Implications for Customers

Customers need to choose appropriately across suppliers and locations, put in place a long-term plan to take advantage of any future positive impact, and plan to re-visit the contracted terms in future. This will ensure that their impact is in line with the rest of the market movement.

Choose across suppliers and locations. The choice of FAO supplier and the delivery location depends on the buyer’s unique situation and requirements. The appropriate delivery location needs to optimize across the maturity of delivery locations versus the savings potential offered by those locations. Do take into account that the maturity and savings potential of delivery locations may evolve differently over the length of the contract (See Figure 1).

Ensure a long-term plan. As the global sourcing landscape evolves, new levers of value creation are likely to emerge, while the impact from current levers may change. Accordingly, the “optimal” solution of the future could be very different from what is termed “optimal” today. Buyers and suppliers need to plan a methodology for making their contracts flexible enough to incorporate any changes in the market as may happen in the future, without jeopardizing their individual interests and maximizing their returns over the length of the contract. For example, in certain situations, building a “gain-share” mechanism could be an effective way for suppliers to gain buyers’ support for exploring better and more cost-effective delivery locations in the future.

Re-visit the plan. Over the lifetime of the contract, FAO buyers and suppliers need to regularly benchmark their impact against the prevalent market, in order to ensure a fair price for the service, and identify areas for further increase in impact.

Implications for Service Providers

For suppliers, a key success factor is their ability to create a long-term sustainable portfolio of global sourcing locations to support their growing delivery needs. In order to do this, suppliers need to adopt a holistic portfolio-management approach to delivery locations that could extend from a five-year strategy down to tactical-operational optimization and risk management of current operations. This portfolio also needs to have a mix of three types of locations: Core locations that would house between 2000–10000 Full-time Employees (FTE), peripheral locations housing between 500–2000 FTEs and opportunistic locations housing between 50–500 FTEs.

In addition, we believe that suppliers need to adopt a more holistic approach toward making location decisions that focus on choosing between 100–150 cities (versus 7–10 countries), and plan for long-term changes versus comparisons of current attractiveness.

Finally, suppliers need to choose their source locations based on where their buyers are situated, as this plays a key role in the choice of the most attractive delivery location (See Figure 2).