David Ellis and Guru Rao of Capco look at what is key to successful sourcing initiatives and how the adoption of a particular governance model is dependent on the size, maturity and development of an organisation's sourcing capability
Over the last few years the sourcing landscape has changed dramatically. Increased focus on transformation coupled with market maturity has led to organisations adopting a global operating model leveraging multiple sourcing models. As a result, organisations today have more strategic sourcing options than ever before to cut costs, increase flexibility, reduce time-to-market for new products and thereby improve their competitiveness in the marketplace. Under the current market situation, it is especially important for financial services organisations to focus on their core competencies and reduce costs.
However despite the relative maturity of the sourcing market there is an apparent gap between sourcing initiatives undertaken and the governance mechanism to oversee and derive value from these initiatives. Organisations are evaluating and implementing different approaches to sourcing governance enabling them to maintain control and coordinate sourcing activities across the organisation. Also, as financial regulation relating to outsourcing evolves, organisations will need to ensure they have the appropriate mechanisms in place to manage compliance across potential and existing sourcing initiatives.
What is Sourcing Governance?
· Sourcing governance is a structure of teams and their management leveraging collaborative work processes (with appropriate metrics) that help define, support and facilitate a sourced environment.
· Team structures and work processes are designed keeping in mind risks/issues which arise in a sourced environment (e.g. integration, coordination & communication, knowledge and change management).
· Sourcing governance is a relatively new discipline that must be gradually and consciously developed as organisations move towards a multi-sourced operating model.
· Good governance requires the extraction of maximum value from all businesses while managing risks in line with the organisation’s profile. Balancing and protecting the interests of various stakeholders is also a critical requirement of sourcing governance.
The development of a sound governance framework for the organisation is shaped first by corporate strategy. This drives out the business operating model which then aids in the development of sourcing guiding principles. A governance framework is then developed in conjunction with the key components and guiding principles.
Sourcing Governance Models
Once the governance framework has been developed, organisations can implement different governance models. The adoption of a particular governance model is dependent on the size, maturity and development of the organisations’ sourcing capability.
Our analysis suggests that the following key sourcing governance models are being adopted by banks and financial institutions – see Table 1.
TABLE 1 – SOURCING GOVERNANCE MODELS
|
MODEL |
DETAILS |
ORG CHARACTERISTICS |
|
Model 1 Independent business operation (Federated) |
§ All vendors are managed independently by the business unit (BU) vendor management team working together with the Operations/IT teams § No uniform procedures/control frameworks may exist across BUs § Each BU may operate captive setup independent of the other BU |
§ Typically adopted by large organisations where there are no synergies between different business units § Each BU has identified sourcing governance champions understanding the requirements of working in a multi-sourced environment |
|
Model 2 Functional Organisation |
§ Governance functions organised by function not product line § Functional groups responsible for determining sourcing requirements, managing vendor performance and contractual matters § All outsourced vendors are managed by function |
§ Horizontally structured organisations § Functionally driven with less diversity across product lines § Limited cross-functional synergies to benefit from |
|
Model 3 Centralised Governance |
§ BUs retains all accountability for service delivery § Central function responsible for contractual matters and issue escalation / resolution § Central function aggregates business demand and co-ordinates service delivery § Central function to help BU with transition management |
§ Suitable for organisations in the early phases of sourcing lifecycle where there is a stronger need for learning, co-ordination and control § Organisations seeking to ensure effective sourcing regulatory compliance |
|
Model 4 Co-ordinated Governance |
§ Centralised sourcing coordination team would provide direction for BU sourcing activities for alignment with group vision § Key functions included group governance and social responsibilities, enterprise wide risk management, supplier synergies § Vendor management functions to reside within BUs § Central organisation would disseminate best practices for sourcing activities across the organisation |
§ De-centralised organisations § Organisations developing sourcing capability where revenue centres drive specific functional requirements |
Our research indicates that some of the more mature organisations (from a strategic sourcing perspective) are progressing towards a ‘co-ordinated’ governance model wherein a central team provides direction (e.g. sourcing feasibility, supplier management handbook, offshoring policies etc) to the business units whilst relinquishing sufficient control to the business to build and manage their sourcing initiatives as they see fit. Organisations following this path are leveraging the significant investment in centralised sourcing structures while applying subtle changes to the way they face off to the business.
A variety of different tactics are being utilised to ensure a degree of autonomy for the business across the sourcing lifecycle:
· One measure is the usage of financial thresholds that aim to create a level of flexibility and simplicity for business units attempting smaller scale sourcing while still allowing the centre to maintain control over ‘high value’ initiatives.
· However, establishing the appropriate “threshold limits” can itself be a significant challenge given the nature and complexity of sourcing deals. Across financial services there is evidence of a range of different thresholds being applied. In a recent Capco survey of Sourcing Governance in Financial services (2009), 37 per cent of respondents said they had established threshold limits - where these exist they typically only allow sourcing initiatives valued below 50,000 USD to be exempt from central governance. However 9 per cent of respondents confirmed that they encouraged a greater level of autonomy through setting limits between 100,000 and 250,000 USD.
Further, in an attempt to balance the advantages realised in maintaining the central function while devolving control to the business units, organisations are experimenting with different options:
· Leverage centres of excellence (CoE) within the organisation to guide, monitor and drive sourcing initiatives. CoE will staff specialised resources from legal, compliance, tax, HR, finance, etc and provide guidance to sourcing initiatives across the organisation.
· Implementation of a Sourcing Council made up of two to three full time resources and a ‘Sourcing Leader’ from each of the business units. This council meet regularly to discuss the various sourcing initiatives across the organisation and to share sourcing best practises, for example, if a specific business unit negotiates favourable pricing for an IT/BPO contract, the same will be communicated to other business units via the Sourcing Council.
An important issue that organisations are seeking to address is promoting a positive image and perception of the central sourcing functions that are often seen as a ‘bottleneck’ to rapid organisational transformation. Indeed, Capco’s recent survey showed that 82 per cent of respondents felt that the increased time and effort to undertake sourcing initiatives was the biggest challenge for sourcing governance functions.
As a result, many organisations are effectively rebranding their central sourcing governance function. This re-positioning attempts to stress the value added benefits of leveraging the expertise of the central team (i.e. providing best practice approaches and management to transitioning, process mapping, supplier management, risk assessment, etc) while also ensuring adherence to group standards. Various organisations have created central functions to co-ordinate sourcing and to provide sourcing lifecycle expertise; some examples of this are as follows:
· ‘Rightsourcing’ a function that sits alongside prescribed Group Policy and will be involved as and when requested by the business units.
· ‘Smartsourcing’ a function that strives to be involved in those parts of the process that require particular expertise, such as contractual negotiations.
Technology lever for Sourcing Governance
Organisations with mature sourcing operating models tend to leverage specific tools/technology to aid sourcing and govern sourcing initiatives. Examples of these tools are databases used to store the requisite data and documentation produced throughout the organisation. A central store for sourcing materials provides transparency to the sourcing team, to senior management and to the regulators. Capco’s recent survey confirmed this view, with more than 61 per cent of the respondents stating that they had or were implementing some form of central data store.
In general, financial services regulatory bodies will not routinely request data regarding sourcing within the organisation, however there is evidence to suggest that organisations with a history of non compliance to regulation will be more intensely scrutinised by the regulators, who may request data regarding current and past sourcing initiatives on an ad-hoc basis. Implementation of a database to store this data illustrates control and transparency to the regulators. Group wide data storage also permits the production of metrics to manage and direct group sourcing.
To assist the complex sourcing approvals process, some organisations have also attempted to implement workflow tools. Such tools define the approvals steps dependent on specified business rules based around the type of sourcing initiative. They provide an efficient method of managing the approvals process and also allow for increased transparency of the approvers progress.
Vendor liaising tools are also now widely used to connect the organisation and the vendor. These tools are often web-based and provide a mechanism for invoicing, work package processing and monitoring service levels. Examples of tools being leveraged within the supplier management functions of organisations include Frictionless, Commerce-hub and Procure2Pay – used for the management of purchase orders and vendor invoicing.
Regulatory compliance and impact on Sourcing Governance
Maintaining a view of regulatory compliance is now potentially more straightforward as many of the regulators have issued clear guidelines on sourcing. There is also increasing cooperation among the different regulatory bodies with the goal of presenting a consistent approach to supervising sourcing initiatives. In general, guidelines published are now increasingly based on the regulators experience and as such are more detailed and display a greater openness to strategic sourcing leveraging a global operating model.
In line with this trend it appears the most mature organisations are doing a number of things to ensure compliance:
Some organisations are going a step further by developing an ongoing dialogue with the regulators – either at a group level or at regional/functional level.
Conclusion
In summary, effective sourcing governance is essential to ensure appropriate oversight over complex and evolving sourcing models and to ensure implementation of commercial and transformational best practices. However, the governance model in itself must not become a barrier to change. Financial services organisations will need to create agile, value-adding sourcing governance models that find the appropriate balance of people, process and technology and “best fit” their specific sourcing challenges.
David Ellis is senior consultant and Guru Rao is principal consultant at Capco. For more information on Capco’s survey, Sourcing Governance in Financial Services (2009), please contact the authors: David Ellis (David.ellis@capco.com) or Guru Rao (guru.rao@capco.com)
Date: 12th, January, 2010
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