The Positive-Sourcing Hypothesis

 At Source we believe passionately that outsourcing when carried out in the right way should have a positive impact on every individual and organisation involved in the process. 

The immediate reaction of many people to this position is, “That’s a glib statement, but surely that’s not possible? In any deal there’ll be a winner and a loser”

Most people, if they think about it at all, think of sourcing as a negotiation where one side is bound to lose, something like this: 

Technically, this resembles what’s called a “zero sum game” – there’s always a winner and a loser. Chess is a good example of a zero sum game, if we ignore the odd stalemate (and the use of that term in the English language shows that it’s pretty much thought of as being a special case where both sides are losers). 

Mathematicians love zero sum games as they are tractable, and you can prove all sorts of interesting results about them.

Economists like these results as, if you make a few assumptions about the way the world works you can come up with some nice models like “the efficient market hypothesis”, which at a stroke of a pencil allow you to do away with the complexity of real life and provide a mathematically sound foundation for your predictions.

Unfortunately for economists, real life has a habit of confounding these assumptions. For example in 1998 a hedge fund called Long Term Capital Management made some rash assumptions based on zero sum games, and as a result lost so much money it almost brought down the world banking system. 

So if zero sum games don’t work too well for economists, how about for outsourcing?

Using a simplistic statement of objectives like the one above you’ll end up in the kind of procurement-led negotiations which gave outsourcing a bad name.

The line old-timers will give you, “Each side should come away thinking they could have got more”, sums up this approach.

In the example above it leaves the client with a rate card they are sure they could have bettered somehow, and the supplier with a margin they can’t live with unless they provide the cheapest possible (under-qualified, low productivity) programmers. 

A more sophisticated statement of objectives can help reveal that the situation isn’t the zero-sum game you thought it was. Here’s an ever-so-slightly more sophisticated version of the example above:

There’s clearly a positive outcome for both sides sitting in there, if only you can break down the barriers of an overly formal procurement process, and allow it to be found.

So, positive sourcing is theoretically possible if you don’t over simplify your model... how can you apply this theory in practice? To achieve positive outcomes:

• You need to be clear about all the needs within your organization which have to be satisfied to achieve a good outcome – including all stakeholders and view points, whether business, IT, transferring staff, legal or financial
• Different suppliers have different objectives, so the selection process needs to be geared to uncovering the supplier with whom you have the most common ground in which to achieve a positive outcome.
• You need to negotiate a contract and governance framework which is aligned against both sides’ objectives. Too many times both sides are aligned when a selection is made, but a procurement-led contract negotiation leads to a stalemate framework in which both sides are set up to lose