A common complaint from service providers during the early days of outsourcing was the unrealistic desire of client organizations to “have it all.”  Specifically, clients would demand low prices on the one hand and added value on the other. Or, they’d haggle on commodity services and then complain when the vendor failed to deliver innovation or devote their top talent to the client’s needs.

In a maturing marketplace, that attitude has given way to a recognition that an effective sourcing strategy requires a balancing of priorities defined by business needs. But this doesn’t necessarily mean that sourcing objectives should be an either/or proposition, a choice between quality on the one hand and low cost on the other. Rather, service delivery should provide the level of service appropriate to the business at the lowest possible cost. Cost and quality, in other words, are integrally linked. 

From this perspective, low cost is always a priority--it’s simply that the definition of low cost varies according to the business environment. Moreover, value-added services can be delivered with lean and mean efficiency, while no-frills commodity services can be a money drain.

Businesses that neglect the cost/quality linkage do so at their peril.  A myopic focus on cost cutting risks disruption of critical business services, while businesses that put quality first, “whatever the cost,” usually pay more than is necessary and miss opportunities to drive out superfluous spend.  For example, Compass recently analyzed the operations of a government agency and found that 15 percent of the total contract was devoted to services not being utilized.  In other words, eliminating that spend had no detrimental impact on quality.

In today’s difficult economy, the need to view cost and quality in the broader context of business requirements often falls victim to short-term pressure for immediate discounts--and the consequences be damned. As such, it’s often the proposal with the lowest initial price tag wins the day, with little regard to business needs or whether the services to be delivered address them.

So how do you overcome this short-termism and build a case for a business-aligned, cost-effective sourcing strategy? Compass recently hosted a panel discussion in Chicago, where executives from several Fortune 500 companies shared their views on sourcing challenges. One of the topics addressed was that of maintaining stakeholder support for an initiative over the long term. To illustrate, the following scenario was outlined: A sourcing initiative takes 18 months to deliver cost savings from labor arbitrage, and a full 36 months to yield significant benefits in terms of optimized process efficiency. The executives then posed the question: Given the short-term focus of business today, how can you maintain momentum and support for the initiative? 

From Compass’ perspective, a business case that justifies the time-frame involved can help keep the project on track. As we’ve discussed in previous Global Services columns, one key to an effective change plan is a detailed baseline analysis of the environment prior to implementation of the sourcing initiative.   This provides a point from which to measure results. Based on the pre-initiative operational analysis, an effective benefit management framework can then be developed to ensure that potential savings and other improvements are realized. 

Another key to a successful sourcing strategy is the ability to assess various alternative scenarios to select the optimal course of action within a given set of conditions and constraints, or in response to changing business needs. Consider the scenario described earlier, where a sourcing initiative yielded cost savings in 18 months and process efficiency improvements in 36. In this instance, a scenario analysis can help the business determine if a shorter initiative delivering less significant benefits might better meet requirements. And, if that’s the case, the analysis can show how best to streamline the initiative, and where to cut corners.

Scenario modeling is also critical to maintaining integration between cost and quality in response to change.  As business requirements evolve, the sourcing relationship needs to adapt accordingly and with agility. For example, following a period of retrenchment, businesses now seeking to innovate to gain a competitive edge may need to revisit their sourcing strategy; clearly defined alternative models can help chart the way to an optimal course, even under less than optimal circumstances.

Effective sourcing strategies are characterized by careful consideration of objectives and priorities, and by the establishment of management frameworks and mechanisms to address those priorities over time. One fundamental goal is to deliver appropriate services at the lowest possible cost. Another is to respond to change in order to continue to deliver appropriate services in a cost-efficient manner.