Enterprises seeking a solution to the Sourcing Dilemma – whether to build, buy or hire — enjoy a panoply of business models in outsourcing. While each model enables the enterprise to obtain access to the service provider’s technology, expertise and resources, each business model reflects differences in management of commercial risks, financial commitments, intellectual property and human resources. Within each business model, nuances arise that reflect special balances of these components. This section deals with various models of business process management and supply chain management.
Internal Constituencies. The variations in outsourcing business models reflect a variety of different factors that matter to the board of directors, the C-suite executives responsible for gross and net profits across multiple lines of business and line-of-business executives having a more limited mission. At the enterprise level, the selection of a particular outsourcing model will reflect the enterprise’s legal framework for managing, reporting, auditing and ensuring compliance with the enterprise’s ethics and code of business conduct internally and externally across the enterprise’s service supply chain. At the line-of-business level, the differences in the models will have a significant impact on how work is done and who is responsible for successes and failures.
Variables Affecting Choice of Outsourcing Business Model. Accordingly, the outsourcing business models reflect differences in the following business factors:
- the allocation of risks and rewards;
- the allocation of control over decision-making;
- the allocation of control over personnel and subcontractors;
- the allocation of ownership of the service delivery infrastructure, and the timing of any shifts in such ownership between the enterprise customer and the service provider;
- the assumption of liability for particular risks including lost profits, regulatory non-compliance, breach of confidentiality and substandard service quality;
- pricing structure, including:
- possibilities for gain sharing and revenue sharing from generation of cash flows from use of the enterprise’s intellectual property, proprietary business information or other assets; and
- the customary challenges of credit risk management and related structures of payment for capital costs and operating expenses and related tax and accounting principles;
- the development of innovative strategies and the ownership or right to perpetual use of innovations developed as part of the long-term relationship;
- organizational change management dynamics, such as the enterprise’s capabilities, intentions and internal governance structures that will effectively use the outsourcing to implement internal changes that have an impact on the goodwill of its customers and clients;
- life-cycle flexibility, that is, how easy and inexpensive it is to enter into, implement, continue and terminate one outsourcing relationship and move to another;
- competitive interchangeability of suppliers (vs. sole-sourcing) for project-based services;
- the regulatory framework relating to control of the workforce and related knowledge management processes;
- whether any assets to be created or used for service delivery are “new” (to be created) or existing;
- which party has ultimate responsibility for keeping the end-user customers; and
- territorial, timing, financial and other factors.
Designing and Patchworking the Enterprise: Mixing and Matching Different Business Models. Outsourcing co-exists with in-sourcing, consulting, joint ventures and other forms of serving markets and creating shareholder value. An enterprise may also choose to “mix and match” multiple alternative outsourcing models and to integrate that mix with its own internal resources so that, as a whole, the enterprise achieves business resiliency, agility, innovation, knowledge management and flexibility to manage volatility in resource demand. In a holistic business strategy, the enterprise can thus design its resources of people, process and technology across different service models to manage contingent demand for such resources in volatile markets.
Life-Cycles of Business Models. The outsourcing model might not last forever. Every contract expiration offers new opportunities for redesigning the value chain in which goods and services are aggregated and sold under the enterprise’s brand. Renegotiation, re-sourcing to another service provider and recapture to in-sourcing are predictable renewal models for an expired or failed outsourcing. A skilled lawyer’s breadth of experience across such life-cycles and alternative business models can prove a valuable investment in the negotiation and viability of technology-enabled, people-supported business services.
Traditional Sourcing Models:
- Classic Outsourcing
- Joint Venture (between Enterprise Customer and Service Provider)
- Group Captive (among Multiple Enterprise Customers for their Own Captive)
- Wholly-Owned Operating Subsidiary (“Captive” or “Shared Services Center”)
- Virtual Operating Subsidiary
- “Managed Services”: Facilities Management / “Operations and Maintenance” / Infrastructure Management
- Build-Operate-Transfer (“BOT”) and Build-Own-Operate-Transfer (“BOOT”)
Variations on Sourcing Models:
- Variations: Divestiture of Facilities and Personnel
- Variations: Multi-Sourcing Model
- Variations: General Contractor Model
- Variations: Multi-Country vs. Single Country Sourcing
- Variations: Reciprocal Sourcing: Barter/Countertrade
Internet-Based Variations on Service Delivery Models:
Traditional Alternatives to Outsourcing