Global Sourcing and Value Chain Unbundling

Abstract

There is an increasing trend for firms to use a portfolio approach to govern their business processes using multiple sourcing mechanisms involving multiple firms and geographic sites. Managers need guidance and frameworks to select the right sourcing mechanisms for different business processes. This article develops two research-driven conceptual frameworks to help managers meet the challenges: (1) a framework for classifying and analyzing different sourcing mechanisms, and (2) a staged-model of major decisions involved in sourcing projects. In the first framework, two major factors that capture underlying strategic intents of sourcing mechanisms, namely governance mode and geographic location are described. Firms may strategically benefit, but may also expose themselves to several vulnerabilities. Second, the article develops a 4-stage model of sourcing choice process. This model provides guidelines to evaluate WHICH business processes are appropriate for various sourcing mechanisms, WHERE to source from, WHOM to select as vendor, and HOW to implement. In making sourcing decisions, the staged-model helps managers to consider process level decision criteria such as process maturity, asset specificity, and strategic criticality; firm level decision criteria such as strategic vulnerability, risk profile, firm’s experience with certain sourcing mechanism and offshore countries; and also country-level macroeconomic criteria such as risk profile, political stability, physical infrastructure, labor markets, and regulatory and cultural environments of offshore countries. Understanding the various variables has important implications in writing contracts and service level agreements. Driven by global IT infrastructure and falling communication costs, an increasing number of firms are exploring various sourcing mechanisms for their business processes for cost and strategic advantage. Once tightly coupled business processes in the firm’s value chain are being unbundled to exploit global sourcing opportunities, particularly from low-wage counties like India, Philippines and China. However, each sourcing mechanism has different cost, benefit and risk characteristics, and may not be appropriate for all companies or suitable for all business processes. For instance, sourcing from another country may entail low cost or access to new markets, but creates risks due to lack of intellectual property protection or differences in legal and regulatory environments. Thus, managers need guidance to select the most appropriate sourcing mechanism given the benefit-risk tradeoffs, and to efficiently manage a portfolio of sourcing choices. The sourcing portfolio of a business process can become complex. A senior executive of a large Fortune 100 company revealed during our discussions a complex sourcing portfolio for their call center services. Some of the call center services are conducted by the firm’s own employees in