Why smaller outsource suppliers have an edge?
January 6, 2011
The economy is picking up again and companies are looking for opportunities to grow. Flexibility, innovation and speed to market are shifting to the top of the wish list. This adjustment has not only an impact on the internal organization, but also on the sourcing strategy. A sourcing strategy which focused the last couple of years on signing contracts aimed at lowering cost through standardization and economies of scale.
As aiming for standardization and efficiency results in a very different sourcing contract than one which aims to improve the company’s capabilities to innovate and become more agile, many companies are looking for a different breed of supplier to complement their portfolio. Suppliers which are often below the Tier 1 and 2 players and many even much smaller. Why? Because the big suppliers are masters in providing standard low cost service solutions, supplemented by staff augmentation.
The need for a different type of supplier becomes even more urgent if one looks at some industry-wide trends. A side effect of globalization and more demanding customers is a shorter lifecycle of products and services. The competitive pressures resulting from globalization and buying behavior of customers in combination with the fast paste of technological advances, shorten the payback time of investments in R&D and new production facilities. This can only be counteracted by improving the companies flexible and agility.
Yes the Tier 1 and 2 players also state in their marketing brochures that they are agile and can provide cloud and as-a-service solutions. But at the same time have they heavily invested the last decennia in datacenters, hardware and software which is not tailored to the shift in demand. The old infrastructure is thus often repackaged into a ‘cloud’ solution and to make matters even worse: the accompanying support and service department is this the same. An service department that is organized in functional silo’s with their concrete processes and procedures. Departments that take ages to comes back to you when you have an issue and excel in ping ponging tickets between teams.
This is why many (even larger) companies these days make two adjustments in their sourcing strategy:
- Smaller contracts allocated to multiple suppliers (‘multi vendor’)
- Engage with niche players which can provide in the companies need to improve its flexibility, agility and speed to market.
The main differences between the traditional ‘old school’ supplier and the ‘new kids on the block’ suppliers in my opinion:
- Economics for old school suppliers is based on high fixed cost make large volumes essential to achieve low unit cost; economies of scale are key. Culture shaped by the continuing battle for scale; rapid consolidation, a few big players dominate. Competition is cost focused; stressed standardization, predictability and efficiency.
- Economics for new entry suppliers is based on focusing on early market entry with new solutions enables charging premium prices and acquiring large market share, speed and innovation are key. Culture shaped by the battle for talent, low entry barriers, many small players can thrive. The competition is employee centered, coddling the creative stars which create the new solutions.
The trick for the company which wants to outsource is to create a sourcing strategy which can leverage on the strong points of both types and the capability to integrate the offerings within the internal organization.