The "Source Board": a tool for identifying, classifying and visualizing sourcing strategies--illustrated with the example of a bank.
Abstract:
Selecting appropriate measures and combining them to create a holistic company strategy are keys for a company's sustainable success. The responsible decision makers within a company can choose between very different options, such as own production, outsourcing or co-operations, which also impact on each other outside of the various company divisions. In order to make informed decisions, a tool is required for visualizing a holistic sourcing strategy, identifying connectivity and providing guidance for future developments. Based on a fundamental understanding of value creation, the Source Board is such a tool. Here, its application is illustrated by the concrete example of a bank.

Keywords: Sourcing Strategy, Sourcing Positioning, Sourcing Decision, Management Decision, Value Creation, Value Chain, Processes in Consumer Banking

Article Type:
Report
Subject:
Vendor relations (Analysis)
Banking industry (Outsourcing)
Outsourcing (Analysis)
Authors:
Braun, Dirk
Schiffer, Sarah
Pub Date:
03/01/2012
Publication:
Name: International Journal of Business Research Publisher: International Academy of Business and Economics Audience: Academic Format: Magazine/Journal Subject: Business, international Copyright: COPYRIGHT 2012 International Academy of Business and Economics ISSN: 1555-1296
Issue:
Date: March, 2012 Source Volume: 12 Source Issue: 2
Topic:
Event Code: 480 Use of services Computer Subject: Vendor relations; Banking industry; Outsourcing
Product:
SIC Code: 6021 National commercial banks; 6022 State commercial banks; 6029 Commercial banks, not elsewhere classified
Geographic:
Geographic Scope: United States Geographic Code: 1USA United States
Accession Number:
293813070
Full Text:
1. INTRODUCTION

In order to raise its level of value creation, it is imperative that a company tackles the concept of "sourcing", enabling it to focus on specific core processes, while other companies implement the less profitable ones. A sourcing decision must, however, be carefully considered, since it is a key factor behind a company's future competitiveness (Langhans, 2007). But in actual practice, it is frequently the case that decisions of this kind are not based on a theoretical foundation or detailed analysis of in-house value creation but principally on potential cost-savings in a sub-area of goods or services (Best/Weth, 2005 and Rebouillon/Bauer, 2001). Basing sourcing decisions on the observation of only one part of the whole is an insufficient measure, and this is demonstrated by the fact that the expected cost advantages frequently fail to materialize and that, in a lot of cases, problems arise with regard to quality (Cooper/Kaplan, 1988 and Grum/Schneider/Frohmuller, 2008).

This paper will demonstrate the relevance of an understanding of value creation if a company is to have sustainable success, and the special significance of the way in which sourcing decisions are handled. It also provides a systematization of potential sourcing alternatives (Section 2), and shows how a fundamental understanding of value creation finds application in a concrete case study from the finance industry (Section 3). The importance of an understanding of processes is highlighted and reflected in our Source Board. The Source Board is an analytical tool that facilitates sourcing decisions. Its compilation entails an intensive analysis of value creation and the processes involved within the company and results in an overview of sourcing positioning for developing strategies or benchmarking within the framework of strategic competitive positioning.

2. THE SIGNIFICANCE OF SOURCING FOR VALUE CREATION

First, in Section 2.1 we look at the significance of a fundamental understanding of value creation for the success of a company. Building on this basis, in Section 2.2 we examine the necessary modifications to this traditional understanding of value creation with regard to the long-term viability of companies, and look at the significance of sourcing. In Section 2.3 we provide a systematization of sourcing options, which includes on the one hand various strategies for companies and on the other hand serves as a basis for the necessary systemization of our Source Board, as introduced in Section 3.3.

An Understanding of Value Creation as a Foundation for a Company's Success

Identifying a company's individual core competences and adjusting its business operations to fit these, enables a company to differentiate and to successfully position itself on the market. PORTER's value chain model, which was developed in the 1980s, is helpful for structurally depicting the strategically relevant activities of (producing) companies. The motivation of this model is the fact that competitive advantages cannot merely be elucidated by observing a company as a whole but rather that competitive advantages arise out of interplay between the various activities within a company (Porter, 2004). However, this is only the case if the product or service has an (identifiable) value for the customer (Ramirez, 1999 and Lombriser/Abplanalp, 2005). The value chain makes visible a company's value creation, which is composed of the costs of resource input and the profit (or the profit margin). As Figure 1 shows, value creation is broken down into primary activities--which are linked to the production and the selling of a product and to customer service--and into support activities, which aid the implementation of these activities and in some cases enable it (Porter, 2004).

[FIGURE 1 OMITTED]

PORTER named his 5 primary activities inbound logistics, operations (incorporating all production steps and all transformation activities), outbound logistics, marketing & sales, and service. His supporting activities are firm infrastructure, human resource management, technology development and procurement (Porter, 2004). Depending on the model's application, the value chain has to be adapted and modified to suit the specific features of a company. (This issue will be dealt with further on in this paper and illustrated by the case study).

If we take a closer look at the value chain, we notice that the activities are not only viewable in isolation of each other, but that linkages exist between them. Via these linkages, information or even tangible objects can be exchanged. If we extend our observation and go beyond the observation level of one single company, we can see "vertical linkages" between that company and its suppliers and customers. The company value chain is only a small part of a larger value chain system, to which other company value chains belong, e.g. those of the suppliers and buyers (Porter, 2004. For more detailed information about the structure of value creation, see e.g. von Nitzsch, 2008).

Sustainability via a Changed Understanding of Value Creation

When secondary functions, such as IT, are completely outsourced, the relative vertical production integration within an individual company decreases. Service functions are reorganized; administration and production functions are, to a great extent, separated. Consequently, the traditional company business model with integrated value creation is being replaced by models of networked and cross-company production and service provision (Sokolovsky, 2005 and Speek, 2008).

In the literature, this particular development is referred to as deconstruction. It involves in particular "the decomposition and innovative reconstruction of the existing economic and organizational structures which define a business" (von Oetinger, 2000, translation author's own). The objective is to develop new business alternatives in such a way that the old and rigid stages of value creation are decomposed. In this way, innovative value creation architectures can be created as part of a value network (von Oetinger, 2000; Normann/Ramirez, 1993; Winkler/Slamanig/Kaluza, 2008; Winkler/Schmetisch/Kaluza, 2008 and Schnedler, 2001).

[FIGURE 2 OMITTED]

Until the late 1980s, the concept of "deconstruction" was little known, and company value chains were regarded as being relatively stable. Particularly larger companies occupied a great part of their industry's value chain themselves, and had a high degree of vertical integration. One main reason for this situation was that of clearly differentiated markets which had arisen from the high costs which occurred when different value-added steps had to be coordinated. The enormous amount of data that had to be exchanged between these stages could only travel short distances, i.e. within a company (Heuskel, 1999). New I&C technologies--in particular the Internet--led to the end of the trade-off between the amount of information and the distance it had to travel, because its dissemination and processing became less expensive--and continue to do so (Evans/Wurster, 1997). Globalization and the related opening up, deregulating and harmonizing of world markets have also enabled global sourcing of products and services. Modern processing and distribution technologies have also made buying on the world market less expensive and have led to an enhanced quality of goods. All of these factors have contributed to the success of deconstruction (Stern, 2000).

In the wake of these multiple changes, many vertically integrated companies lost their biggest competitive advantages and a rigid relationship between the individual value creation stages was no longer imperative. These changes have had the effect that there are now less vertically integrated companies. Traditionally, profit is assessed as being the mean of all the value creation stages which are incorporated in a company. Through deconstruction of the value chain, each individual stage now has to compete with its alternatives (see Figure 3). For each task, the decision has to be made as to whether it is profitable within the company or whether another company could do it more profitably (Normann/Ramirez, 1998 and Winkler/Slamanig/Kaluza, 2008).

[FIGURE 3 OMITTED]

Systematisation of Sourcing Alternatives

It transpired that in the wake of deconstruction the linkages between the various value creation stages have weakened and that there is a distinct trend away from vertically integrated companies towards networks (cf. Figure 2). In networks, the value creation stages are occupied by those companies that are best for doing the job from an economic and a qualitative perspective.

On the path towards new value creation architectures, sourcing--in all its various forms--is a central tool (Achenbach/Moormann/Schober, 2004). As a generic term, sourcing covers all the different varieties of product and service procurement. Outsourcing refers to the utilization of external resources for fulfilling in-house functions and insourcing is where a company provides products or services for external third parties. Further sub areas are co-sourcing, where the product or service is jointly provided in cooperation between employees of the outsourcing company and external resources. There is also the (classic) own production (Recker/Jahn/Jarke, 2003). Own production, co-sourcing (also known as cooperation) and outsourcing are all various ways of procuring a product or service for a company's own use. On the other hand, insourcing involves a company producing goods or services in-house but for other companies. These three options for procuring products or services for a company's own use are classic courses of action when it comes to a "make or buy" decision.

The four above named types of sourcing can be differentiated according to their coordination and charted on a scale of different coordination types ranging between hierarchy (where the coordination instrument is the issuing of directives) to market (where the coordination instrument is the price) (Schober, 2004). Figure 4 illustrates this:

[FIGURE 4 OMITTED]

In the case of outsourcing, a product or service is bought in from the market by an insourcer at an arranged price. If the product or service stems from within the company itself, the process is coordinated by directives being issued. Co-sourcing lies in between these two extremes of outsourcing and own production because control over a particular value chain stage is not completely relinquished (Recker/Jahn/Jarke, 2003). In-between these various forms of sourcing there are other possibilities which change the form of cooperation. For instance, between outsourcing and cooperation, there might be long-term delivery/supply contracts (Picot, 1991). Outsourcing and cooperation require a respective partner company, whereas own production does not.

This compact overview of the main sourcing alternatives is intended to show what is meant when we speak of "sourcing decisions". These decisions handle the question of which sourcing form is meaningful for a particular part of a company's value creation, whereby such decisions (may) change the company's value chain. In order to avoid errors being made during the decision making process, it is necessary to first identify the individual (relevant) processes and to assess their share of value creation for a company. On the basis of such information, potentials can be sketched out for deconstructing and re-forming the value chains.

Regarding the question of which sourcing alternative is the most suitable, it is necessary to have detailed knowledge of the main processes involved in the value creation of a company, and how they interrelate. In a decision situation, a tool is required which helps to clarify a company's own sourcing position in the main sub areas of value creation, to recognise linkeages and to visualize the company strategy as a whole, thus leading to sound decision making. A basis of this kind also enables benchmarking in order to recognize--and potentially question--differences between a company's strategic positioning and that of its competitors. Such a tool is the Source Board, which we shall introduce in the following. It has been derived from the findings on the understanding of value creation and on the significance of sourcing decisions. To facilitate an understanding of this tool, we use a concrete case study from the financing industry.

3. CASE STUDY--VALUE CREATION IN A BANK

In our case study, we depict the sourcing strategy of a full-service bank for business activities in consumer banking. Our objective is to show the main activities involved in value creation and to provide an overview of the current (in some cases very different and therefore non-transparent) positioning in "make or buy" decisions. On the basis of these activities, a complete overview as well as a comparison with competitors, is compiled. This is done in three steps:

Step one: First of all we identify areas of value creation and their linkages. We do this by applying and adapting Porter's Value chain. Although this information is still too abstract or rather strategic for operative implementation, it does provide a basis for further, more detailed, deliberations.

Step two: These more detailed deliberations serve to identify processes and to provide a dynamic understanding of their interplay. The value chain is extended by a detailed (core) process level.

Step three: In order to determine the company's own positioning in a value network, its selected strategies are compiled in a Source Board to provide an overview and enable benchmarking.

Further Developing and Transferring of the Value Chain onto Banks

Whereas PORTER focused his development of a value chain model on producing companies, the transferring of the value creation model onto service companies in general, and banks in particular, means that there are peculiarities to be observed. Correspondingly, the model must be adapted in order for it to be applied to such companies. The differences in the structure of the value chain result mainly from the special features of those services which themselves are of a "process" character, since the process itself of producing a service is actually the "service" (Stauss/Bruhn, 2007). Other constitutive features are the "integration of the external factor" (customer), the "intangibility" of the service and the large "degree of individualization" (Meffert/Bruhn, 2006 and Maleri, 1991). One consequence is the "uno-actu principle", i.e. direct contact between producer and consumer of a service (Altobelli/Bouncken, 1998).

The integration of an external factor results from the customer--or his respective object--being present during the service provision. The customer is thus integrated into the service process and impacts on its path and on its result. The customer may incorporate his own preferences, which leads to a certain degree of individuality. The necessary modifications of the value chain for service companies can be derived from the before mentioned special features of service provision. For instance, the activities marketing and sales, which are located in PORTER's value chain behind logistics and operations, are now positioned in front, because without customers being present, no "production" of a service can be initiated. The actual provision of the service to the customer has to be located in one of the corresponding operations categories, whilst outbound logistics can be largely ignored since there is a lack of storability and transportability (Altobelli/Bouncken, 1998). SPIEGEL developed a value chain model for service providers who have longer relationships with customers entailing ongoing service provision (as is generally the case for banks).

[FIGURE 5 OMITTED]

As Figure 5 shows, the above mentioned differences have been taken into consideration in this model in the area of primary activities. Modifications have been made so that there are now two phases: preparing business and continuing business relations. The value chain starts with acquisition, which corresponds to the concept of "customer pull" for services. This activity covers all those processes which are related to customer acquisition and which are implemented via "marketing mix" activities. The objective is to create a long-term contractual relationship. Preparing the service is intended to ensure that the service can be provided to a customer over the whole length of the contract. It incorporates in particular preparatory measures such as training courses or installing the necessary infrastructure. These activities should only be implemented once per customer or at very big intervals (Spiegel, 2003).

The phase of the continuing business relations begins with the preparatory contact phase, while those measures are implemented which follow on from talks with the customer. These are in particular the temporal and organizational integration of the service at the customer's. Following these preparatory phases, the activity service provision takes place. In the follow-up contact phase, a final exchange of information takes place between customer and provider in order to improve the service if necessary. This phase may be seen as one of quality or complaint management. Together, the last three activities form a cycle which is followed through several times in the course of the contractual relationship and which continually improves the process of service provision (Benkenstein/Steiner/Spiegel, 2007).

Differences in the supporting activities are not so much differences in the way activities are divided up but more in their weighting and importance. Procuring entails principally the provision of input goods and human resources, whereby the procuring can often only take place after an order has been placed. In contrast with PORTER's original value chain, technology development, which SPIEGEL refers to as firm development since machines or facilities rarely need to be developed, carries little weight. Particularly with financial service providers, the focus is on I & C technologies. On the other hand, firm infrastructure carries much more weight, because administrative activities are more intense (Benkenstein/Steiner/Spiegel, 2007). This is also true for human resource management, because human capital is usually the key resource of service provider firms (Benolken/Greipel, 1990).

As banks are a very special type of service provider, it is necessary to modify and adapt the value chain even more to the special features and processes in order to be able to implement a detailed analysis of the value creation stages involved. In the literature there exist various studies on the value chains of banks, e.g. that of Lamarque 1999 or Scheffer 2007. With regard to the necessary process orientation in the second stage, the models of Lammers/Lohndorf/Weitzel 2004, Petry/Rohn 2005 and Falkenberg/Muller/Bonsch 2006 would appear to be very suitable bases for creating a new model for consumer banking, and we thus use these as a foundation for our own deliberations.

As a basis for examining the value creating activities in the consumer banking sector we created a modified model for the case study. It is based on the before mentioned value chain models and is supplemented by the dynamic understanding of value creation in financial institutions, as described in Section 3.2. Figure 6 shows the modified value chain and emphasizes the distinctions between primary and support activities. For the sake of clarity and the later application of the model, the number of activities has been limited to include only 5 key areas of value creation.

[FIGURE 6 OMITTED]

The primary activities consist of the elements sales, production and transactions. Marketing has a special strategic position, because on the one hand there are banks where marketing is a central part of production and product development and on the other hand there are banks where marketing is, for example, integrated in sales support and has a corresponding supportive function. The support activities can be broken down into administration and sales support. The respective core processes within the 5 value creation stage of the modified model of a value chain specifically for the consumer banking sector are shown in Figure 7. The 5 value creation stages will be specified later in this context.

Observation and Analysis of the Processes in Banks

It would seem necessary to provide further details about core processes, since a meaningful sourcing decision cannot usually be made at the value creation-stage level owing to the many different processes involved. For example, if we look at the value creation stage "sales support", this subsumes core processes such as customer management and technology/IT. These are, of course, processes which support marketing and sales activities but they are so different from each other and can be carried out by other co-workers or in different locations. Consequently, it would be feasible for one process to be outsourced to an external service provide whilst the other one stays in the company. As the core processes shown in figure 7 are mostly self-explanatory, a more detailed description of them is not given here. If more detailed information is needed, see Falkenberg/Muller/Bonsch 2006.

[FIGURE 7 OMITTED]

Depending on the degree of integration, sourcing activities may be considered if a clearly defined area is identifiable. Otherwise, a core process is difficult to source because, for instance, different employees are each responsible for a specific share of marketing activities which have a high degree of connectivity in their processes. Supporting activities are divided into sales support and administration. Administration is itself divided up into management tasks and administrative tasks. With regard to sourcing activities, this differentiation is necessary because core tasks of a management (in contrast with general administrative activities) are--on account of existing legal restrictions, not sourceable (Falkenberg/Muller/Bonsch, 2006 and Schuller/Simon, 2008).

As previously mentioned, several variations of bank value chains exist and it is of course debatable which form is the optimal one. This depends however on the individual case and banking institution involved. For this particular case study, the selected value chain seemed most suitable because its modular structure enables it to be adapted to specific institutes and to illustrate their differences and specific features, as is required for benchmarking at a later stage. Its detailed view of the core processes is also an advantage with regard to its later application, because the processes to be analyzed are standardized and fixed. As previously mentioned, both of the value chains shown in Figures 6 and 7 demonstrate clearly the various value creation stages and core processes, and will be used as a basis for further observations.

However, this static form of representation does not totally do justice to the real-life process--as SPIEGEL's model has already demonstrated. In reality, the three primary value creation activities sales, production and sales support in addition to the supporting processes of the value chain are not sequential or chronological and independent from each other. It is much more the case that they interact, i.e. their development impacts on the continuation of other processes and also overlaps temporally. (Risk) control and management accompany the whole process of value creation and thus impact on every activity. The individual value creation stages are linked together via a continuous flow of information and materials. Figure 8 depicts the dynamic understanding of the interaction and the inter-linkage of the individual value creation areas.

[FIGURE 8 OMITTED]

Source Board--Analysis and Visualization of Strategic Sourcing Positioning

Now that the concept of the value chain has been introduced and transposed onto banks, and we have shown how value chains change during deconstruction, and the possibilities of different sourcing strategies for positioning a company competitively, we shall finally observe how the "Source Board" operates for the value creation of banks.

A fundamental and detailed understanding of the working processes and their interlinkages in value creation should be the basis of any sourcing decisions. Dependencies and interactions can, however, only be sufficiently taken into consideration if the total positioning of an institute is known, because only then can sourcing activities be coordinated and viewed from a cross-process perspective. Additionally, only an "as is" analysis of this kind can enable a comparison with competitors in order to critically examine a company's own strategy and to facilitate benchmarking. In the following, the Source Board--which has been developed specifically for these purposes, serves as a model for an "inventory" and as a basis for controlled measures for changing a bank's sourcing strategy.

[FIGURE 9 OMITTED]

The Source Board is divided into two columns. On the left side, we have the breadth of service offer. This is horizontally divided into two subcategories of "range of services" and "service types". These subcategories are vertically divided up according to the 5 value creation stages and their (up to 23, depending on the individual financial institution) core processes, which are shown in the value chain model of Figure 7. These are illustrated in more detail in the subcategory "service types" although they differ from bank to bank. This has a very small negative impact on comparability but also enables a very specific application.

The right-hand column includes the degree of vertical integration and shows the choice of sourcing varieties for the observed types of performance. The sourcing varieties correspond to the terminology introduced in section 2.3: Insourcing (in), self-made (sm), cooperation or co-sourcing (co) and outsourcing (out). Both of the last two varieties are additionally split down into internal (int) and external (ext). This is particularly meaningful in the banking industry because many institutes have established their own service companies, managing, for example, certified payment processes. However, as they are 100 % subsidiaries of the banks, they cannot be seen as economically autonomous. They serve to reduce costs, e.g. by avoiding labour agreements, rather than being a strategic outsourcing decision. In cases of outsourcing, the Source Board provides additional information about the number of selected partners and whether single (sg) or selective (sl) sourcing is implemented, and about spatial proximity, i.e. whether it is a local (loc), nearshore (ns) or global (glo) partner. Figure 9 provides an example of a Source Board for a full-service bank.

The Source Board in figure 9 makes no claim to completeness in every detail. rather, the analysis is limited to core aspects of those business activities which are significant for the value creating provision of service. For each of the 5 vertical levels, it elaborates the key sourcing combinations, and this indicates an overall sourcing strategy for the bank.

By comparing this Source Board information with that of other institutes, different strategies and competitive positioning become apparent. Additionally, a systematic data collection, such as is necessary for creating a Source Board, is provided by a table, which cites the service program, types of services and the service provider. The overview also shows the relations that each sourcing partner maintains with the bank, and provides sources which give more detailed information. The Source Board, then, delivers a strategic overview on which a clear strategy can be built and depicted. The detailed table enables the operative execution and adaptation of such strategies. A section of such a table for a bank's core process sales is given in Figure 10.

4. CONCLUSIONS AND PROSPECTS

Building on the concept of "deconstruction", we have shown that currently there is a development away from fully integrated companies (e.g. full-service banks) towards a specialized provision of services. Value chains are being decomposed and re-positioned, creating new organizational structures. Consequently, companies are forced to match themselves against their competitors. In the areas which are identified as profitable, leverage is possible, whereas the less profitable areas have to be repositioned in the sourcing process. Sourcing decisions are becoming increasingly relevant; they include every conceivable method of procuring products and services. Instead of a complete own-production, co-sourcing can take place, i.e. cooperation with other companies, full outsourcing of processes or insourcing with other successful processes. There is a wide range of potential sourcing possibilities. A Source Board can be implemented as an analytical tool for forming or visualizing a company's own sourcing strategy and for positioning a company vis a vis its competitors. Implementing a detailed assessment of a strategy overview enables an important understanding of a company's internal processes and knowledge. Such an understanding is vital for undertaking sourcing decisions. Financial institutes also attempt to limit the complexity of their business operations by focussing on specific areas of their value creation activities and business areas and concentrating on their own strengths (Flesch, 2005 and Speek, 2008).Consequently, smaller branches have the chance to be competitive although they cannot, for instance, achieve either the know-how status or the business volume of larger branches in order to be able to develop all of the services and products themselves that their customers demand. But they can profit by, e.g. allowing other specialists to develop their products for them whilst themselves only concentrating on regional sales.

This means that as a result the vertical integration of value creation will become less on account of further developments of value creating architectures. Even today, in certain areas of a bank's value creation, new value creating architectures which are adapting to changed competitive conditions, are become visible. Not least, on account of the considerable regulatory demands made on banks, the financial industry will in the next few years witness increasing movement in their sourcing activities. Something that the British naturalist, Charles Darwin, said describes this situation very well: "It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change".

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Dr. Dirk Braun earned his PhD in business administration at the RWTH Aachen University, Germany in 2010. Currently he is assistant professor of decision theory and strategic management in financial services at RWTH Aachen University.

Sarah Schiffer earned her degree in industrial engineering and management at the RWTH Aachen University, Germany in 2010. Currently she is research assistant and PhD student for business administration at RWTH Aachen University.
FIGURE 10: EXAMPLE OF AN OVERVIEW TABLE FOR DERIVING A SOURCE BOARD
(AUTHOR'S OWN ILLUSTRATION)

Range of Services   Service Type   Service Provider   Relation

Acquisition         Investment     In-house           Internal
                    Counselling

                    Internet       Independent Bank   Minority
                    Banking                           Stake

                    Affiliate      Own Service Firm   Associated
                    Business                          Company

                    Field          Own Service Firm   Majority
                    Business                          Stake

                    Financial      In-house           Internal
                    Planning

                    Estate         Independent Bank   Majority Stake
                    Business

Range of Services   Service Type   Reference

Acquisition         Investment     Annual Report
                    Counselling

                    Internet       Participation
                    Banking        Agreement

                    Affiliate      Removal Agreement
                    Business

                    Field          Participation
                    Business       Agreement

                    Financial      Annual Report
                    Planning

                    Estate         Participation
                    Business       Agreement
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