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How to manage the global sourcing of services

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Today’s guest post is from Robert Kennedy, executive director of the William Davidson Institute and Tom Lantos Professor of Business Administration at the University of Michigan’s Ross School of Business. His new book, “The Services Shift: Seizing the Ultimate Offshore Opportunity” explores the issues discussed in this article.

One of the most important, but underappreciated, economic developments in recent years is that globalization has come to the services sector. This Services Shift is both an opportunity and a challenge for firms. To realize the potential of global sourcing, firms must develop new skill sets in their management ranks.

Until the mid-1990s, most workers in the services sector — which comprises 78% of US employment — were largely isolated from global competition. Today, India’s services exports total more than $70 billion, and they are growing at 25-30%. More than 30 other countries are working feverishly to emulate India’s success, and offshoring is becoming a global phenomenon.

Global sourcing offers the potential of large improvements in firm performance, including:

  • Labor cost savings that range from 40-70%.
  • Access to scarce talent.
  • Access to best-practice service delivery platforms. When working with leading providers, it is common to see reductions of 50-80% in cycle times and error rates.
  • Building capabilities to help with future sales in the growth markets of the future.

Realizing the benefits of global sourcing requires a dramatic change in how firms manage themselves. The old model of vertical career paths (where the best clerk becomes the supervisor, the best supervisor becomes the manager, etc.), no longer works. The new model requires that global sourcing managers influence workers around the globe, many of whom the manager has never met and who work for another firm.
Firms must develop and nurture five distinct skill sets in their middle management ranks to unlock the potential of global sourcing:

  1. Analytics competency. The old model was based on deep domain knowledge and management by walking around. The new model relies on daily reports, statistical analysis, and adherence to performance levels specified in service level agreements.
  2. Systems thinking. The old model emphasizes fixing errors and moving on. Global sourcing managers must work with vendors to identify the root cause of errors, jointly redesign workflows and controls, and negotiate how to share the costs and benefits of such continuous improvements.
  3. Negotiation and soft skills. Global sourcing managers do not directly control workers, so they must influence them via incentives, well-designed contracts, and other soft influence methods.
  4. Cross cultural comfort. Front-line workers now reside in far away places, with very different work styles and cultural backgrounds. Global sourcing managers must thrive in this environment, but many can not make the transition. My research shows that 50-70% of middle managers cannot make this transition – primarily for cultural reasons.
  5. 24/7 work cycles with constant travel. Global sourcing managers are constantly on call, and many are abroad at least one week a month. Again, some managers thrive on such challenges. Others wilt.

This is a demanding set of criteria, and managers with these skills are difficult to find. The rewards of going offshore are vast, but doing so successfully requires deep changes in management.
Global sourcing is a tough game. But it’s one you have to play. If you don’t and a rival does, it will be difficult to catch up.

Image credit, iStock