Right Sourcing: Enabling Collaboration

By Pieter Van der Ploeg, Rien Dijkstra and John Gøtze

Right Sourcing - Enabling Collaboration puts forward the proposal that the modern enterprise must fundamentally rethink its sourcing equation to become or remain viable. By presenting perspectives on sourcing from 21 different contributors, the editors hope to enable and inspire readers to make better-informed decisions.

Sourcing is a business theme which gets more and more attention. But making the right decisions is not easy. Sourcing is a wicked problem. This book provides valuable insights and concepts that will help to improve decisions with regard to sourcing. I would recommend this book to anyone who wants to achieve right sourcing.
Martin van den Berg
Enterprise Architect, Co-Founder of DYA and author of several books, including Dynamic Enterprise Architecture: How to Make It Work.

Sourcing is becoming an increasingly complex task one that requires fundamental changes in management thinking, radical new ways in which to communicate and deal with knowledge, and a totally new and different view of all the stakeholders. In this book leading thinkers in this space, do a great job in opening up the readers mind to possibilities for alternative solutions that integrate the human aspects in everything we do.
Franois Gossieaux
Co-President Human 1.0 and author of The Hyper-Social Organization

What most impressed me about this book is the scope of its coverage, and the level of academic rigor behind the analysis. The broad scope makes this relevant to senior executives concerned with strategy, operational executives accountable for results, and technologist on the ground. The academic rigor gives me confidence that the findings and recommendations are sound. This book will be the reference guide for anyone seriously involved in strategic sourcing.
R. Lemuel Lasher
Global Chief Innovation Officer, CSC

Thought provoking, occasionally frustrating and timely! As the theory of the firm is tested with evolving technology and globalization driving down transaction costs and enabling greater connectivity were presented with many different possibilities for business operating models. By exploring the perspectives of organization, economics, technology and people this book provides the reader with a compendium of theory, ideas and practical tips on Right Sourcing the business of IT and enabling different business models. The slightly idiosyncratic nature of a book with contributions from different authors only serves to engage the reader in the discussion. I hope the editors find a way to continue this discussion beyond the book!
Adrian Apthorp
Head of Enterprise Architecture, DHL Express Europe

The pursuit of sustainable development is one of the greatest challenges of our time. For this to succeed we must transform our current linear economy to a circular one. This calls for better coordination and collaboration between all players in product chains. Right-sourcing people, products and services is becoming an increasingly important topic therefore. This book provides the reader valuable insights and food for thought on right sourcing and collaboration.
Prof. Dr. H.H.F. Wijffels
Utrecht Sustainability Institute (USI), University of Utrecht, The Netherlands

• Language: English
• Publisher: AuthorHouse UK
• Release date: May 8, 2013
• ISBN: 9781481792813

Pieter Van der Ploeg

Rien Dijkstra, John Gøtze and Pieter van der Ploeg are the editors. The foreword is written by Chris Potts, and contributing authors are Mette Axél, Thierry de Baillon, Joor Baruah, Oscar Berg, Joost van Boeschoten, Freddy Brugmans, Dick van Dijk, Edwin van Dis, Erik Doernenburg, Tom Graves, Johan den Haan, Jack van Hoof, Wouter Meijers, Steef Peters, Micha Schimmel, Menno Weij, and Rob Zuijderhoudt.

Book preview

2013 Dijkstra, Gøtze & van der Ploeg. All rights reserved.

No part of this book may be reproduced, stored in a retrieval system, or transmitted by any means without the written permission of the author.

Published by AuthorHouse 05/02/2013

ISBN: 978-1-4817-9280-6 (sc)

ISBN: 978-1-4817-9281-3 (e)

Cover image source: U.S. Coast Guard Historic Photographs.

This book represents a collection of works from over 20 contributors. Where necessary, permission to take part was sought and granted to contributors from their respective employers. All contributors were motivated by a personal desire to spread their views about right sourcing. The views, concepts and conclusions put forth by the contributors do not necessarily reflect those of their employers and may not be endorsed by them.

Contents

Foreword

—Chris Potts—

Introduction: Sourcing as an Interdisciplinary Approach

—Rien Dijkstra, John Gøtze, Pieter van der Ploeg—

A Business Case for Collaboration

—Oscar Berg—

Sourcing, a Key XXIst Century Manager’s Role

—Thierry de Baillon—

Sourcing-IT or Sourcing it?

—Pieter van der Ploeg—

The Curious Box of Right Sourcing

—Freddy Brugmans and Edwin van Dis—

What makes an Organization? An Economics Perspective

—Rien Dijkstra—

The Effect of Sourcing on Organizational Coherence

—Steef Peters—

The Quest for an Agile Enterprise Requires Outsourcing

—Johan den Haan—

Sourcing from an Enterprise Architecture Perspective

—John Gøtze and Mette Axél—

Using Enterprise Architecture in Sourcing Review

—Tom Graves—

How to Incorporate Everything as a Service into Your Organization

—Joost van Boeschoten, Dick van Dijk, Pieter van der Ploeg—

The Buy versus Build Shift—Build May Be Better

—Erik Doernenburg—

Effects of Sourcing IT Services on Consolidation and Standardization

—Pieter van der Ploeg—

Cloud Computing: Outsourcing Your IT Infrastructure?

—Rien Dijkstra—

The Impact of Application Architecture on Sourcing Strategy

—Jack van Hoof—

The Role of Identity and Access Management in Your Sourcing Strategy

—Wouter Meijers—

Cross Cultural Collaboration (3C) and ‘Right’ Sourcing

—Joor Baruah—

In Search of Synergy in Organizations

—Rob Zuijderhoudt—

Sourcing IT—Legal Aspects of Sourcing

—Micha Schimmel and Menno Weij—

Epilogue

—Rien Dijkstra, John Gøtze, Pieter van der Ploeg—

If you want to build a ship, don’t drum up the men to gather wood, divide the work and give orders. Instead, teach them to yearn for the vast and endless sea.

Antoine de Saint-Exupery,

‘The Wisdom of the Sands’

Foreword

—Chris Potts—

001_a_gfhdf.tiff

Sourcing is a core capability of being a savvy enterprise—however big or small—and of being a savvy consumer. The faster markets change, and the more options they offer us, the better at sourcing we all have to be. And, as consumers and enterprises, our sourcing decisions don’t just impact ourselves. Markets are ecosystems, and are shaped over time by patterns in sourcing. Collectively, our sourcing decisions impact the shape and structure of each market in which we buy things. As we source everything we want and need, we are collaborating with others, whether we know it or not.

Here’s an example: as a consumer, how do you source your music? Do you play it yourself, pay for live performances, buy CDs, listen to it on the radio, download it from the internet, or stream it live? With all of these options, and more, how do you know which choices and in which combination are the right ones for you? And, if as a consumer you’re interested in such things, how are your choices together with everyone else’s reshaping the market for music and affecting the other consumers and enterprises involved?

For an enterprise, given the sourcing decisions that both consumers and other enterprises are making, the challenge is how best to source the people, services and products it needs to deliver its business model and keep its commitments to all its stakeholders. The pace of change in consumer behaviour, in competition, and in the markets in which the enterprise is a buyer, means that sourcing has to be a continuous, agile capability, driven by a clear strategy and shrewd, value-creating investments.

Yet, core capability or not, many enterprises still find it difficult to get sourcing right, and they lose out as a result. Some get out-of-touch with the evolution in consumers’ and other enterprises’ sourcing choices, and therefore base their own sourcing strategy on an increasingly out-of-date business model. Some assume that procurement equals sourcing. Some regard sourcing as primarily IT-related. Some treat sourcing as simply a choice whether to outsource or not.

That apparently binary choice whether to outsource or insource has to-date dominated much of the strategy-level conversation about sourcing. But, according to Jeff Immelt, CEO of General Electric, outsourcing is now "yesterday’s model" [1]. Anyone concerned with sourcing can breath a huge sigh of relief. Sourcing is never simply outsourcing versus insourcing, and Immelt’s assertion opens the way for more strategic conversations that this simplistic, binary debate has been suppressing.

When we look at enterprises’ sourcing strategies, we notice that many are especially focused on Information Technologies—who operates the IT they use, who develops it, and who procures it. The reason for this focus isn’t always obvious. But, as a support activity in Michael Porter’s Value Chain [2] it’s true that Technology Development has more sourcing options than the enterprise’s primary activities. And, IT has long been a magnet for both frustration and innovation in ways Porter’s other support activities struggle to match. So, what we see is IT acting as the practice ground for innovations in sourcing which may then be extended to other subject-areas.

Porter’s Value Chain remains to this day a core architectural model from which enterprises are designed, either explicitly or implicitly. It helps to highlight why sourcing and procurement must never be treated as the same. Procurement is a support activity, and can itself be outsourced to a similar extent as Technology Development and the other support activities. Sourcing, on the other hand, is a core capability—something which Porter’s model isn’t designed to show. Any enterprise using Porter’s model as its design template and tempted to treat sourcing as the support activity called Procurement will undervalue sourcing’s role in strategy and operations, will underperform as a buyer and influencer in market ecosystems, and risks under-delivery in its business results.

The IT market, which led the way in outsourcing, is not stopping there. It is now innovating all over again in the sourcing model for enterprises, and this time for consumers too. Alongside the mass consumerization of IT, the IT industry has coined the term ‘cloud’ to describe a sourcing and delivery model in which the user (whether consumer or enterprise) of a product or service is untroubled by the structure through which it created and delivered. Instead, as users we need to focus on the value we can get from the product or service, how much we’re prepared to pay for that value, how scalable we want the product or service to be, and so on. Don’t be misled by the term Cloud Computing. Cloud is a sourcing and delivery model that the IT industry has named and is pioneering, but it can be applied to anything.

With IT suppliers battling, all over again, for competitive advantage and supremacy in today’s consumerized, cloud-driven IT market, the rest of us need to become more capable at sourcing than ever before. Information Technologies pervade our lives, relationships, business and markets. Any material change in the structure of the IT market impacts the structure of just about every other market, worldwide. As enterprises in the music industry have already found, what we now call IT consumerization and cloud have, together, made old value chains and business models obsolete in favour of new ones. Anyone buying their music from iTunes is sourcing it directly from an IT supplier. Scenario planners take note: this may be a portent of how IT may impact the ecosystems of other markets, if it hasn’t already.

So, with outsourcing being regarded as "yesterday’s model", and the next big wave of innovations in sourcing and delivery models well under way, a book on ‘Right Sourcing’ is very timely indeed. Its proposition—Enabling Collaboration—is perfectly expressed given how markets behave and how sourcing relationships work. We may, or may not, know we are collaborating with other consumers and enterprises as we make sourcing choices day-in, day-out, but we are. And, with the inter-dependencies that exist in market ecosystems, accentuated by all the outsourcing that has taken place, collaborative relationships between enterprises—robustly driven by each party’s self-interests—are now more productive and efficient than simple procurement.

The editors have lined-up for us a diverse range of thought-provoking and instructive chapters, written by experts who know, and are passionate about, sourcing as a core capability of being a successful enterprise in a rapidly-changing market. Read, value, enjoy, challenge, and take heed of their guidance. This is essential reading for anyone involved in strategy. The wellbeing of your enterprise and the shape of your markets are truly at stake.

Chris Potts

London, United Kingdom

Chris Potts is a corporate strategist specializing in Enterprise Investment. He is the author of a trilogy of business novels: FruITion: Creating the Ultimate Corporate Strategy for Information Technology; RecrEAtion: Realizing the Extraordinary Contribution of Your Enterprise Architects; and DefrICtion: Unleashing Your Enterprise to Create Value from Change.

References

[1] Quoted in The Economist, January 19th 2013.

[2] Porter, M.E., 1985, ‘Competitive Advantage’, Free Press/Collier Macmillan.

Introduction:

Sourcing as an Interdisciplinary Approach

—Rien Dijkstra, John Gøtze, Pieter van der Ploeg—

005_a_gfhdf.tiff

Shortening time to market, increasing transaction volumes, 24 x 7 business, and all of this at less cost, all puts a burden on organizations. How should one adapt to the increasing complexity and changes in the organization and its environment? According to the common view, outsourcing is one of the solutions. Outsourcing—the transfer of operations and responsibilities for specific business functions or processes to an external provider—is a billion dollar industry today and is changing the global economy.

Given the complexity of modern organizations and the dependencies between the organization and its customers, employees, partners and suppliers, sourcing activities can be quite an endeavour. Without fully understanding the strategic, tactical and operational consequences, sourcing can also be a risky business and decisions can have serious repercussions.

Our proposition is that the modern enterprise must fundamentally rethink its ‘sourcing equation’ in order to become or remain viable. When the enterprise solves its sourcing equation, it has achieved what we call Right Sourcing. Right sourcing has great potential to help organizations to optimize the use of resources and to eliminate or reduce wastes of capital, human labour and energy. It also has the potential to create adaptive organizations that stimulate, enable and improve collaboration for the mutual benefit of all of the parties involved.

To further explore the idea of right sourcing, we invited a variety of experts to write contributions for this book. We were interested in finding ways to improve the sourcing strategy and decision making. We also wanted to explore the parameters and circumstances that influence the success of right sourcing and make the dependencies with respect to people, organization, technology and economics visible and explicit and to make better informed decisions possible. We mapped the territory out as follows:

006_a_gfhdf.tiff

The contributions to this book cover the territory from different perspectives and with different scopes, but they all share in shedding light on important aspects of right sourcing. Essentially: How can the agility of the chosen right sourcing solution be ensured? How well is it equipped to deal with future changes? And last but not least, how can we ensure that the chosen solution is in line with the business strategy, business models, business plans and the technology that is available? For an enterprise to answer all of these (and more) questions is what we mean by solving the sourcing equation.

Maybe there is a paradox in finding the answer to ‘what is right sourcing’? Right sourcing has all of the properties of what is also known as a ‘Wicked Problem’ [1]. This is a problem where stakeholders are involved with differing perspectives, incomplete, contradictory, and changing requirements and complex interdependencies. With sourcing problems there is no simple, clear definition of the problem and there is no simple right or optimal solution. The solution strongly depends on how the problem is framed. On top of this, in decision making, rationality, or the lack of it, is at least partly determined by the amount of information available to the decision maker, due to the finite amount of time and resources available. This aspect of ‘bounded rationality’ [2] is also something to be aware of when finding a way of making sourcing decisions.

Nevertheless, decisions must be made and the effectiveness of the decisions depends on the quality of the analysis and how it is communicated to the stakeholders. Handling sourcing questions therefore calls for a multi-disciplinary approach and for different views and perspectives in order to obtain a good understanding of what is at stake.

The idea is that right sourcing is based on economics, organization, technology and people. With this book we hope to offer at least multiple views and aspects of sourcing to allow readers to gain a better understanding of sourcing and its ability to ensure, and deter, collaboration.

What is Sourcing?

If you were to ask people what Sourcing is, you would end up with a lot of different answers. The concept of sourcing originates from purchasing and procurement and sourcing is thus a synonym or a more contemporary term for the process of buying for a lot of people. Nowadays, however, the concept of sourcing goes beyond a ‘simple’ purchasing activity. Sourcing is an interdisciplinary approach that combines different methods and tools from various disciplines to answer the ‘make, buy or ally’ question. Several related terms (outsourcing, strategic sourcing, Business Process Outsourcing (BPO), Information Technology Outsourcing (ITO), offshoring, etc.) have emerged to refer to various aspects of this activity. The different terms and definitions that are being used emphasize the different dimensions of sourcing. The following definitions show some of the different perspectives within and across sourcing.

The activity of searching and obtaining goods, services and other resources on a possible worldwide scale, to comply with the needs of the company and with a view to continuing and enhancing the current competitive position of the company [3]

The specific processes that are necessary to effectively manage the involvement of suppliers in product development [4]

A collaborative and structured process of critically analyzing an organization’s spending and using this information to make business decisions about acquiring commodities and services more efficiently and effectively. [5]

The operation of shifting a transaction previously governed internally to an external supplier through a long-term contract, and involving the transfer of staff to the vendor. [6]

Define, plan and manage how an enterprise deploys internal and external resources and services to ensure the continuous fulfillment of its business objectives. [7]

Global Sourcing involves proactively integrating and coordinating common items and materials, processes, designs, technologies, and suppliers across worldwide purchasing, engineering, and operating locations. [8]

Global sourcing involves setting up production operations in different countries to serve various markets, or buying and assembling components, parts or finished products world-wide. [9]

A significant contribution by external venders in the physical and/or human resources associated with the entire or specific components of the IT infrastructure in the user organization. [10]

Transferring the provision of IT functions and, if applicable, the related workforce and assets, to a specialized service provider and subsequently receiving these IT functions throughout the duration of the contract in correspondence with the agreed level of quality and financial compensation structure. [11]

In this book, we don’t want to focus on any dimension in particular, but we are interested in finding ways to improve sourcing strategy and sourcing decision making. Therefore we use the following definition for Sourcing:

Sourcing is the process of organizing and procuring an optimal combination of people, components and services inside and outside an organization to produce and deliver products and services.

Focus of this Book

The book you are about to read (we hope) is about how to obtain resources and especially the information and communication technology that is needed to make your business prosper.

What makes information technology so special that we need books to procure it, you may wonder? Why is it not the same as buying iron ore to feed a steel mill? Or getting flour to bake bread? Why all the fuss?

Information is needed to make a production line run and be controlled. Management cannot exist without information. Information brings order to chaos. And in the present era, information is in many cases also the output of a ‘production’ line. For many companies information is their primary or secondary product.

There is something special about information as a product or service. Traditionally, an organization tries to create value by producing physical goods and services with the use of energy. As stated by Boisot:

Goods were thus bundles of frozen labour converted into potential energy, and services were bundles of living labour or kinetic energy. Value might be free to vary according to the laws of supply and demand [12]

According to this view, information and knowledge are inseparable parts of products and services and the process of economic exchange, but they are not objects of exchange in their own right. This 19th century energetic and physical view of value and goods and services makes information goods and services cumbersome. Information and knowledge are non-tangible and in fact non-subtractable goods, where consumption of the good doesn’t make it less available for consumption by others [13]. But according to the traditional view, information goods could only enter the process of economic exchange if one could make these information goods appropriable, using property rights [14], and create scarcity. However, what then is the value of information and knowledge if it is not shared? Diffusion of information and knowledge is crucial.

Information is therefore more than just raw material that needs to be turned into products. Information technology is used to produce and distribute information. Information technology is therefore a vital defining ingredient of the identity and functioning of an organization (or indeed of an organism). This is why sourcing information technology is not the same as buying flour to bake bread.

In the chapters of this book, various aspects and views of sourcing and its effects are presented in various ways. The editors have tried very hard not to direct contributing authors in any particular direction, and to allow them as much freedom as possible in this respect.

On reading these contributions you will recognize common elements and themes. One of these themes is about the source of organizational order. There seem to be two views or models that permeate the chapters of this book. These seemingly opposing models are:

1. The Newtonian View. A production process and the required organization are designed by some clever people and constructed and implemented accordingly. A control mechanism is installed as part of the design. The fundamental part of this control mechanism is a linear feedback loop. At some points of the process, some critical variables are measured. Based upon these measurements, decisions are taken and instructions and stimuli are administered accordingly, as a result of which the behaviour of the system is adjusted. Order is the result of design and control.

2. The ‘Biological System’ View. An organization consists of a number of different people (‘actors’) who interact with each other and with the environment. Order within the company emerges as the result of internal and external interactions between actors inside and outside the company. This emerging order is stable because the organization exhibits adaptive behaviour to external stimuli and as a result of this the effects of these stimuli are annihilated. At the same time, some small fluctuation may cause the organization to change into a new stable state.

These two views of organizational order do not necessarily contradict each other in every aspect. Both views may be true and both forms of order may be present in organizations simultaneously. The editors have found that there is support from reputable sources for both views and they feel no desire to choose one view above the other. It should be noted, however, that if both views of an organization are true, it may have a profound effect on the role and importance of information, information technology and its procurement. The two views of organizational order are explained below in more detail and the role of information in both models is highlighted.

The Newtonian View

In the Newtonian view, an organization is seen as a complicated machine whose operation can be controlled and steered by means of equally mechanical machinery. Such an organization and its processes are designed according to the specification of its inputs and outputs. It is built using a blueprint. Skills are defined and the organization’s human parts (i.e. employees) are hired. Remuneration schemes are implemented, management is installed and reporting structures and control structures are set in place. On a good day, the machinery is set in motion. Management receives information (i.e. reports), usually about a number of predefined characteristics of the operation (KPI’s), and issues commands to adjust the operation to keep it aligned with pre-set goals. The management style is more or less directive. Information is used to measure the status of the operation and to convey decisions.

Coordination of employee activities is achieved by a real or ‘virtual’ (i.e. not mechanized procedures) conveyor belt, supplemented if needed by instructions from operational management. As the company grows, more structure and management layers need to be added. Correlation between the activities of the top and bottom layers becomes smaller and models are needed to show upper management what the effects and interdependencies of their decisions are. These models also need to be implemented, communicated and adhered to in a controllable manner.

In general terms, in this view, information consists of data about the performance of the machine and instructions to adjust the workings of the machine to some pre-set value. In general it is assumed that small adjustments have small overall effects.

An important aspect of the Newtonian view is that an economic participant (individual, firm or state) is not subject to communicative or data-processing limitations i.e. well-structured information is instantaneously available and the decision making can be completely rational [15].

The description above is of course grossly exaggerated. But readers will recognize the general idea. There is ample literature available that describes the details of an organization, its management and its characteristics.

The ‘Biological System’ View

In the biological view, an organization is seen to be like a biological system (a living cell for instance) producing substances. Every constituent part of the system takes part in the production of every other part. Interaction between parts takes place by exchanging substances (i.e. products) whose production is controlled by yet other products of the same system. The set of constituent parts of a cell is internally consistent and the cell exhibits homeostasis.

A term introduced by Humberto Maturana and Francisco Varela to describe this kind of order is Autopoeises [16]. The theory of irreversible thermodynamics of systems far from equilibrium put forth by Nobel laureate Ilya Prigogine [17] provides a fundamental physical basis for this kind of emerging order. For other examples of theoretical treatises see [18] and [19]. From a different perspective, Niklas Luhmann’s theory of socio-communicative systems [20] offers a viable, less reductionist model of communication between humans in and across organizations [21].

External stimuli are reacted upon in such a way that the effect of the stimulus is annihilated. Substances not belonging to the consistent set introduced to the system either kill it or are neutralized. Information is transmitted by the transport of substances (i.e. proteins and hormones in a biological cell) under the influence of gradients of various other ‘products’. Order results from the flow of stuff and energy in and out of the system. The system’s identity, i.e. its output, which differentiates it from other systems (in biology a lung cell, a kidney cell, a muscle cell, etc.) is a macroscopic result from the pattern of interaction between its constituents parts. There is no design, no controlling management and there are no predefined goals. The cell results from a recipe that was used by its predecessor(s).

There is an important difference between a blueprint and a recipe. With a blueprint there is a one-to-one mapping, back and forth, between every line in the blueprint and a part of the finished building. With a recipe for a pie there is no mapping between a line in the recipe and a slice of the pie. No part of the recipe can be attributed to a slice of the pie.

The system interacts with its direct environment (like other cells in the same organism in biology), and the ‘organism’ interacts with its environment by means of an exchange of chemicals, radiation or heat. Usually, there is a distinct barrier between the system and its environment. The barrier and its properties are an indistinguishable part of the consistent set of parts that make up the system. Information that is exchanged between constituent parts and information patterns are themselves constituent parts that define the identity of the system.

Although in general such a system constitutes a stable set of parts (i.e. chemical substances) and exhibits stable macroscopic properties, some microscopic fluctuation may have macroscopic (and generally devastating) effects. Like in a living cell where one or two missing amino acids may cause a cell to die or produce proteins that affect other cells is some drastic way. As is the case with a recipe, a small change (i.e. a slightly higher temperature) may have macroscopic effects on the resulting pie.

Another important aspect of the system view is that the omniscience of the economic participants (individual, firm and state) is gone; in other words, rationality is bounded and therefore rational decision making is too [1]. Economics as ‘cyborg science’ [22] makes a place for evolutionary economics [15]:

Evolutionary economics does not take the characteristics of either the objects of choice or of the decision-maker as fixed. Rather its focus is on the non-equilibrium processes that transform the economy from within and their implications. The processes in turn emerge from actions of diverse agents with bounded rationality who may learn from experience and interactions and whose differences contribute to the change. The subject draws more recently on evolutionary game theory [23]

The table below, derived from [24], summarizes the difference between the two views: