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 Distinctiveness – The sourced vendor is the source of distinctiveness for the sourcing organization. The sourcing organization then becomes particularly dependent on the continued development and success of the second organization.

Do not confuse distinctive activities with critical activities. Critical activities do not necessarily refer to activities that may be distinctive to the service provider. Take, for example, customer service. Customers may believe it is critical, but if it does not differentiate the provider from competing alternatives then it is not distinctive, it is context.

This does not mean critical activities are not important. Contextual activities are not of secondary importance. It means they do not provide the differentiating benefit that generates value. One service provider’s context may be another’s distinctiveness. What is distinctive today may over time become context. Contextual processes may be recombined into distinctive processes. Here is a basic test:

 Does the customer or market space expect the service provider to do this activity? (context)

 Does the customer or market space give the service provider credit for performing this activity exceptionally well? (distinctiveness)

Early adopters of airline kiosks, for example, differentiated themselves through self-service technology (Mode-E). While kiosks were a distinctive activity central to the service strategy, it was hardly critical. Years later, customers expect kiosks at all locations for every airline. Every major airline considers it a critical activity but not distinctive – it no longer differentiates. Hence airlines consolidate or source this critical activity. They collaborate with partner airlines to provide kiosks any member airline may use. They source kiosks from Type III providers who place them in corporate locations, hotels and public places.

6.5.2 Sourcing structures

The dynamics of service sourcing require businesses to formally address provisions for a sourcing strategy, the structure and role of the retained organization, and the impacted decision rights processes. When sourcing services, the enterprise retains the responsibility for the adequacy of services delivered. Therefore, the enterprise retains key overall responsibility for governance. The enterprise should adopt a formal governance approach in order to create a working model for managing its outsourced services as well as the assurance of value delivery. This includes planning for the organizational change precipitated by the sourcing strategy and a formal and verifiable description as to how decisions on services are made. Figure 6.12 and Table 6.2 describes the generic forms of service sourcing structures.

Figure 6.12 Service sourcing structures
































































































































	Sourcing structure
	Description
	Internal (Type I)
	The provision and delivery of services by internal staff. Does not typically include standardization of service delivery across business units.
	Provides the most control but also the most limited in terms of scale.
	Shared Services (Type II)
	An internal business unit. Typically operates its profit and loss, and a chargeback mechanism. If cost recovery is not used, then it is Internal not Shared Services.
	Lower costs than Internal with a similar degree of control. Improved standardization but limited in terms of scale.
	Full Service Outsourcing
	A single contract with a single service provider. Typically involves significant asset transfer.
	Provides improved scale but limited in terms of best-in-class capabilities. Delivery risks are higher than Prime, Consortium or Selective Outsourcing as switching to an alternative is difficult.
	Prime
	A single contract with a single service provider who manages service delivery but engages multiple providers to do so. The contract stipulates that the prime vendor will leverage the capabilities of other best-in-class service providers.
	Capabilities and risk are improved from Single-Vendor Outsourcing but complexity is increased.
	Consortium
	A collection of service providers explicitly selected by the service recipient. All providers are required to come together and present a unified management interface.
	Fulfils a need that cannot be satisfied by any Single-Vendor Outsourcer. Provides best-in-class capabilities with greater control than Prime. Risk is introduced in the form of providers forced to collaborate with competitors.
	Selective Outsourcing
	A collection of service providers explicitly selected and managed by the service recipient.
	This is the most difficult structure to manage. The service recipient is the service integrator, responsible for gaps or cross-provider disputes.

The term Co-Sourcing refers to a special case of Selective Outsourcing. In this variant, the service recipient maintains an Internal or Shared Services structure and combines it with external providers. The service recipient is the service integrator.

Table 6.2 Service sourcing structures

The selection of a sourcing structure should be balanced with acceptable risks and levels of control. The method an organization uses to manage a sourcing relationship depends greatly on the sourcing organization’s characteristics such as degrees of centralization, standards and process maturity. In general, the sourcing organization should excel in establishing a set of relationship standards and processes. Other key responsibilities are to:

 Monitor the performance of the agreements and the overall relationship with providers.

 Manage the sourcing agreements.

 Provide an escalation level for issues and problems.

 Ensure prioritization for providers.

When sourcing services, enterprises should first focus on clearly defining the services. All too often the primary focus is on the reporting structures and the resources aligned to those structures. Resource alignment and organizational structures should be analysed and adjusted only after understanding the dynamics of the new or enhanced services. This affords the opportunity to remove redundancies and ambiguities, and chokepoints and dysfunctions prior to creating workflows.

Once the resource and organizational discussion begins, be sure to account for the introduction of new critical skills. While highly dynamic, these competencies generally fall into three categories: business, technical and behavioural. For example, the greater the level of outsourcing, the greater the need for business and behavioural skills. The greater the level of internal sourcing, the greater the need for technical skills.

6.5.3 Multi-vendor sourcing

The approach of sourcing services through multiple providers has emerged as a good practice. The enterprise maintains a strong relationship with each provider, spreading the risk and reducing costs. The challenges are in governance and managing the multiple providers. When sourcing multiple providers, the following issues should be carefully evaluated:

 Technical complexity: sourcing is useful for standardized service processes. Be mindful that as customization increases it is more difficult to achieve the desired efficiencies.

 Organizational interdependencies: contractual vehicles should be carefully structured to the dynamics of multiple organizations. Incentives, training, and other intangibles can have significant long-term effects.

 Integration planning: carefully consider the need for integration planning and solutions. This can take the form of standardized reporting and service reporting, or installed technology and protocols that integrate tools and data.

Figure 6.13 The service sourcing staircase

There are multiple approaches and varying degrees in sourcing. How far up an organization is willing to go with sourcing depends on the business objectives to be achieved and constraints to overcome (Figure 6.13). Regardless of the sourcing approach, senior executives must carefully evaluate provider attributes. The following is a useful checklist:

 Demonstrated competencies: in terms of staff, use of technologies, innovation, industry experience and certifications (ISO/IEC 20000)

 Track record: in terms of service quality attained, financial value created and demonstrated commitment to continual improvement

 Relationship dynamics: in terms of vision and strategy, the cultural fit, relative size of contract in their portfolio and quality of relationship management

 Quality of solutions: relevance of services to your requirements, risk management and performance benchmarks

 Overall capabilities: in terms of financial strength, resources, management systems, and scope and range of services.

6.5.4 Service Provider Interfaces

To support development of sourcing relationships in a multi-vendor environment, guidelines and reference points (technical, procedural, organizational) are needed between the various service providers. These reference points can be provided through the use of Service provider interfaces (SPI) (Figure 6.14).

SPIs help coordinate end-to-end management of critical services. The Service Catalogue drives the service specifications, which are part of, or extensions to, standard process definitions. Responsibilities and service levels are negotiated at the time of service relationship contracting, and include:

 Identification of integration points between various management processes of the client and service provider

 Identification of specific roles and responsibilities for managing the ongoing systems management relationship with both parties

 Identification of relevant systems management information that needs to be communicated to the customer on an ongoing basis.

Figure 6.14 Service provider interfaces

Process SPI definitions consist of:

 Technology prerequisites (e.g. management tool standards or prescribed protocols)

 Data requirements (e.g. specific events or records), formats (i.e. data layouts), interfaces (e.g. APIs, firewall ports) and protocols (e.g. SNMP, XML)

 Non-negotiable requirements (e.g. practices, activities, operating procedures)

 Required roles/responsibilities within the service provider and customer organizations

 Response times and escalations.

SPIs are defined, maintained and owned by process owners. Others involved in the definition include:

 Business representatives, who negotiate the SPI requirements and are responsible for managing the strategic relationships with and between service providers

 Service provider process coordinator(s) who take operational responsibility for ensuring the operational processes are synchronized.

6.5.5 Sourcing governance

There is a frequent misunderstanding of the definition of governance, particularly in a sourcing context. Companies have used the word interchangeably with ‘vendor management,’ ‘retained staff,’ and ‘sourcing management organization’. Governance is none of these.

Management and governance are different disciplines. Management deals with making decisions and executing processes. Governance only deals with making sound decisions. It is the framework of decision rights that encourage desired behaviours in the sourcing and the sourced organization. When companies confuse management and governance, they inevitably focus on execution at the expense of strategic decision making. Both are vitally important. Further complicating matters is the requirement of sharing decision rights with the service providers. When a company places itself in a position to make operational decisions on behalf of an outsourcer, the outcomes are inevitably poor service levels and contentious relationship management.

Governance is invariably the weakest link in a service sourcing strategy. A few simple constructs have been shown to be effective at improving that weakness:

1. A governance body. By forming a manageably sized governance body with a clear understanding of the Service Sourcingstrategy, decisions can be made without escalating to the highest levels of senior management. By including representation from each service provider, stronger decisions can be made.