

Nearshore refers to two types of locations. One type is in the same time zone, perhaps with a different language involved. Examples include Mexico, Costa Rica, Panama and Canada. It can also mean relative proximity to the U.S.  Again Canada and Mexico are good examples. In some cases locations outside U.S. time zones, where the language and culture are similar to the U.S., such as Northern Ireland and Australia, are also considered nearshore.

Although the cost of nearshore alternatives may be higher, using them has advantages. The benefits of nearshore alternatives include easier access by U.S. companies due to geographic proximity, and fewer perceived risks (e.g., language and cultural barriers, more familiar and similar laws).

Many companies accept the trade-off between less cost savings and less risk with nearshore locations because they are willing to pay for the risk mitigation.

Offshore

Offshore sites include India, China, Russia and other countries in different time zones, which speak different languages, with different cultures and considerable geographic separation. These countries may be developing countries.

Using the Strategic Framework for Global Sourcing

Assembling the sourcing types as columns and the sourcing locations as rows yields a 3 x 3 matrix that can be used to segment who performs processes, and where those processes are performed.

In-house processes can be performed onshore, nearshore or offshore. As well, onshore processes can be performed in-house, under contract, or outsourced. The completed matrix is set out in graphic below.

 

Global Sourcing – Strategic Framework

Global Sourcing - Strategic Framework

 

This 3 x 3 matrix provides a concise way to illustrate the relationships between a company and its service providers as well as to identify where the work is being performed. Using this framework allows situations to be described quickly and also show how changes in an organization’s capabilities may be needed.

Conclusion - All Cells Represent Valid Sourcing Strategies

If the sourcing strategy and agreements work as planned, every cell in the 3 x 3 matrix is a legitimate sourcing strategy. A common problem is for companies that intend, for example, to enter into an outsourcing agreement with an offshore service provider and, in fact, end up with an offshore contract agreement. In these situations, the companies spend more time managing the offshore service provider than originally anticipated, eroding much of the planned cost savings.

You also need to remember that movement among the cells is possible. Relationships with a service provider should be flexible, either by design from the outset or by evolution.

We hope that that our Framework we have described in this paper will help you simplify what can be a complex subject. If you have any questions regarding its content please feel or how CIOPS can assist you, contact Jeff Richards, at: (650) 474-0113 or This email address is being protected from spambots. You need JavaScript enabled to view it..

Written By: Jeff Richards
Jeff Richards is the Managing Partner of CIO Professional Services, LLC. He possesses 25 years of experience in process innovation and the implementation of the supporting information technology and associated organizational changes. He focuses his international experience and in depth knowledge of supply chain, after sale service, information technology and outsourcing to help our clients grapple with sourcing and operational issues on a global basis. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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