Any companies implementing a global sourcing strategy would do well to take the time to read a new report by The Boston Consulting Group (BCG). And according the study “Sourcing from China: Lessons from the Leaders”, the challenges posed by the Chinese market are greater than ever, requiring companies to “continually renew themselves” to overcome them.

Primary among them are internal resistance, lack of incentives for sourcing success, and perceptions of risks, leading the co-author of the report, Jim Hemerling to conclude: “Without top management support and drive to remove roadblocks, it is difficult to drive changes internally.”

The report found that the most important differentiating factors were the development of a clear strategy, incorporating specific targets and plans – according to study, despite 87 percent of companies having sourcing targets, whilst only a third have translated these into specific action plans; an ability to gain 100 percent transparency into sourcing volumes and savings; and the integration of China suppliers and R&D into design. The study’s findings also suggest that the top companies are outperforming their peers in risk management – both real and perceived – in areas such as exchange rates, labour and material cost fluctuations and problems with quality and transportation. In addition the report identifies that, increasingly, companies are consolidating their local and global China sourcing activities in order strengthen their negotiating position with suppliers, with almost two-thirds (64%) of respondents merging the two functions under one organisation.

When it comes to sourcing from China, it seems, the gap between the best and the rest, is as wide as ever, but there has never been a better, or more important, time to play catch-up.

No sooner had Gordon Brown unpacked his bags at Downing Street than Oxfam were calling on the new Prime Minister to take action to encourage greater ethical sourcing in the public sector.

Just weeks later a Guardian investigation raised some uncomfortable questions surrounding the sourcing practices employed by some of the UK’s most prominent retailers and now a new report has claimed that ethical sourcing could see production costs rise by as much as 5% in the near future.

The report ‘The Future of Ethical Sourcing’ , which was carried out by Verdict Research, found that as many as 40% of respondents thought that increased ethical sourcing would see production costs rise by between 5 and 10%, with a further 35.7% saying that they expected a rise of up to 5%.

Less than 10% thought there would be no increase in costs, and 14.3% of respondents said they believed that production costs would soar by over 10%.

The report – which identified that sourcing concerns were increasingly concentrating on environmental as well as Labour issues - also claimed that ethical sourcing expense was likely to place retailers under huge pressure.

"With margins already under increasing pressure from escalating rents and fixed costs, finding a way to absorb the ethical sourcing expense will prove crucial to the profitability and survival of many retail businesses," the report said.

Whether profits will be sacrificed in the quest to source ethically remains to be seen, but there’s little doubt that the pressure placed on companies by increasingly ethical aware consumers, will take its toll on those who chose to ignore these concerns.

A few weeks back I gazed into my crystal ball and predicted that Sarbanes Oxley would soon be rearing its head in the supply chains of many high profile companies who had, to date, escaped its advances.

Now it seems the NYSE is the latest loser as companies are running to the hills to avoid the cost of compliance.

Natural gas giant, BG Group, who were formed in 1997 when British Gas took over Centrica, announced yesterday they were to become the fourth UK blue chip to de-list from the NYSE since January, citing the financial demands placed on it by Sarbox as the major reason for their defection.

BG, who will still trade on the London Stock Exchange, are following the likes of British Airways, ICI and United Utilities down what is fast becoming a well-trodden path.

“It no longer makes sense from a cost and administrative perspective to maintain our SEC (Securities and Exchange Commission) registration and NYSE listing,” the company’s chief financial officer, Ashley Almanza, told reporters.

Hardly surprising given that the move will save BG Group more than £4m a year.

How much longer it will be before another major UK or European company follows their lead is unclear, but one thing seems certain – they won’t be the last.

I once knew of a guy who was unrealistically terrified of the Year 2000. Certain that the Y2K computer glitch would bring commerce to a halt and turn the city into a post-apocolyptic Waterworld, he bought a safehouse in the mountains, stocked it with food, and converted most of his wealth into gold bullion bricks.

True Story.

Now most ELP readers would characterize this person as a paranoid crackpot. (I know I did.) You might argue that he wasted his money and time planning for the most unlikely of events. And you’d be right.

Yet, this is exactly what most supply management organizations do when planning for supply chain risks. (This, or nothing at all.)

“Most companies spend too much time trying to predict and protect against unlikely risk events,” said Venu Nagali, head of Hewlett-Packard’s Procurement Risk Management (PRM) program. Speaking at AMR Research’s Supply Chain Executive Conference, Nagali stated plainly: “The geopolitical risk and natural disasters we hear about in the news are low probability events.”

In short, Negali recommends that supply managers need to pay more attention to the high probability risks that you can control, such as supplier failure or market risks, and take steps to mitigate these.”

HP tracks three areas or uncertainty:

1. Demand uncertainty of its own products
2. Uncertainty of future commodity cost and components
3. Supply availability

As part of its PRM program, HP has embraced new processes, supplier engagement approaches, and systems to better predict, mitigate, and balance risk across the supply chain.

“Risk has traditionally been put on the weakest players in the supply chain — the suppliers,” said Nagali. “Even today most companies don’t set a forecast. They don’t commit [volume] and just expect suppliers to take on all the risk.”

Nagali says HP’s PRM approach is a generic framework designed to answer three basic questions: How much should I buy? At what price? And for how long?

To answer these questions HP assesses the probability of its demand forecasts and of the cost or availability of supply required to support it. Based on this assessment, HP determines high, base, and low scenarios for its demand forecasts and the probability that each will occur.

The high-tech giant uses this probability analysis to define supplier agreements that share both risk and reward. Depending upon the probability and risk of a particular product or supply market, agreement terms range from a fixed quantity with a market-based discount to a fixed quantity, fixed price contract. HP may also use price caps and floors to protect parties even further.

Nagali states simply, “The company that bears the risk, gets paid for it.”

HP first applied this PRM approach to its direct material spend, both for commodity and custom parts and assemblies. The company has since used it to mitigate risk for key and volatile indirect spend categories, such as energy and advertising. In fact, Nagali reported that $7 billion of HP’s spending last year was based on such PRM contracts.

All told, HP has generated more than $445 million in cost savings from implementing its PRM approach. “We help HP take on more risk and save more money,” said Nagali. “But cost savings is not the key objective. Our key goal is to always be certain that we can get the material we need.”

In short, by sharing risk and reward with suppliers, HP has been able to ensure that it is the Customer of Choice when supply markets get tight. And this has helped the company not only to cut costs, but more importantly to gain a leg up on competitors using outdated approaches that require suppliers to take on all the risks of an uncertain market.

For more information on the supply risk issue and approaches to combating it, download the Aberdeen Group report, Supply Risk Increases While Market Stands Still. 

A few months ago ELP looked at the impact an increasingly volatile currency market was having on procurement. And with the dollar showing no sign of recovery, consultancy firm neoIT has just published a research report examining the effect that currency fluctuations are having on the huge number of companies across all industries who are leveraging global sourcing.

According to the report ‘Currency Risk: Overcoming the Dollar’s Demise’, clients should brace themselves for a series of price hikes as the plummeting dollar continues to hit vendor’s profits.

The report also calls for clients to build currency fluctuations and hedging in global service contracts as part of contingency plans aimed at minimising the impact of these ongoing currency changes.

In addition, neoIT claim, current sourcing agreements need to be closely monitored to ensure that any price increases are not shielded by shifts in vendor practices and billing procedures.

Speaking at the launch of the report, neoIT CEO Atul Vashistha, said: "While the current downward movement of the U.S. dollar is not likely to result in major changes for global services clients, clients need to be prepared for longstanding vendors to undergo behavior changes.

"In India , for example, the U.S. dollar has slipped 8.5% compared to the Rupee since the start of 2007. Putting contingency plans in place now to deal with currency risk will help to avoid unpleasant surprises later in the year."

For some companies that unpleasant surprise has already presented itself, but for the remainder planning now could see them steal a march on the competition.

It’s safe to say that most financial directors across the pond wouldn’t complain if someone offered them five minutes in a boxing ring with messers Sarbanes or Oxley.

Sarbox, which came into effect in July 2002, threw executives at some of the world’s top companies into a state of panic from which they are yet to recover but in the UK, and the rest of Europe, those companies who are neither quoted on the US stock market or are subsidiaries of US companies have previously viewed those effected with something approached mild amusement.

However, according to a new report by Henley Management College, the smiles could soon be wiped off their faces.

And as Andrew Sawers rightly points out in his recent blog on vnunet.com, companies that have previously operated “safe in the knowledge that they’ve probably been able to devote more time to actually growing their business than their Sarbox-compliant rivals”, may soon have to forsake a coffee break or two.

The report, sponsored by Microsoft suggests that a large number of UK companies (possibly as many as 9000) will soon have to comply with the act as Sarbox begins rearing its head through their supply chain.

At present 5000 British companies already comply, or will soon do so and although Henley describe the current legislation as “an economic constraint”, the report does point out that, hard to believe as it may seem, a competitive advantage can be gained through the voluntary adoption of the rules. This is particularly the case for any companies look to trade with the US.

Henley argue that the same goes for companies striving to attain supply management excellence: “the more outsourced and dispersed the supply chain, the more difficult it becomes to establish and audit process controls. Therefore, working with trading partners that share a similar commitment to security and financial integrity is imperative,” the report states.

There will, of course, be companies who will, rightly or wrongly do all they can to avoid US companies and the perceived baggage that association comes with, but for many non-compliance will not be an option – it will be an imperative.

 

In a rather bold claim, recruitment company Harvey Nash believe Vietnam will be a more popular outsourcing destination than either China or India within the next five years.

Although slightly clouded by the fact the London-based recruiters have just purchased Ho Chi Minh-based recruitment business SilkRoad for $1.8 m, they do offer some compelling evidence to back it up .

The company rightly point out Vietnam has the second-highest GDP growth in south-east Asia (China, unsurprisingly tops th e table), and is already the third-largest offshore services destination in the region.

So far so good. When you add in the fact Vietnam currently boasts around 80,000 IT graduates in a country where more than half of the population of 84m are under 25-years-old, its appeal becomes abundantly clear.

"With a growing and youthful IT workforce, low costs and high aspirations to develop its software services, Vietnam is a natural offshore location and has all the ingredients to become the leading market choice in the next few years," Marc Voss, the chief executive of SilkRoad said.

However, despite it’s booming reputation it clearly has some way to go to catch up with the likes of India and China, who are relentlessly churning out graduates to the tune of 2.5m a year. But with the likes of Honda and Intel already outsourcing IT services to the country, Vietnam, as Harvey Nash undoubtedly hope, could soon be the new kid on the block.

Ever wondered what separates those who benefit most from outsourcing and those who don’t? Well if you’re still curious then it’s worth taking a couple of minutes to log on to Accenture.com to hear the company’s chief executive for outsourcing, Kevin Campbell, impart some words of wisdom.

Focusing on the bigger picture and not getting bogged down in day-to-day issues are just two of the key messages from the man at the top, who also insists that taking the time and effort to build relationships with outsourcing providers is another key to unlocking the secrets of outsourcing success.

“Too often people get caught in the contract or the cost reduction,” Campbell warns. “They get focused on the inputs not the outputs.” Something we can all relate too.

“You need someone to contribute to how you’re moving your company forward, that’s not a provider, that’s a partner,” he adds.

Creating additional value through the leveraging of gain sharing is also one of the attributes that separates the best from the rest, alongside ensuring that the relationship is managed by a dedicated executive.

“This is not a part-time job, this is not a some-time job this is not a job that someone can do two hours a week,” Campbell says.

Moving on, he then debunks and deals with some of the current myths that have been built up and surround outsourcing, such as companies believing that when they outsource they lose control.

Not so, says Campbell : “In general a well constructed contract and relationship will actually improve control, you don’t lose control.”

And if companies thought that outsourcing was the preserve of struggling companies they couldn’t be further from the truth.

“The best companies in the world, the ones that are the top performers are the ones that are making extensive use of outsourcing,” he says. “It’s the stuff that the leaders do.”

You heard it here first.

It’s official – acting in a corporately responsible manner is not only good for the soul, it can also seriously improve your business. At least that’s what a new survey from one of the largest global investment banks claimed on the eve of the UN’s two-day Global Compact summit in Geneva .

According to Goldman Sachs, companies on their ethical list outperformed the MSCI World Index by an average of 25 per cent. Furthermore, 72 per cent of companies also outperformed their sector peers.

All of which should be enough to make those companies being dragged kicking and screaming into a more corporately responsible world sit up and take notice, even though the latest findings fly in the face of previous figures concerning ethical indices.

Since 2000 it has been widely acknowledged that indices, such as the Dow Jones Sustainability Index and the FTSE4Good, have performed well below the stock market average. The latest study, however, claims that this can be attributed to the fact that the indices are based on ethical environmental, social and governance (ESG) factors in isolation.

McKinsey have also got in on the act, launching another survey that illustrates the growing importance of CSR and demonstrating that social responsible conduct is no longer viewed as a costly burden, but is now seen as a means of leveraging a competitive advantage over their peers.

McKinsey surveyed almost 400 top executives of Global Compact companies and found that the past five years have seen companies do more than ever before to ensure that ESG issues are integrated in their business strategies.

Striking a cautionary note though, McKinsey found that there was still a gap between the intentions and actions of many companies, with findings suggesting that only 50 per cent of CEO ’s think their companies were doing enough to embed new CSR practices into company strategy.

Last week it was announced that Infosys may be looking to acquire Capgemini in a bid to dramatically increase its European capability. While the rumour is yet to be confirmed or denied, this marks an interesting shift in the global sourcing market.

For the past couple of years, global outsourcing providers have been increasing their offshore capability through the set up of global delivery models as well as the acquisition of smaller organisations in India . In the past eight months there have been at least seven major acquisitions in the Indian market including Mphasis by EDS and Kanbay by Capgemini.

A global delivery model with substantial offshore leverage has become a necessity for providers in today’s market and as the leading offshoring destination; India emerges as the natural choice for acquisition targets.

However, while this has been happening the Indian players have been slowly but surely expanding their capability and client base in the US and Europe , taking the fight straight back to the global players.

Since 2006, Indian providers have made at least thirteen acquisitions abroad, spread over the North American and European Markets. However, up until now, the majority of these acquisitions have been modest in comparison to what has been taking place on their home turf. With the market capitalisation of some of the big Indian providers between two and five times that of other traditional outsourcing providers is it about time they made the jump and bought big on the acquisition field?

The cash rich Infosys has been notoriously shy of acquisitions. But then, it’s also been a trend-setter of sorts, and this acquisition would certainly shake up the playing field and would be an interesting development for the market and clients from both organisations. A key challenge is, with Infosys already growing at an impressive rate would the acquisition provide them with enough of an opportunity to warrant the slow down in its business that integrating such a fundamentally different business and culture would bring?

Only time will tell – but consolidation in the outsourcing market place is here to stay and the battle will no doubt be played in both the East and the West.