‘Defining sourcing strategy for ‘operations’’
SOURCING STRATEGY
‘Factors that play a role in defining the sourcing strategy from an
operations management view’
Master thesis Business Administration, Change Management
University of Groningen
Faculty of Management and Organization
Master Change Management
In association with
G.M. Brink
Student number: 1503952
Rhonestraat 45
8226 MJ Lelystad
06-52652816; 0320-844663
[email protected]; [email protected]
Internal supevisor:
B. Emans
KPMG
P. Damen ; M. Kooper
Burgemeester Rijnderslaan 10-20
1185 MC Amstelveen
020-656 7890
G.M. Brink, August, 2006
‘Defining sourcing strategy for ‘operations’’
DEFINING SOURCING STRATEGY: ABSTRACT
Sourcing, which is one of the latest trends in organizational strategy, can generate lower costs and higher quality.
However, realizing that, good configuration and coordination too choose between the different sourcing options;
offshoring, outsourcing and shared service centers (SSC), is necessary. Next to that, sourcing of ‘operations’ plays
a much larger role in sourcing issues than in previous years. It will therefore be investigated; ‘how a sourcing
strategy for ‘operations’ is defined and which factors play a role when formulating this strategy’. According to the
three interviews and respondents of two questionnaires, it can be determined that internal process characteristics,
external factors and change management implications, which all three are used for the research-concept, indeed
play a role in the sourcing strategy for ‘operations’. The process characteristic ‘volume’ is the largest internal roleplaying factor and determines the reasons for a choice between a SSC and outsourcing. Next to that, the external
factors, ‘legislation’ and ‘technology’ determine the reasons for the same choice. Offshoring is conversely a
sourcing option that is not well known yet. Therefore more research is still necessary. Furthermore it showed that
resistance, competencies necessary and needed expertise, are not decisive, comparing these factors to the process
characteristic and external factors. However, the choice between the three sourcing options does have influence on
‘consultant’s role’, ‘planning’, ‘leadership’ and ‘focus’ of the change resulting from the choice. Defining sourcing
strategy for ‘operations’, which includes all above mentioned factors, is mainly done by higher- and middlemanagement.
Key words:
Sourcing, operations management and change management.
Research theme:
Defining sourcing strategy for ‘operations’
st
nd
1 and 2 evaluators:
B. Emans and M. Bergervoet
Word count abstract: 246
G.M. Brink, August, 2006
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‘Defining sourcing strategy for ‘operations’’
TABLE OF CONTENT
CHAPTER 1: INTRODUCTION
6
1.1 SOURCING
1.1.2 Other empirical research
1.1.3 Sourcing cycle
1.2 STEP ONE OF THE SOURCING CYCLE: DEFINING SOURCING STRATEGY
1.3 SOURCING AND OPERATIONS MANAGEMENT
1.3.1 SSC
1.3.2 Offshoring
1.3.3 Outsourcing
1.3.4 Operations management
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CHAPTER 2: OPERATIONS AND DEFINING SOURCING STRATEGY
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2.1 FACTORS RELATED TO SOURCING STRATEGY FORMULATION FOR ‘OPERATIONS’
2.2 INTERNAL PROCESS CHARACTERISTICS
2.2.1 Volume
2.2.2 Variety
2.2.3 Variation
2.2.4 Visibility
2.3 EXTERNAL FACTORS
2.3.1 Competitors
2.3.2 Technology
2.3.3 Legislation
2.4 CHANGE MANAGEMENT IMPLICATIONS
2.4.1 Leadership
2.4.2 Consultant’s role
2.4.3 Focus of change
2.4.4 Planning
2.5 CHANGE MANAGEMENT AND SOURCING
CHAPTER 3: RESEARCH METHODS
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3.1 QUESTIONNAIRE A
3.2 QUESTIONNAIRE B
3.3 PERSONAL INTERVIEWS
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CHAPTER 4: RESULTS
22
4.1 RESEARCH
4.2 INTERNAL PROCESS CHARACTERISTICS
4.2 EXTERNAL FACTORS
4.3 DECISIVE FACTORS
4.4 CHANGE MANAGEMENT IMPLICATIONS
4.5 PLANNING, LEADING AND IMPLEMENTATION OF SOURCING OPTIONS
CHAPTER 5: CONCLUSIONS
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5.1 RESEARCH
5.2 INTERNAL PROCESS CHARACTERISTIC
5.3 EXTERNAL FACTORS
5.4 DECISIVE FACTORS
5.5 RESISTANCE, EXPERTISE AND LEADERSHIP
5.6 FOCUS, LEADING AND PLANNING
5.6.1 Outsourcing
5.6.2 SSC
5.6.2 Offshoring
5.7 SOURCING STRATEGY
G.M. Brink, August, 2006
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‘Defining sourcing strategy for ‘operations’’
CHAPTER 6: RECOMMENDATIONS AND LIMITATIONS
34
6.1 LIMITATIONS
6.2 FURTHER RESEARCH
34
34
LIST OF DEFINITIONS
35
REFERENCE LIST
36
G.M. Brink, August, 2006
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‘Defining sourcing strategy for ‘operations’’
LIST OF TABLES AND FIGURES
Figure 1.1 Sourcing life cycle, adjusted KPMG 1, 2005
7
Figure 1.3 Overview of sourcing options - Adjusted KPMG 1, 2005
10
Figure 2.1 Framework of operations and role-playing factors.
12
Figure 2.2 Dimensions of operations management
14
Figure 4.1 Contribution of ‘operations’-sourcing to organizational objectives
22
Figure 4.2 Criteria for ‘operations’
22
Figure 4.3 Specific sourcing strategy
23
Figure 4.4 Role of the four V’s on the sourcing strategy
23
Figure 4.5 Internal process characteristics and the three sourcing options
24
Figure 4.6 External factors and the choice for the three sourcing options
25
Figure 4.8Relation between decisive factors and sourcing option chosen
26
Figure 4.9 role-playing factors
26
Figure 4.10 Role of change management elements
27
Figure 4.11 What kind of role play change management implications
27
Figure 4.12 Interview quotes concerning planning,focus and leadership of the sourcing options
28
Figure 5.1 internal profile outsourcing
30
Figure 5.2 internal profile SSC
30
Figure 5.3 external profile outsourcing
30
Figure 5.4 external profile SSC
30
G.M. Brink, August, 2006
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‘Defining sourcing strategy for ‘operations’’
CHAPTER 1: INTRODUCTION
In today’s competitive world, organizations are seeking for methods to stay ahead of their competitors and to
reduce their costs to stay in business (Kotabe and Murray, 2004 ; Trent and Monczka, 2002). When ‘firms want to
outstand they must implement strategies to achieve cost reduction, quality and delivery improvement’ (Trent and
Monczka 2002). Barney (1991) partly agrees on this by saying that a firm possesses sustained competitive
advantage when it adopts a strategy that is not simultaneously being implemented by any current or potential
competitors and when these other firms are unable to duplicate the benefits of this strategy. This can imply that a
strategy is necessary to gain competitive advantage and to reduce costs. Next to that in today's competitive
environment, more than at any other time in history, continuous improvement is necessary (Trent and Monczka,
2002). As organizations search for new ways to gain competitive advantage and are trying to continuously
improve themselves, the development of new strategies and approaches becomes an increasingly attractive option
(Kotabe and Murray, 2004). In other words, organizations want to enhance their performance and gain
competitive advantage by using new ways. Sourcing is seen by many organizations as a solution to improve this
competitive advantage by enhancing organizations’ financial and operational performance and in that way staying
ahead of their competitors (Huibers and Schut, 2006). This because with effective sourcing, organizations can
generate lower costs and higher quality products or services (Roe, 2005). Sourcing is therefore one of the most
popular trends in organizational strategy of the last decade (Roe, 2005; Strikwerda, 2005).
1.1 Sourcing
Sourcing generally refers to those decisions determining how components will be supplied for production and
which production units will serve which particular markets. Multinational firms have been pursuing integrated
sourcing to a greater extent than before because such an operation allows them to exploit their competitive
advantages (Kotabe and Murray, 1990). Sourcing can, next to the above, be defined as ‘the reorganization of
tasks, functions and services of an organization, whereby the more effective managing of organizational and
operational processes is the main issue (Huibers and Schut, 2006).
Huibers and Schut (2006) also state that ‘with sourcing, organizations can manage their operational and
organizational processes more effectively’. This can be done internally, externally, national or international.
Sourcing can be done by concentration of activities, by transferring the execution of services or processes to an
external party or by the transferring business activities abroad. In other words sourcing can have many forms
depending on the organization it is applied to. Three of the main sourcing options that can be applicable for
organizations to enhance their competitive advantage are: shared service centers (SSC), outsourcing and
offshoring.
1.1.2 Other empirical research
Because sourcing becomes more and more a trend in the last decade, the configuration and coordination necessary
for a successful choice between the different sourcing options and strategies have received an increasing amount
of research attention (Kotabe and Murray, 2004). Most of the recent research on ‘sourcing strategy’ has dealt with
G.M. Brink, August, 2006
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‘Defining sourcing strategy for ‘operations’’
various managerial issues, ranging from structural complexity to operational complexity of international sourcing
(Kotabe and Murray, 2004). Next to that the different sourcing options are discussed and investigated only from
the perspective of that sourcing option, such as SSC (Strikwerda, 2005) and outsourcing (Hoogenveen, 1994;
corporate finance). However, there is no empirical study that shows how sourcing options are selected from the
viewpoint of operations management. Next to that, no empirical research is done to investigate which factors play
a role between the choice of the different sourcing options of the viewpoint of operations management.
1.1.3 Sourcing cycle
As seen in the explanation of sourcing and the many investigations that are done on sourcing, which by far not
cover all issues related, sourcing can be classified as complex. To keep some overview in this complex process,
sourcing can be approached as a structured process; from formulating the sourcing strategy to evaluating the daily
processes that are connected. Clearly explaining sourcing, six steps can be identified, which together are the
‘sourcing life cycle’ (KPMG 1, 2005). See figure 1.1.
In the first step, sourcing approach, the possible sourcing project needs to be clearly aligned with the business
strategy to aid effective decision-making throughout the project lifecycle. This strategic alignment should assist in
ensuring that the required sourcing benefits are achieved and that any risks to realizing outsourcing benefits are
effectively managed. The main aspects that need to be done at this stage are, the development of a sourcing
strategy that considers the various sourcing options; the development of a business case examining the reasons for
and benefits for sourcing; the consideration of other factors, such as proposed staffing models and outsourcing
locations; and identification of critical success factors for the project.
In step two of the life cycle model, the sourcing
preparation phase, the detailed planning occurs.
1
During this stage, the objectives of the sourcing
6
project are identified; the risks and constraints
2
are identified and plans put in place to mitigate
these risks; and the business processes that are to
be affected by the sourcing project are
5
documented. In short this means that during the
second step, the future operating model is
defined and a project plan is developed.
4
3
Figure 1.1 Sourcing life cycle, adjusted KPMG 1, 2005
Sourcing selection, which is the third step, involves detailed processes surrounding analysis, selecting the most
suitable supplier. In this step also the structure-selection process is performed. This step is followed by step four,
G.M. Brink, August, 2006
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‘Defining sourcing strategy for ‘operations’’
transition management, which is the process of moving from the current state to the complete implementation of
the outsourcing solution. It involves transition of people, process and technology. This step includes risk, change
management and implementation plans of the project.
During the delivery management phase, step five, ongoing delivery of the sourced service occurs. The tasks
performed in this step depend upon the services that have been outsourced. However, a number of key processes,
like service level- , financial- , capacity-management and service continuity are generally performed.
The last step of the sourcing life cycle, the service evolution phase, refers to those tasks that are intended to
improve or evolve the level of service that is provided, including the exit process. In short this step involves
process performance improvement.
1.2 Step One Of The Sourcing Cycle: Defining Sourcing Strategy
Looking at step one of the sourcing cycle (figure 1.1), it can be seen that defining the sourcing strategy is part of
this step. Sourcing strategy, in this case, can be defined as the direction, scope and timeframe an organization
gives to the arrangement and grouping of tasks. This definition will be used in relation to the three main sourcing
options; outsourcing, offshoring and SSC. The strategy gives insight in, the backgrounds, objectives, what needs
to be achieved and gives insight in a thorough assessment of the sourcing options.
In all sectors, organizations are, discussing new initiatives to concentrate activities or contracting out activities to
other organizations national or international (Huibers, et al, 2005) and thus discussing the sourcing strategy. These
initiatives involve not only supporting processes (as finance or IT), but also ‘value adding’ processes, because
sourcing issues are coming closer to the heart of the organization in the last years. This means that ‘operations’, in
which value adding processes take place, plays an increasingly important role in sourcing issues. However, as said
before, little attention is paid on specific sourcing issues from the viewpoint of operations management. Therefore
a closer look will be paid to this specific part of sourcing, which is part of step one of the sourcing cycle (figure
1.1). Investigating this area, also a link can be made to step two of the sourcing cycle, while in this step the
business processes that are to be affected by the sourcing project are documented. Taking this altogether it will be
investigated ‘how from the viewpoint of operations management a sourcing strategy is defined and which factors
play a role when formulating this strategy’. In figure 2 this question is presented graphically.
1.3 Sourcing And Operations Management
Before the above mentioned question can be investigated more in detail, the main sourcing options, offshoring,
outsourcing and SSC, will be explained first. Although there are many forms and combinations of these sourcing
options, only the main three will be used in this research. Next to that the basics of operations management, which
is necessary to deal with the research question, is explained as well.
G.M. Brink, August, 2006
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‘Defining sourcing strategy for ‘operations’’
1.3.1 SSC
A shared service center is a result responsible unit within the
Operations
mangement
internal organization, which has as task to deliver services, based
on a specialization, to the operational units of that organization,
based on a standard price (Strikwerda, 2005). Organizations can
also jointly lead a SSC (ex. a joint venture). Another definition of a
Sourcing strategy:
SSC given by KPMG (2, 2005) is ‘the consolidation of common
• Outsourcing
• Offshoring
• Shared service
functions, systems, processes and personnel across several
center
business units into an internal service bureau, managed as an
independent organization. As Strikwerda (2005) says ‘the interest
of the SSC is the interest of the group of organizations the SSC is
in’.
Figure 1.2 Operations level and sourcing strategy.
In short it is believed that organizations make use of SSC to reduce costs and to enhance quality of internal and
external services. Next to that KPMG (2, 2005) identified that organizations choose for an SSC when, complete
control of processes is desired, relevant competencies (like staff and technology) are owned and when
organizations want to generate long term benefits. A risk however, is the one-sided view on cost reduction
(KPMG 1, 2005).
1.3.2 Offshoring
Offshoring can have two forms. First of all, outsourcing business activities to another country, but keeping
control, is called ‘captive offshoring’. Next to that, outsourcing business activities to a third party in another
country is called ‘offshore outsourcing’. Although there are two types, it can be identified as one single group:
offshoring. (International financial services, 2005 London). Offshoring can be defined as the allocation of (IT
enabled) processes to be managed by an internal/external service provider at a remote location, i.e. at centers in
countries outside the originating location (KPMG 2, 2005).
Cost reductions together with reason such as increasing flexibility, following customers/suppliers and entering
new markets are the most important motive for organizations to offshore activities (Van Gorp, 2005).
1.3.3 Outsourcing
Outsourcing can be defined as a ‘long-term, results-oriented relationship with an external service provider for
activities traditionally performed within the company’ (KPMG 2, 2005). Not being interested in operational
control and the desire to generate short-term benefit are two reasons why organizations outsource (KPMG 2,
2005). Next to that outsourcing is used to simplify processes and to lower, share or transfer the risk where it can
best be managed.
G.M. Brink, August, 2006
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‘Defining sourcing strategy for ‘operations’’
In short an overview of the reason to outsource, offshore or to make a SSC can be found in figure 1.3.
SSC
Outsourcing services
z
z
z
z
z
z
z
z
z
z
Organization wants to complete control of process
Cost reduction
Enhance quality of internal and external services
Generation of long term benefits
Organization owns relevant competencies
Reduce unit costs
Focus not on core competence processes
Focus management time on core business
Simplify processes
Lower or share risk or transfer it where it can be best
managed
Off-shore services
z
z
z
Retain or enlarge market position
Focus on core competencies
Cost reduction
Figure 1.3 Overview of sourcing options - Adjusted KPMG 1, 2005
1.3.4 Operations management
All types of organization must ‘do’ operations management because all organizations produce some mixture of
products and services (Slack, 2001). Next to that ‘operations’ is an important part of the organization; the
decisions made in operations have a major impact on both the cost of production and delivery, which has in turn a
major impact on the revenue coming into the organization. Furthermore operations management has strategic
importance; an organization can have strategically success because of the way it manages its operations (Slack,
2001). The definition used in this research for ‘operations’ is; ‘the part (or activities) of the organization that
deliver products and services. This part executes the added value activities (Huibers, 2005). Operational level is in
this case the organizational layer in which operations is placed.
Note that the term ‘operations’, will be used in the following part of this research to cover that part of the
organization where added value activities take place and where the operation’s strategy is defined.
G.M. Brink, August, 2006
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‘Defining sourcing strategy for ‘operations’’
CHAPTER 2: OPERATIONS AND DEFINING SOURCING STRATEGY
Defining strategy and strategic decisions depend on a large number of factors. First of all, the vision and mission
of the organization plays a role, as well as the resources and stakeholders (Johnson and Scholes, 1999). Defining a
sourcing strategy also involves these factors (Huibers, 2005), but is then connected to the choice between SSC,
offshoring and outsourcing. Formulating a strategy from the viewpoint of operations management depends not
only on external factors but also on stakeholders, resources and processes (Johnson and Scholes, 1999). In other
words, the following three factors play a role in the strategy formulation for ‘operations’:
•
Factors related to the internal process,
•
Factors related to external events and,
•
Humans’, participating in the process the strategy involves.
That the first two are role-playing factors is also stated by Slack and Lewis (2002); they say that ‘the objective of
an operations strategy is to reconcile market requirements with operational resources’. Next to that the operationsstrategy formulation process can be market-led (Platts and Gregory, 1990) or resource-based (Barnes and
Rowbotham, 2003). In other words both internal and external factors are important. The term internal or external
factors can be used for many different issues; therefore in the coming part of chapter two, these factors are
specified and linked to sourcing strategy.
The third factor; stakeholders, involves, according to Roe et al. (2005), the human resource aspect, impact on
employees, unwillingness to change and how this change, that follows from the (new) strategy, is led. Changes
within the organization that occur because of the operational strategy are often related to resources, culture and
expertise (Johnston and Scholes, 1999). In other words, many of these factors are related to human resource
aspect, culture, which are according to Burnes (2004), part of change management. Also in the book written by
Beer and Nohria (2000) many of these issues are described and argued as ‘change’ implications. Therefore this
last factor, that plays a role in formulating an ‘operations’ strategy, will be called ‘change management
implications’. In the coming part of chapter two, also these change implications are further specified and linked to
sourcing strategy.
2.1 Factors Related To Sourcing Strategy Formulation For ‘Operations’
In the previous paragraph the factors that play a role in ‘operations’ strategy formulation can be found. Looking at
the research question, a nuance must be made, because it is about the factors that play a role in the sourcing
strategy for ‘operations’ that will be investigated. It is known that the definitions of ‘sourcing strategy’
formulation and ‘overall-strategy’ formulation both include ‘the direction, scope and timeframe of an
organization’ and both ‘give insight in the backgrounds and objectives’. However, ‘sourcing strategy’ is only
related to the three main sourcing options, outsourcing, offshoring and SSC. Conversely, both definitions can be
linked to the same ‘operations’ definition. Therefore, the factors that relate to, internal processes, change
management implications and external events, may also play a role in the sourcing strategy formulation for
‘operations’. To investigate more thoroughly if this is indeed the case, all role-playing factors, given in the
G.M. Brink, August, 2006
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‘Defining sourcing strategy for ‘operations’’
previous paragraph, are explained more extensively and linked to sourcing, in the following paragraphs. An
overview of the mentioned role-playing factors is given in figure 2.1.
External factors
Internal proces
characteristics
Change management
implications
‘Operations’
Sourcing strategy:
• Outsourcing
• Offshoring
• Shared service
centers
Figure 2.1 Framework of operations and role-playing factors.
2.2 Internal process Characteristics
In the beginning of this chapter it is argued that internal factors related to the process, play a role in strategy
formulation for ‘operations’. As explained in paragraph 2.1 there might be a relation between these factors and
sourcing strategy formulation for ‘operations’. To investigate this, internal factors for ‘operations’, or in other
words process characteristics, are explained more extensively.
Operations in different organizations differ on four main points; volume, variety, variation in demand and
customer contact (Slack, 2001). These four main points are called the process characteristics of organizations’
processes. Only a well understanding of these processes makes an effective operations strategy possible (Barnes
and Rowbotham, 2003).
With volume it is meant how many products or services are made by the organization. Variety means how many
different types of products or services are made. With variation the change in the level of demand over time is
meant. The last point customer contact or ‘visibility’ means how much of the ‘operations’ processes are ‘exposed’
to its customers, or in other words, how many contact with the customer is necessary.
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‘Defining sourcing strategy for ‘operations’’
2.2.1 Volume
Looking at the definitions of the sourcing options, given in the introduction, it can be seen that concentration of
product or services is one of the characteristics of a SSC (KPMG 1, 2005). Concentration has in its turn to do with
the volume of produced products or services. This can be one reason that volume is a factor that influences the
choice between the sourcing options. Next to that, looking more closely to offshoring, which means in short
‘taking the process(es) abroad’, volume might play a role in actually remove or keep processes. However not
much is written about this and therefore more investigation is needed.
2.2.2 Variety
An organization can differ in variety which has to do with the flexibility (Slack, 2001) of the organization. Many
different products can mean a different schedule of production and more complicated sub-processes than when
fewer products are produced. This can than have an effect on the choice between the sourcing options. Next to that
variety can be an important factor because this determines whether a process can be easily standardized or not.
Standardization can be linked to the choice for outsourcing or SSC (figure 1.3).
2.2.3 Variation
Variation in demand can be linked to personnel and purchase planning. According to Slack (2001), a high
variation in demand can bring difficulties with both personnel and purchase planning. This has to do with the
predictability of the production. Predictability can in its turn be linked to standardization and cost reduction. These
two objectives can again be found in figure 1.3 which shows the reasons for the three sourcing options.
2.2.4 Visibility
The degree of customer contact, another word for visibility, can first of all be linked to offshoring. When no
customer contact is involved it may be easier to bring the processes abroad then when your customers need to visit
the production site. Next to that, visibility can also be related to cost reduction; when more sub-processes with
high customer contact are performed by the same department (SSC) costs can be reduced. This can also increase
the quality, which is again one of the reasons to choose between three sourcing options (figure 1.3). This can
therefore imply that visibility also plays a role in the choice between the sourcing options.
In the above paragraphs it is implied that volume, variety, variation and visibility are role-playing factors when
formulating a sourcing strategy for ‘operations’. To know if these process characteristics indeed play a role, and to
know what kind of role they play, the following question is stated.
Question (1): How do the characteristics; volume, variety, variations in demand, and visibility play a
role in the choice between offshoring, outsourcing and SSC on operations level?
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‘Defining sourcing strategy for ‘operations’’
In other words, it will be investigated how the process characteristics play a role in defining the sourcing strategy.
This includes which factors are more important for offshoring, outsourcing or SSC. This can then be linked to an
operations profile that can be made according the four main dimensions (see figure 2.2).
2.3 External Factors
When formulating operations strategy, not only the
internal proces characteristics are important. Slack
(2001) states that ‘Operations managers have some
responsibilities in the organization which contribute
to
effective
production
and
one
of
these
responsibilities is to respond to the emerging
challenges for the future’. This may imply that also
for ‘operations’ an outside-in perspective needs to be
used, which means an analysis of the external factors.
Next to that some authors state that it is dangerous
when only one view, external or internal, is applied.
Figure 2.2 Dimensions of operations management
From an internal perspective it is difficult to see the
external opportunities and correct market positioning. Therefore the danger is that ‘too much time, effort and
money is wasted in the wrong areas of little importance’ (Russell, 1999). Market positioning must take place
within the context of the broader resource based strategy and not contradict the main thrust of the firm. This
means that the selected market positions must leverage the existing resource base and not ignore it (Wit and
Meyer, 2004). Shortly stated; ‘formulating a funded strategy involves reconciling the often conflicting pressures
of market requirements (external analysis) and operations resource capabilities (internal analysis)’ (Slack, 2001).
This means that besides the internal process characteristics also external factors are important when defining a
sourcing strategy for ‘operations’.
As Burnes (2004) says ‘one of the approaches to strategy is to align the organization to the environment’, which
means that the environment can have influence on strategy formulation. Next to that, Burnes (2004) says that
industry structure strongly influences the competitive rules of the game as well as the range of strategies open to
the organization. Linking this back to sourcing strategy, the strategies that are open to the organization are already
limited to the three souring options; offshoring, outsourcing and SSC. This may imply that only a few external
factors are important to when formulation sourcing strategy. Next to that not much is written about the influence
of external factors on sourcing-strategy formulation or, in particular, sourcing strategy formulation for
‘operations’. Therefore the most important external factors that might be important in sourcing-strategy
formulation will be explained more extensively.
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‘Defining sourcing strategy for ‘operations’’
2.3.1 Competitors
‘Operations’ is defined as the activities of the organization that deliver products and services and executes the
added value. The mix of resources that organizations use to produce this added value is never the same as their
competitors (Burnes, 2004), because organizations consequently want to be heterogeneous of their competitors to
distinguish themselves. The core competence, which is called the process that makes the organization unique, or
in other words ‘added value’, makes that real competitive advantage comes from the ability to produce at lower
cost and speedily competitors (Prahalad and Hamel, 1990). This means that what competitors do, plays a role in
‘operations’. Next to that, because sourcing is one of the latest trends (Roe, 2005), it can also be important for an
organization to get involved with sourcing before competitors.
2.3.2 Technology
Technology as an external factor includes Internet, transportation, speed of technology transfer and new
developments (Johnson and Scholes, 2001). Linking this to the sourcing options, it can be seen that, when
activities that require regular contact are offshored, Internet and fast technology transfer need to be present. Next
to that, high technology means a high level of computerization, which means that people might be replaced for
machines and that centralization of systems is necessary. Looking at the sourcing options, centralization can be of
influence for the choice process. Next to that linking technology to ‘operations’, whole processes might change
because of technological or transportation developments. This implies that technology might be an important
factor for defining sourcing strategy for ‘operations’.
2.3.3 Legislation
Employment law, environmental rules and national legislation can all have their impact on an organization
(Burnes, 2004). Organizations might be especially concerned with (inter)national legislation, when there are plans
for (re)place organizations activities outside the country (Johnson and Scholes, 2001). Replacing activities inside
or outside organizations is one of the essentials of sourcing (Huibers, 2005). Next to that national legislation may
differ from place to place, which can have impact in employee or environmental regulation. Therefore
‘legislation’, which covers employee law, environmental and national rules, may play an important role in the
sourcing strategy formulation for ‘operations’.
The above mentioned external factors are expounded and linked to a role-playing factor in the sourcing strategy
formulation process. However no empirical research has been done to verify if these factors actually play a role in
real practice. Therefore the following question is stated:
Question (2): How do the external factors; technology, rules and regulations and competitors play a role
in the choice between offshoring, outsourcing and SSC for ‘operations’?
Both external factors and internal process characteristics are explained and may play a role in the sourcing
strategy formulation process. Next to that it is exactly the mix of both factors, which is important in strategy
G.M. Brink, August, 2006
15
‘Defining sourcing strategy for ‘operations’’
formulation (Russel, 1999 ; Slack, 2001 ; Wit and Meyer, 2004). Although it can be grounded that as well internal
factors as external factors are important it is not clear which are more important and which are decisive. Therefore
question three is asked. Note that with internal factors, mentioned in question three, the internal process
characteristics are mend
Question (3) Which factors, external or internal, are decisive for the choice between a SSC, offshoring or
outsourcing?
2.4 Change Management Implications
As explained in the beginning of this chapter, also change management implications may play a role in the
strategy formulation for ‘operations’. Strikwerda (2005) agrees and states that the ‘process of sourcing involves a
process of change management’ (Strikwerda, 2005). Next to that, comparing the following statement of
Strikwerda (2000), who states that ‘implementing a sourcing option means a change in habits, relations and
political relationships’ to the statement of Burnes (2004), who states that ‘politics, power, norms, values and
habits are very important elements in change management’, it can be said that elements from change management
are present in the sourcing process. In other words, when an organization is planning to source the organization is
making plans for change, which includes different change management implications.
Many change implications are described by different writers. Beer and Nohria (2000) combined the views of
different writers and identified leadership, focus, planning, consultant’s role, purpose and motivation as the main
change management implications. Beer and Nohria made a thorough assessment of organizational change
dimensions and combined different views (Strikwerda, 2002). Therefore the change management implications
they discuss are used in this research as a guideline to investigate which change management implications may
play a role in the sourcing strategy formulation.
Next to the role these change management implications play in the sourcing strategy formulation for ‘operations’,
Beer and Nohria also describe some dichotomy’s between these implications. They divide these implications
within two different approaches that exists within theories about organizational change; ‘Theory O’ and ‘Theory
E’ (see figure 2.3). The former focuses on organizational capability driven change. Hereby development of highcommitment culture is emphasized and change initiatives are driven from bottom up, by means of high
involvement. The latter approach, focuses on economic value driven change and shareholder value, whereby
focusing on formal structures and systems is important. Change initiatives are driven from the top with help of
consultants and financial incentives.
Looking more closely to the dichotomy’s (figure 2.3), it can be seen that, different changes may be implemented,
leaded, and planned via the different theories. Although much is written about these theories and the different
changes, no empirical research has been done between these theories and the different sourcing options.
G.M. Brink, August, 2006
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‘Defining sourcing strategy for ‘operations’’
Objective
Theory E
Theory O
Leadership
Consultant’s
role
Top-down
Participation
Knowledge driven
Process driven
Focus
Planning
Structure
Planned
Culture
Emergent
Therefore, both the change management
implications that may influence the sourcing
strategy formulation for ‘operations’ are
explained more extensively and the different
dichotomy’s (figure 2.3) are explained to be
able to link there to the different sourcing
Figure 2.3 Dichotomy’s in change management
options.
2.4.1 Leadership
Change management traditionally focuses on identifying sources of resistance to change and offered ways to
overcome them (Cummings and Worley, 2001). Resistance occurs because changing the formal organization will
be painful. It changes, or the people involved will think it changes, the status and power-position of managers, the
old and engraved routines. Next to that it exposes inefficiencies and there will always be the contingency of the
new situation (Strikwerda, 2005). One of the aspects that deals with reducing resistance is participation (Beer and
Nohria, 2000). Employee participation is a generic approach to reduce resistance (Kreitner et al, 2002). Most of
the time employees are less likely to resist when they perceive that the benefits of change overshadow the
personal costs. However, in spite these positive statements about participation and the reduction of resistance,
others criticize the tendency to treat participation as a cure-all for resistance to change. ‘A contingency approach
is preferred because resistance can have many forms and because situational factors vary’ (Kreitner et al, 2002).
This dilemma of participation or no participation, can be called the dichotomy of top-down and bottom-up
leadership, also indicated by Beer and Nohria (2000).
Implementing one of the sourcing options can include a change in personnel that includes job losses (Huibers,
KPMG1, 2005). Next to that, outsourcing can include more than only economic impacts; it can include
unwillingness to change, lack of commitment and impact on employees (Roe, 2005). Because involving
employees and increasing the lack of commitment can be done by participation, e.g. leading the change bottomup, the above can imply the leadership of change can have influence on sourcing strategy formulation.
Next to that, it is not researched yet how to lead the change when it involves a particular sourcing option. Change
can be led top-down or bottom-up (Beer and Nohria, 2000). Conger (2000) argues that, because of the nature of
today‘s organizational change, effective change begins at the top. No other approach can make the change process
succeed successfully, this because small departments who want to lead the change (from bottom up) cannot see
the consequences for the total company. Another explanation is that reinvention of this kind can involve a change
in company strategies and organizational architectures which can only be adapted by senior leaders while they
have the ‘overview of the organization’. On the other side Bennis (2000) argues that top-down leadership is
unrealistic and dangerous, because there are too many problems that need to be solved and identified. Next to that
he states that changes cannot be done without willingness and commitment of lower employees. This is what
Burnes (2004) refers to as ‘successful change is a bottom-up, emergent, response to change.
G.M. Brink, August, 2006
‘Defining sourcing strategy for ‘operations’’
2.4.2 Consultant’s role
Carefully analyzing the strategic possibilities and making the choice between the sourcing options, makes that a
thorough assessment of the organization and related business know-how are necessary (KPMG 2, 2005).
Consultants that give advice about strategic options and change are most likely to have that business know-how
and expertise to make a thorough analysis. Miles (2000) states that, next to the role described above, consultants
are concerned about the assessment and development of employee competencies to achieve the desired level of
performance. Looking at the definitions of the sourcing options, it can be seen that competencies of employees
change when sourcing options are implemented. However the magnitude of change can differ. With a SSC (figure
1.3), the competencies needed for the new situation are most of the time already in-house, employees only need to
expand their special competencies. Next to that, offshoring may imply that jobs in the organization will disappear,
because business processes are moved abroad. This will then imply that employees will loose their job or need to
learn new competencies for other jobs. In other words different sourcing options need different changes in
competencies. Linking this to the above explained consultant role, the different sourcing options may need a
different role of expertise. Although some situations may require an expert, some organizations may not always
like the presence of a consultant because this can also result in a failure of the project (Schaffer, 2000) or because
it is too expensive. Therefore the consultant’s role, might play a role in the choice between the three main
sourcing options.
Next to that, for the ‘consultant’s role’ it is not researched what kind of expertise-role, consultants need to play
when it involves one of the sourcing options. Beer and Nohria (2000) made the distinction between an expert role
for a consultant or a process driven change. Besides the expert role, explained in the paragraph above, an
alternative, is a model based on a continuous series of rapid-cycle projects (Schaffer, 2000). This rapid cycle
model means that no matter how high and good the expertise of a consultant is, the real success can be found in
the organization’s implementation capability.
2.4.3 Focus of change
The focus of change can be twofold; it can be a structure approach or it can be a culture approach (Galbraith, 2000
; Leavitt, 1965). Galbraith (2000) argues that changing formal structures is central to the success of the overall
organizational process. Leavitt (1965) supports this view by saying that under some circumstances both a hard or
soft approach may be more central to the success of change. This means that structure can be the driver for change
when it is a key element for the organization. Hirschhorn (2000) does not agree with these statements, and
believes that organizational structure is abstract and does not exist. He argues that structure is a set of interlocking
relationships that people believe they have with one other; it is socially constructed. To attain increase in
performance, managers have to attend the organization’s culture.
2.4.4 Planning
The last dichotomy, used in this research, is planning of change. According to Choshal and Bartlett (2000) change
need to be carefully phased planned. In that way, changes in organizational hardware can be matched to the
G.M. Brink, August, 2006
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‘Defining sourcing strategy for ‘operations’’
behavioral software that has to change also. Opponents of the planned change say that in this way the change
cannot be aliened to the fast changing environment and propose the emergent approach (Weick, 2000 ; Lewin,
1999).
2.5 Change management and sourcing
Although much is written about the above mentioned dimensions, also discussed by Beer and Nohria, there is not
much literature on how to manage change processes that include sourcing. Next to that also no empirical research
has been done to the role ‘leadership’ and ‘consultant’s role’ actually play in the choice between the sourcing
options.
To research how the different change management implications influence the choice between the sourcing options
for ‘operations’, the following question is stated:
Question (4): How do the change management elements, leadership and consultants role, play a role in
the choice between offshoring, outsourcing and SSC for ‘operations’?
Next to this, the different dichotomies described (figure 2.3) imply that different changes need to be implemented,
leaded and planned in a different way. Because sourcing is also a form of change (Strikwerda, 2004 ; Burnes,
2004) this may imply that the different sourcing options need to be planned, leaded and implemented differently.
However, as said before, there is no empirical research that describes how different sourcing options need to be
planned, leaded and implemented. Therefore the following question is asked:
Question (5): How do offshoring, outsourcing and SSC need to be planned, leaded and implemented in
order to do this successfully?
Furthermore, managing change on operations level is one of the important factors in the total change process.
Johnson and Scholes (1999) support this view by saying ‘if change is to be successful it also has to link the
strategic, operational and everyday aspect of the organization. This emphasizes not only the importance of
translating strategic change into detailed resource plans, critical success factors and key tasks, but also ‘how
change is communicated through everyday aspects of the organization’ (Johnson and Scholes, 1999) or in other
words ‘operations’. Next to that the Chief Operating Officer, the highest person on operations level can influence
change in the entire organization (Parsons, 2004), which means that change is a valuable issue for ‘operations’
and that change implications need to be considered. Linking this back to the two research question 5 and 6, the
research will focus primarily on the change management implications that are of importance for ‘operations’.
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‘Defining sourcing strategy for ‘operations’’
CHAPTER 3: RESEARCH METHODS
To answer the questions stated in chapter two, data needs to be gathered. Two approaches can be used to gather
primary data; communication and observation (Cooper and Schindler, 2001). Communication, in the form of
personal interviews and self-administrated surveys (questionnaires), are used as methods for research.
3.1 Questionnaire A
To generate an answer on the first two research questions, that deal with the internal process characteristics and
external factors that can play a role in the strategy formulation for ‘operations’, knowledge and experiences of
people that deal with sourcing, or will be dealing with sourcing on the short term, need to be revealed. As said
before, Cooper and Schindler (2001) state that this can be done with questionnaires. With a questionnaire more
persons can be questioned than with interviews and the answers are, depending on the questions, more easily
standardized and categorized. The questionnaire that deals with research questions one and two is called
questionnaire A.
Questionnaire A is send to individuals that have a managerial function and knowledge about ‘operations’ in their
organization. Next to that the organizations need to be dealing with sourcing issues (in the near future). To be able
to send the questionnaire to this target group the database of KPMG business advisory services (BAS) is used. In
this database 550 organizations are listed that deal with sourcing issues (in the near future). The organizations are
mid-size to large-size organizations operating in the Netherlands and participate already in a monthly send
questionnaire of KPMG. Questionnaire A is part of this monthly send questionnaire. Before questionnaire A can
deal with research question 1-3, introductionary questions about sourcing will be asked, which may also justify
the total research about sourcing strategy.
First of all, from 51 employees of different organizations dealing with sourcing of ‘operations’, the contribution of
‘operations’-sourcing to organizational objectives, is measured. Next to that, criteria on which sourcing of
‘operations’ is determined, are measured with an open question. The last variable measured by questionnaire A is
the role of the internal process characteristics. The questions measuring this are build up from answers from ‘no
role’ to ‘decisive role’ in four steps.
3.2 Questionnaire B
Guidelines of the monthly send questionnaire of KPMG BAS make questionnaire A a more general questionnaire.
Therefore a more detailed and extensive questionnaire, called questionnaire B, is created. In this way research
questions 1-4, which deal with external, internal and change management factors that play a role in the sourcing
strategy formulation for ‘operations’, can be investigated more thoroughly. These questions also need to be
answered with knowledge and experiences of people that dealt with sourcing and therefore questionnaire B is send
to a select group of the target group of questionnaire A. Because this questionnaire is more extensive, it was asked
in a previous ‘monthly send questionnaire’ if these individuals wanted to participate in a more detailed research.
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‘Defining sourcing strategy for ‘operations’’
From 11 employees that have knowledge about sourcing of ‘operations’, the role of the internal process
characteristics in relation to the choice between a SSC, offshoring and outsourcing is measured. This is done with
statements about the reasons for outsourcing, offshoring and SSC. For example, there is stated ‘how larger the
volume, the more reasons there are for outsourcing’. This statement can then be answered with ‘totally disagree’
to ‘totally agree’ with four steps. Also the option ‘no opinion can be chosen’. The statement mentioned in the
above example is converted to every sourcing option and every internal process characteristic. Next to that, all
statements are also asked in the opposite form: ‘how smaller the volume, the more reasons there are for
outsourcing’, etc.
The same is also done to link the three external factors to the different sourcing options. In this case the variables
‘larger’ and ‘smaller’ are linked to the role ‘competitors’, ‘technology’ and ‘legislation’ play. Furthermore, to
know which factors are decisive, external or internal process characteristics, the answer of 11 employees that have
knowledge about sourcing of ‘operations’, is measured according to a closed ‘yes or no’ question. The question
about the decisive factors is extended with a question about the sourcing option chosen, to see if there is a relation
between the decisive factors and the sourcing option chosen.
Also the role of the change management implications (research question four) is measured with questions that are
build up from answers from ‘no role’ to ‘decisive role’ in four steps. Next to that, it is measured if organizations
have a specific sourcing strategy for activities for ‘operations’, with a closed ‘multi option’ question. Note that
questionnaire A and B are send in Dutch and simultaneously.
3.3 Personal interviews
With this face to face communication tool research question four and five are revealed and an assessment of the
answers of questionnaire A and B is discussed with the interviewee’s. In this way the indistinctness’s that
appeared after questionnaire A and B can be smoothed out. The individuals that conducted both questionnaire A
and B and that have extensive knowledge about all sourcing options are selected for the interviews. Next to that,
all interviewee’s have an ‘operations management’ function. In total three interviews are conducted and in all
cases the interview situation is anonymous. Information about the role that change management implications play
in the sourcing strategy formulation process is gained with open questions without fieldcoding. Also, information
about planning, leading and implementation is gained with open questions without fieldcoding. The respondents
knew by forehand what the purpose of the interview was.
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‘Defining sourcing strategy for ‘operations’’
CHAPTER 4: RESULTS
Results will be presented in line with the research questions. Although this is the case, before the answering of the
four research questions, results are presented that can justify the total research.
4.1 Research
All research questions relate to the sourcing strategy for ‘operations’. Before knowing what factors play a role in
sourcing strategy formulation, it is important to know if organizations are willing to source ‘operations’ and if it is
seen as an important issue. Figure 4.1 shows that 82% of the respondents believe that sourcing of ‘operations’
contributes to the organizational objectives.
Can sourcing of 'operations' contributes to the organization's
objectives?
18%
Yes
82%
No
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Figure 4.1 Contribution of ‘operations’-sourcing to organizational objectives
Research questions 1,2 and 4 deal with the question: ‘what role do the internal processes characteristics, external
factors and change management implications play in the sourcing strategy formulation?’. In the literature part it is
founded that these three criteria groups have influence on the sourcing strategy. To know if organizations are
really considering these factors when sourcing is wanted, criteria on which sourcing for ‘operations’ is
determined, can be found in figure 4.2.
Criteria on which the sourcing of
‘operations’ is determined.
Criteria
Contribution to objective
External factors
Internal factors
Strategic concerns
Continuity
Other
The external factors are specific factors relating to
Percentage
18%
22%
31%
10%
8%
10%
Figure 4.2 Criteria for ‘operations’
‘competitors’ or ‘legislation, etc. The internal
factors include both process characteristics and inhouse competencies or expertise. ‘Contribution to
objective’
includes
the
specific
criteria
that
contribute to the organizational objectives, like cost
saving or quality enhancement. Strategic concerns
may be linked to either internal or external factors,
however in this case the scope and direction of higher management is meant. Continuity means to ensure an
organization’s continuation.
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‘Defining sourcing strategy for ‘operations’’
The research deals with ‘sourcing strategy’, which makes it useful to know if organizations actually have a
specified sourcing strategy that incorporates all preferences and role-playing factors. Figure 4.15, based on
questionnaire A, shows how many organizations have a specified sourcing strategy for ‘operations’.
Strategy for the different sourcing activities of 'operations'.
9%
2 7%
3 7%
Yes, part of total sourcing
strategy
Yes, explicit for
'operations'
No
Other
2 7%
Figure 4.3 Specific sourcing strategy
4.2 Internal Process Characteristics
The first research question deals with the role the process characteristics; volume, variety, variations in demand,
and visibility play, in the choice between offshoring, outsourcing and SSC for ‘operations’. In figure 4.4, based on
the answers of questionnaire A, it can be found how large the role of these internal process characteristics is.
Questionnaire B also reveals
Role of internal process characteristics on the sourcing strategy
Volume
Variety
Variation
Visibility
No role
22%
22%
40%
18%
Small
role
14%
30%
36%
32%
Large
role
52%
46%
22%
34%
information
Decisive role
Figure 4.4 Role of the four V’s on the sourcing strategy
12%
2%
2%
16%
about
research
question one. Figure 4.5 shows
what kind of role the four
internal process characteristics
have on the choice between the
three main sourcing options.
The figure shows specific when organizations are willing to choose for outsourcing, offshoring or SSC. Looking
at the top row of figure 4.5 it can be seen that 82% disagrees on the statement ‘how larger the volume, the more
reasons there are for outsourcing. All other rows can be interpreted the same, considering the sourcing option
mend, indicated in the blue rows. It can also be seen that all statements about offshoring score >73% on the option
‘no opinion’.
G.M. Brink, August, 2006
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‘Defining sourcing strategy for ‘operations’’
Internal process characteristics and the choice for outsourcing, offshoring and SSC
Outsourcing
How larger volume…
How smaller volume…
How larger variety…
How smaller variety…
How larger the variation…
How smaller the variation…
How larger visibility…
How smaller visibility…
SSC
How larger volume…
How smaller volume…
How larger variety…
How smaller variety…
How larger the variation…
How smaller the variation…
How larger visibility…
How smaller visibility…
Offshoring
How larger volume…
How smaller volume…
How larger variety…
How smaller variety…
How larger the variation…
How smaller the variation…
How larger visibility…
How smaller visibility…
Totally disagree
0%
9%
10%
10%
0%
0%
70%
10%
Disagree
82%
9%
20%
60%
20%
50%
30%
10%
Agree
9%
64%
60%
0%
30%
30%
0%
50%
Totally agree
9%
18%
10%
20%
40%
10%
0%
30%
No
opinion
0%
0%
0%
10%
10%
10%
0%
0,00%
10%
20%
10%
10%
10%
0%
20%
10%
0%
30%
20%
30%
0%
20%
30%
10%
20%
30%
30%
40%
40%
30%
20%
40%
60%
10%
20%
0%
20%
10%
10%
20%
10%
10%
20%
20%
30%
40%
20%
20%
9%
9%
0%
0%
0%
0%
27%
0%
0%
0%
9%
0%
0%
0%
0%
0%
9%
9%
0%
0%
0%
0%
0%
9%
9%
9%
0%
9%
0%
0%
0%
9%
73%
73%
91%
91%
100%
100%
73%
82%
Figure 4.5 Internal process characteristics and the three sourcing options
4.2 External Factors
Questionnaire B also reveals information about research question 2; ‘how do the external factors, technology,
rules and regulations and competitors play a role in the choice between offshoring, outsourcing and SSC for
‘operations’. Figure 4.6 shows what kind of role these three external factors play in the choice between the three
sourcing options. The figure can be interpreted as follows; looking at outsourcing and legislation, it can be seen
that 56% agrees or totally agrees on the statement ‘how smaller the role of legislation the more reasons there are
to choose for outsourcing’. For offshoring it can be seen that all statements score >82% on the option ‘no
opinion’.
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24
‘Defining sourcing strategy for ‘operations’’
External factors and the choice for outsourcing, offshoring and SSC
Outsourcing
How larger the role of technology…
How smaller the role of
technology…
How larger the role of legislation…
How smaller the role of legislation…
How larger the role of competitors…
How smaller the role of
competitors…
SSC
How larger the role of technology…
How smaller the role of
technology…
How larger the role of legislation…
How smaller the role of legislation…
How larger the role of competitors…
How smaller the role of
competitors…
Offshoring
How larger the role of technology…
How smaller the role of
technology…
How larger the role of legislation…
How smaller the role of legislation…
How larger the role of competitors…
How smaller the role of
competitors…
Totally disagree
11%
Disagree
22%
Agree
45%
Totally agree
11%
No opinion
11%
11%
22%
11%
11%
45%
22%
22%
45%
33%
22%
45%
0%
0%
22%
11%
11%
11%
12%
11%
33%
11%
22%
22%
0%
45%
0%
11%
11%
67%
11%
11%
0%
11%
0%
22%
11%
45%
22%
56%
22%
22%
22%
0%
56%
0%
45%
11%
11%
22%
11%
11%
45%
11%
22%
11%
9%
0%
0%
9%
82%
9%
18%
0%
0%
9%
0%
0%
0%
0%
0%
9%
9%
0%
0%
9%
9%
82%
82%
82%
82%
9%
9%
0%
0%
82%
Figure 4.6 External factors and the choice for the three sourcing options
4.3 Decisive factors
Research question three; ‘which factors, external or internal, are decisive for the choice between SSC, offshoring
or outsourcing’, can also be revealed with questionnaire B. In figure 4.7 it can be found how many respondents (in
percentage) think that internal process characteristics or external factors are decisive.
Which factors are decisive
56%
Internal strenghts and weaknesses
33%
Extrnal opportunities and threats
11%
Not applicable to our organization
0%
10%
20%
30%
40%
50%
60%
Figure 4.7 Decisive factors
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25
‘Defining sourcing strategy for ‘operations’’
The relation between the factors that are decisive, in the choice process, and the actual chosen sourcing option,
can be found in figure 4.8. It can be seen that the correlation is < 0,500.
Correlations
Chosen
Decisive
Pearson
Correlation
Sig. (1-tailed)
-,447
,133
Figure 4.8Relation between decisive factors and sourcing option chosen
In research question 2-3 it is asked what the role of the process characteristics and external factors is. Figure 4.9,
stating interview quotes, shows if these factors are the only factors important or if other factors are also important
for defining the sourcing strategy for ‘operations’. Next to that figure 4.9 shows the relevance of these factors.
Factors important for the choice between the three main sourcing options
Factors
Interview quotes
Internal (four V’s) and
‘The factors mentioned are the most valid and acceptable’ (2x), ‘these factors are
external factors used in the
definitely used, only in some cases more factors are needed’, ‘not everything can
questionnaires.
only be based on these factors, however it gives a robust fundament to base the
choice on (2x)’.
Quality level
‘Outsourcing and offshoring can only be done when the quality level of the third
party is high or sufficient enough’, ‘you have to fully rely on the party you
outsource to, this can only be the case if they have enough knowledge and a high
quality level’.
Risk
‘Sometimes it is more risky to offshore’, ‘sometimes our organization is not
willing to take the highest risk which can mean that another sourcing option will
be chosen’, ‘risk, can as I see it be related to financial risk’.
Figure 4.9 role-playing factors
4.4 Change management implications
Research question four; ‘how do the change management elements, needed expertise, change in competencies
resistance, play a role in the choice between offshoring, outsourcing and SSC’, can partly be revealed with figure
4.10, which shows how large the role is. The figure can be interpreted as follows; 56% thinks that expected
resistance of employees plays a large role in the choice between the three sourcing options.
G.M. Brink, August, 2006
26
‘Defining sourcing strategy for ‘operations’’
Role of change management elements
Very large role
Role of expected
resistance
Role of needed
expertise
Role of new
competencies needed
Large role
Mediocre
Small role
Very small role
0%
56%
11%
21%
11%
0%
34%
33%
11%
22%
22%
56%
11%
11%
0%
Figure 4.10 Role of change management elements
For answering research question four, it is also important to know what kind of role these change elements play in
relation to the sourcing options. Figure 4.11 states interview quotes about resistance, change in competencies and
needed expertise in relation to the role they play in the choice between a SSC, offshoring and outsourcing.
Role of resistance, competencies and expertise in the choice between the sourcing options
Interview quotes
Expected
‘With all sourcing options you can experience resistance, it is the way how you deal with it’,
resistance
‘offshoring generates most of the times more resistance, however that does not mean it will
not be implemented’, ‘resistance or not, when it is better for the organization, it is eventually
also better for the employees’.
Expected
‘When employees already have the acquired skills, it is easier to create a shared service center
change in
than to outsource because you will loose these employees’, ‘when competencies need to
competencies
change drastically, it is save and secure to outsource or offshore your business activity’.
Needed
‘Sometimes it is too expensive to get the acquired knowledge’, ‘for offshoring more expertise
expertise
is necessary, however I think this issue is more related to costs than to expertise’, ‘it is easier
and cheaper to choose a sourcing option that the organization is already acquainted with,
because the organization has to buy-in less knowledge’.
Figure 4.11 What kind of role play change management implications
4.5 Planning, leading and implementation of sourcing options
The last results are connected to the last research question; ‘how do offshoring, outsourcing and SSC need to be
planned, leaded and implemented in order to do this successfully’. Figure 4.12 shows quotes of the interviews that
relate to the concerned sourcing option and change management implication.
G.M. Brink, August, 2006
27
‘Defining sourcing strategy for ‘operations’’
Planning, leading and focus of the different sourcing options
Outsourcing
SSC
Offshoring
Leader-
‘When communicated well outsourcing does not
‘Because activities/ processes stay within the
‘Offshoring is most of the time a real strategic
ship
experience much resistance’ (2x), ‘implementing
organization, less communication to lower level
consideration, which is decided by top
outsourcing plans must be done not only by top
employees is necessary because less resistant will occur’,
management’, ‘because offshoring is often
management but also middle management’,
‘not only higher management should be involved, but
accompanied by job loses (3x), informing lower
‘opinions of lower level employees are important
also lower management dealing with the future shared
level employees is good, but considering all
and must be taken into considerations (2x),
service center needs to be involved’, ‘although lower
their opinions is too much work and will bring
however this can only be done till a certain
level employees are not always conferred, open
too much resistance’, ‘with offshoring you need
degree’.
communication is necessary’ (2x).
to see the overall-picture of the organization’.
‘Structure will most of the time not change
‘Creating a shared service center includes most of the
‘Many offshoring projects involve a change in
drastically’, ‘not the structure, but the role of the
time a change in structure’ (3x), ‘like with outsourcing,
culture’, ‘the organizational-culture needs to be
process will change (3x)’, ‘only the employees that
cultural changes are not really an issue’.
adapted to the culture of the country whereto the
Focus
join the ‘third party’ will experience culture
processes are offshored’, ‘with only a structural
change’ (2x).
change, it will not succeed because of cultural
differences’.
Consul-
‘Consultant expertise can be necessary for market
‘The success of a shared service project is often related to
‘Offshoring is a difficult process that acquires
tant’s
research, however the change inside the organi-
the organization itself’ (2x).
expertise (2x)’, ‘a thorough market analysis is
role
zation still depends on the organization capabilities
necessary’, ‘expertise is necessary to analyze all
to change’, ‘creating the agreements, between the
rules and legislation of the country whereto the
party that outsources and the party that insources,
processes are offshored’ (3x).
can best be done by consultant’s’ (2x).
Plan-
‘Planning a sourcing option always needs to be done step by step and by forehand. It does not matter if it involves, a shared service center, offshoring or
ning
outsourcing’ (3x), ‘contingency plans are necessary, when something (un)expected happens’, ‘although plans need to be made by forehand, still some (very little)
room needs to be present to adapt these to the circumstances’, ‘good planning is the keyword in successful sourcing ’ (2x).
Figure 4.12 Interview quotes concerning the planning,focus and leadership of the main sourcing options
G.M. Brink, August, 2006
‘Defining sourcing strategy for ‘operations’’
CHAPTER 5: CONCLUSIONS
5.1 Research
Before answering the research questions separately, some conclusions can be drawn that justify the total research.
First of all, looking at figure 4.1 it can be seen that the main majority thinks that sourcing of ‘operations’
contributes to the organizational objectives. This may then imply that sourcing of ‘operations’ is at least one of the
sourcing possibilities that can be attractive to organizations. Therefore it can be said that this research can have a
contribution to knowledge about sourcing strategy for ‘operations’, while sourcing of ‘operations’ can be
attractive to the main majority of the organizations that (are willing to) deal with sourcing. Furthermore in the
literature part it is assumed that internal process characteristics, external factors and change management
implications all play a role in the sourcing strategy formulation for ‘operations’. From figure 4.2 it can be
concluded that these factors indeed play a role in sourcing topics for ‘operations’. Moreover, from the interviews
(figure 4.9) it can also be concluded that these factors play a role and that it is also a relatively large role in
relation to the other factors mentioned; risk and quality level.
Next to the above conclusions about sourcing strategy for ‘operations, it can also be concluded (figure 4.3) that
more that the majority of the organizations has a (specific) sourcing strategy for ‘operations’. This may imply that
organizations are dealing with specific issues about sourcing strategy for ‘operations’, whereas, before this
research, no other empirical research has been done in this specific area.
5.2 Internal Process Characteristic
One of the conclusions for question one, that deals with the role the four internal process characteristics play, can
be drawn from figure 4.4. From the four characteristics, ‘variation in demand’ plays the smallest role, whereas
‘volume’ plays the largest role. Linking figure 4.5 to the dimension of ‘operations’ (figure 2.2) as explained in the
literature part, a profile of the process characteristics for each of the different sourcing options can be made. For
outsourcing (figure 5.1) it can be seen that when volume is low, variety is high, variation is also high and visibility
is low organizations see more reasons to outsource. In other words when, the quantity of production is low, the
different types of products/services are high, the variation in demand is also high and customer contact is low,
organizations see more reasons for outsourcing. In figure 5.2 this profile can be found for SSC. It can be
concluded that when, the quantity of production is high, the different types of products/services are high, the
variation in demand is also high and customer contact is low, organizations see more reasons for SSC. This means
that for outsourcing and SSC the difference can be found in the characteristic ‘volume’. Looking to the literature
part it was said that ‘concentration of products is one of the characteristics of a SSC’ (KPMG 1, 2005), which can
be the reason why volume is indeed a factor that influences the choice between the sourcing options, and in this
case the choice in favor for a SSC. Next to that it was concluded earlier that volume plays the largest role of the
process characteristics and can therefore be a real distinctive and important factor in the choice between SSC and
outsourcing.
G.M. Brink, August, 2006
‘Defining sourcing strategy for ‘operations’’
L
Volume
H
L
Volume
H
H
Variety
L
H
Variety
L
H
Variation
L
H
Variation
L
H
Visibility
L
H
Visibility
L
Figure 5.1 internal profile outsourcing
Figure 5.2 internal profile SSC
Looking at the choice for offshoring in combination with the process characteristics (figure 4.5), it can be
concluded that too many respondents had no opinion about this matter. As a result the process characteristics
profile for offshoring cannot be well-founded enough. What this may imply is that organizations’ knowledge
about offshoring can be improved, because the respondents actually indicated that the process characteristics are
important for the choice between outsourcing, SSC and also offshoring.
5.3 External Factors
For question two, that deals with the role the external factors play in the sourcing strategy formulation process,
also a profile, just like with the process characteristics, can be concluded based upon the results (figure 4.6). It can
be concluded that organization see more reasons for outsourcing when the role of technology is large, when the
role of legislation is small and when the role competitors is either large or small (figure 5.3). This means that
nothing specific can be concluded for the role ‘competitors’ play. For SSC, organizations see more reasons doing
that when, the role of technology is large, the role of legislation is large and when the role of competitors is also
large (figure 5.4). The role of technology can in this case either be small or large, however slightly more
respondents see more reasons for outsourcing when the role of technology is large. Comparing these two profiles,
it can be concluded that there is a difference in the role of legislation and competitors; in an environment where
the role of technology is large and legislation is small, organization see more reasons for outsourcing than for
SSC.
S
Technology
L
S
Technology
L
S
Legislation
L
S
Legislation
L
S
Competitors
L
S
Competitors
L
Figure 5.3 external profile outsourcing
Figure 5.4 external profile SSC
G.M. Brink, August, 2006
‘Defining sourcing strategy for ‘operations’’
Again, the main majority of the respondents gave no opinion about offshoring. Therefore no real conclusions can
be founded for offshoring in relation to the external processes.
5.4 Decisive Factors
It can be concluded that internal process characteristics are decisive for the choice between SSC, offshoring and
outsourcing (figure 4.7), which answers research question 3; ‘which factors, external or internal, are decisive for
the choice between SCC, offshoring or outsourcing’. Linking this question to the sourcing options, no clear
relation was visible between the option chosen and the factors that are decisive (figure 4.8). Furthermore, based on
the interviews (figure 4.9) it can be concluded that next to the process characteristics and external factors, two
other factors are important for sourcing strategy formulation for ‘operations’; risk and quality level. Although risk
and quality level are also important, process characteristics and external factors are predominant. Next to that, the
interviewees classified quality level and risk, mainly as important factors to choose for offshoring.
5.5 Resistance, expertise and leadership
First of all it can be said that resistance play a large role in the choice between SSC, offshoring and outsourcing
(figure 4.10). Furthermore, based on the interviews (figure 4.11), it can be concluded that offshoring generates
most resistance. Although resistance occurs in different magnitudes in the different sourcing options, it will never
be a decisive factor because the need to implement the sourcing option, from management point of view, is greater
than the resistance of lower level employees.
Second, it can be concluded that more than the majority thinks that needed expertise plays a mediocre or large role
(figure 4.10). Furthermore, it is not really an expertise issue, but more a cost issue (figure 4.11). It is easier and
cheaper to choose a sourcing option the organization is already acquainted with, because the organization has to
buy-in less knowledge.
Third, more than the majority thinks that the change needed in competencies plays a large or very large role.
Based on the interviews it can be seen that when an organization already has the acquired competencies it is easier
to create SSC. In contradiction to this, when competencies need to change drastically, organization see more
reasons for outsourcing or offshoring.
5.6 Focus, leading and planning
Question five deals with the planning, leading and implementation of the main sourcing options. From figure 4.12
it can be concluded that the different sourcing options can have different implications. This may imply that these
different sourcing options actually need to be planned, leaded and implemented differently.
5.6.1 Outsourcing
Outsourcing, according to the interviews, can best be led from the top. This because then the overview of the total
situation will be kept, which is in line with Conger’s (2000) view. Another conclusion that can be drawn is that
besides the top-down leadership, enough communication and a slight consultation to the lower level employees is
necessary to avoid resistance. Next to that, the focus of the change may best be a focus on structural change. This
G.M. Brink, August, 2006
‘Defining sourcing strategy for ‘operations’’
because outsourcing can be a key element for the organization, which can then, according to Leavitt (1965) be
classified under a structural focus. However, looking at the interview quotes (figure 4.12), the change for the
individuals that will join the party where the activities are outsourced to, can best be realized by a cultural focus.
This is than a cultural focus from the viewpoint of the organization that takes over the employees of the
organization that outsources. For outsourcing, the consultant’s role needs to be an expert-role, only when the
arrangements between the two parties need to be settled (figure 4.12). The change itself still depends on the
organizational capabilities to change.
5.6.2 SSC
Leadership for SSC can be compared to outsourcing (figure 4.12); leadership can best be top-down with a little
room for open communication to reduce resistance. The focus of the change for SSC can also be compared to the
focus of the change for outsourcing. However, with SSC the focus of the change can best only be based on a
structural change, while there is no third party to outsource to. According to the interviews (figure 4.12), the
success of SSC is often related to the organization itself, which can be linked to the view of Schaffer (2000). This
means that the change ensuing from creating SSC can best be linked to a model based on a continuous series of
rapid-cycle projects. This rapid-cycle model means that no matter how good the expertise of consultants is, real
success must be found in the organization’s implementation capability.
5.6.2 Offshoring
According to the interviews, offshoring can best be led top-down, while only with top-down leadership strategic
consequences for the entire organization can be overseen. Next to that, generally for offshoring, resistance will
occur because of job loses. Therefore early communication is wanted, however consulting lower level employees
can best remain undone. Furthermore, it can be concluded (figure 4.12) that with only a structural focus
implementation of offshoring will not succeed. Next to that, offshoring, in contrast with outsourcing and SSC,
needs an expert role during the whole process.
The conclusion that can be drawn for the change factor ‘planning’ is for all three sourcing options the same;
planning needs to be done step by step (figure 4.12). Although planning needs to be done by forehand, some
contingency possibilities within this planning need to be considered.
5.7 Sourcing strategy
The main research question; ‘how is a sourcing strategy for ‘operations’ defined and which factors play a role
when formulating this strategy’ can be answered based on the answered research questions. First of all, the main
majority of the organizations have a specified sourcing strategy for the different activities for operations.
This sourcing strategy is firstly based on the internal process characteristics of which ‘volume’ plays the largest
role and ‘variation in demand’ plays the smallest role. Looking at the internal process characteristics profile
(figure 5.1 ; 5.2) it can be seen that the choice between outsourcing and SSC is mainly based on ‘volume’; when
quantity of produced products is high, organizations see more reasons to create SSC.
G.M. Brink, August, 2006
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‘Defining sourcing strategy for ‘operations’’
Secondly, a sourcing strategy is based on the external factors ‘legislation’, ‘competitors’ and ‘technology’.
Looking at the external factors profile (figure 5.3 ; 5.4), it can be concluded that in an environment where the role
of technology is large and legislation is small, organization see more reasons for outsourcing than for SSC.
Comparing internal process characteristics with external factors, process characteristics are decisive in the choice
process.
Thirdly, sourcing strategy for ‘operations’, is based on change management implications. First of all when an
organization already has the acquired competencies, it is easier to create SSC. Contrary, when competencies need
to change drastically, organizations sooner choose for outsourcing or offshoring. Next to that, sourcing strategy is
sometimes based on sourcing options organizations are already acquainted with, because in that way organizations
have to buy-in less knowledge. Furthermore resistance will never be a decisive factor.
Two other (less important) factors where sourcing strategy for ‘operations’ is based on are risk and quality level.
Both are factors mainly to choose for offshoring.
Defining sourcing strategy involves also decision making. Based on the interviews, it can be concluded that top
and middle management are generally involved in defining the sourcing strategy for ‘operations’. Middle
managers can in this case be defined as employees responsible for units or activities being sourced.
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‘Defining sourcing strategy for ‘operations’’
CHAPTER 6: RECOMMENDATIONS AND LIMITATIONS
6.1 Limitations
For answering the research questions, two questionnaires and three interviews were conducted. Although the
respondents were selected based on strict criteria, a higher quantity of respondents create a higher certainty degree
for the conclusions drawn. Next to that, because many respondents did not answer the questions about offshoring,
conclusions regarding the comparison between offshoring and the other sourcing options could have been more
optimal.
6.2 Further Research
Looking at the limitations, it can be seen that more research about offshoring is necessary to compare the three
main sourcing options more optimal. Furthermore, this research was not conducted with a restriction of any
industry-sector. Although the organizations that co-operated represent a well-outmoded mix of all industry
sectors, it can also be interesting to see the differences between industry sectors.
Word count: 11.409
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‘Defining sourcing strategy for ‘operations’’
LIST OF DEFINITIONS
Offshoring
The allocation of (IT enabled) processes to be managed by an internal/external
service provider at a remote location, i.e. at centers in countries outside the
originating location.
Operations
The part (or activities) of the organization that deliver products and services. This
part executes the added value activities or services. Used in this research to cover
that part of the organization where the added value activities take place and where
the operation’s strategy is defined.
Outsourcing
A ‘long-term, results-oriented relationship with an external service provider for
activities traditionally performed within the company.
Shared service center (SSC)
A result responsible unit within the internal organization, which has as task to
deliver services, based on a specialization, to the operational units of that
organization, based on a standard price.
Sourcing
The reorganization of tasks, functions and services of an organization, whereby the
more effective managing of organizational and operational processes is the main
issue
Sourcing strategy
The direction, scope and timeframe an organization gives to the arrangement and
grouping of tasks. In this research this definition will be used in relation to the
three main sourcing options; outsourcing, offshoring and SSC. This gives insight
in the backgrounds, objectives, what need to be achieved and gives insight in a
thorough assessment of the sourcing options.
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‘Defining sourcing strategy for ‘operations’’
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