Digital innovation is progressing rapidly in every function of business, demanding considerable investment and budgetary needs. On the other hand, cost pressure is steadily increasing as the market becomes competitive. Considering these demands on additional investments and cost pressure, every corporate leader is looking into additional avenues and new ways to reduce spend. The traditional cost-out approach is favored by leaders as one of the avenues to reduce spend and most leaders are looking for new methods and techniques for cost-out.
The cost-out approach through outsourcing has been the trend for the past couple of decades. However, there is still ample opportunity to move several activities to service providers. Over the past two decades the skills and maturity of service providers has increased considerably and they are ready to support higher levels of work. The increased focus on advanced trends like connected vehicles/IOT, wearables, and AI/ML, has resulted in deprioritizing several traditional core activities, with companies weighing the option of increasing the outsourcing scope. On the other hand, there are businesses still figuring out what activities to outsource, and how.
The need of the hour is a robust process to efficiently identify the activities which can be outsourced to service providers. This document outlines an approach to effectively adopt the traditional make vs. buy decision matrix to enable an organization to identify activities or tasks to be outsourced and which activities they need to retain in-house. This approach has been successfully applied at several engagements and one such case study related to the Engineering function of a tier-1 automotive supplier will be presented in the second part of this article.
The approach is based on identifying core vs. non-core activities along with cost effectiveness of executing these tasks in-house. This also helps in developing a digital innovation strategy for transforming the core activities to be retained in-house. Eventually, the combination of outsourcing and a digital innovation strategy will help efficiently identify activities to eliminate, outsource, retain and automate.
The Decision Matrix:
The activities identified for assessment are mapped into a 4-Quadrant (2x2) decision matrix, shown in Fig. 1. The matrix provides an analytical approach to logically arrive at making the decision about whether or not to outsource an activity in a business. Each of the unique activities identified for assessment are rated for (i) strategic importance to the organization and (ii) how competitively the task can be executed compared to external service providers. The decision making process is based on the position of each of the tasks.
Quadrant 1: Activities that are core (strategically important) and also competitive are retained in-house. This enables an organization to continue to have competitive advantage. These activities are further assessed for automation or to enable digital innovation.
Quadrant 2: Activities that are non-core but competitive will be outsourced though a JV or to a trusted partner along with technology transfer of how to execute these tasks.
Quadrant 3: These activities are prime candidates for outsourcing to a capable vendor.
Quadrant 4: These are core activities, but with low competiveness. The recommended approach is to outsource these activities to trusted service providers and form a strategic alliance. The best example of such an activity or subsystem is aircraft engines. Most aircraft manufacturers like Boeing or Airbus source engines from trusted partners like GE or Rolls-Royce, even though it is the most strategic system in an aircraft.
4-Step methodology to arrive at the decision matrix:
Step 1: Mapping of the business process identified for assessment and breakdown of the processes into unique activities for assessment. This is followed by capturing cost of execution or annual spend, skills required and associate tools and processes to execute these activities.
Step 2: Strategic importance and competitiveness assessment of each activity. Strategic importance assessment is normally performed by numerically assessing a series of customized questions like (i) Is the activity vital to your company’s competitive advantage? (ii) Is it part of what makes your business unique? The competitiveness is assessed against external service providers based on Quality, Cost and Delivery (QCD).
Step 3: Mapping of the activities onto a decision matrix, X axis being strategic importance and Y axis competitiveness.
Step 4. Grouping of tasks and strategy planning including road map and cost benefits estimates to eliminate or outsource non-core and non-competitive activities. Modernize and introduce digital innovation to automate and accelerate execution of core tasks.
For further details contact Narayana Prasad (email@example.com)