The In’s and Out’s of Strategic Sourcing

Strategic sourcing asks, “What’s the best source for every IT service?” This broad context for sourcing looks dispassionately at the variety of sourcing alternatives for every IT service to capitalize on opportunities.

First, embracing strategic sourcing means that no option for obtaining IT services are taken off the table. You consider every alternative and always select the one that meets business needs most effectively.

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Second, strategic sourcing decisions look beyond short-term constraints on resources or current high costs. Strategic sourcing considers the long-term goals of the enterprise to decide what services, skills, competencies, funding arrangements, and so forth, are needed within the enterprise over the long term.

Strategic sourcing is a process, not a one-time decision.

Each decision entails, but is not limited to, attaching numbers (units of money) to the alternative solutions you are considering. As CIO, you and/or your subordinates will usually rely on experts not always from within your organization to value the services from providers.

The specifics of what is being valued need to be identified clearly in a written contract (it’s usually called by another name when discussing an in-house provider). But, first you need to select an appropriate expert.

The Expert

Research suggests that people tend to view desirable outcomes as more probable than undesirable ones. In one study, college students were asked to estimate how likely they were, relative to other students of the same age and sex, to experience various positive and negative events in their lives.

Typically, students considered themselves 15% more likely to experience positive events, such as owning their own home, but 20% less likely to have negative events in their lives, such as suffering a heart attack before they reach the age of 40.

While undergraduates usually have no special knowledge to base such a prediction on, real decision makers will have real-world expertise. Yet, I know from years of experience that even veteran decision-makers can make unrealistic estimates that lead to projects that finish late and/or over budget.

In practice, decisions are often quite complex, and the decision-maker must rely on experts to provide information, usually in the form of probability assessments, regarding crucial uncertainties.

The process by which the expert information was acquired must stand up to professional scrutiny, and thus decision-makers who acquire and use expert information must be able to document the assessment process.

The definition of an expert in any given situation is not always without controversy. Thus, the policy-maker must document and justify the expert selection process. Also, as mentioned, experts can be subject to biases. Thus, decision-makers must show that the environment in which the judgments were made did as much as possible to reduce or avoid these biases.

If judgments from multiple experts are combined to obtain a single probability distribution, then issues of relative expertise and redundancy among the experts must be taken into account.

Skilled negotiation is an integral part of the strategic sourcing processes. If your organization does not have the requisite negotiation expertise internally, and you don’t have the time nor the need to build the expertise internally, you should get reinforcements from a third party before proceeding.

Looking for positive reviews from two (or more) trusted technology partners is a good way to find the needed help.

When evaluating a prospective expert, try to determine whether the candidate is a single-skilled expert or a versatile expert, who has interest in, plus in-depth knowledge of related areas.

The Contract

Contracts are employed to change the risk profile of the project by transferring risk from the project team to the outside provider. A contract is a mutual agreement that obligates two (or more) parties to perform to a specific scope for a specified consideration, usually in a specified time frame.