The jargon used in the sourcing world seems to grow on an almost weekly basis. To help you through this maze, we have put together a list of the most frequently used words / phrases alongside a short definition of them. If there is something we have omitted, please let us know and we will happily add it to the list.
Alternative Service Delivery Models (ADSM)
When an organisation is clear about the outcomes it is trying to achieve, this approach looks at a full range of methods for delivering those outcomes – whether in-house, shared service or a variety of outsourced options. The aim is to find the service delivery model that offers the best prospect of delivering the desired outcomes efficiently and effectively. The feasibility of that model can then be explored.
Benchmarking is the evaluation of an organisation’s services /practices against best practice, usually within their own sector, and using agreed Key Performance Indicators (KPIs). This then allows organizations to develop plans on how to adopt such best practice, usually with the aim of increasing some aspect of performance. Benchmarking may be a one-off event, but should be treated as a continuous process in which organizations continually seek to challenge their practices.
There are several types of benchmarking:
i) Process Benchmarking
ii) Financial Benchmarking
iii) Performance Benchmarking
iv) Product Benchmarking
v) Strategic Benchmarking
vi) Functional Benchmarking
Business Process Outsourcing (BPO)
Business Process Outsourcing (BPO) involves the transmission of processes and their associated operational activities and responsibilities, to a third party. This third party provides services back to the purchasing organisation at an agreed service level for an agreed cost.
The main reason for BPO deals is to find a more efficient organisational design, such as transformation of service delivery, cost reduction, productivity growth and access to innovative capabilities. They take the form of back office outsourcing (includes internal business functions such as billing or purchasing) and front office outsourcing (includes customer-related services such as marketing or technical support).
If the BPO is contracted outside a company’s own country it is referred to as offshore outsourcing; if it is contracted to a neighbouring country then it is nearshore outsourcing.
Commissioning
A term used extensively in UK government; this seeks to differentiate between customers, users or those seeking to deliver policy outcomes (the ‘commissioners’) and suppliers of services.
Co-sourcing
This refers to services that are performed in conjunction with a client’s existing internal audit department and they may focus on one or more aspects of the internal audit function.
Corporate Sourcing
This is when various divisions of a Company coordinate the procurement and distribution of materials, equipments and supplies for the organisation.
Direct Procurement
This form of procurement only occurs in manufacturing settings and is the focus of supply chain management. It encompasses all items that are part of finished products such as raw materials, components and parts.
Global Sourcing
This is a term used to describe strategic sourcing in a global setting. It is often a component of a company’s procurement strategy, and is aimed at exploiting global efficiencies in a product or service. This is often in the form of low-cost sourcing for example labour-intensive manufactured products produced using low-cost labour; however it is not always the case. It can also refer to a centralised procurement strategy for a multinational, where a central buying organisation seeks economies of scale through corporate-wide standardisation and benchmarking.
Homesourcing (also known as homeshoring)
This is the transfer of service industry employment from offices to those working from home. This has increased in popularity recently and can offer reduced costs for the employer as they can save on the cost of office space, and precludes the prejudice that is sometimes created from regional accents, mannerisms and rates of speech.
Indirect Procurement
This form of procurement concerns operating resources that an organisation purchases to enable its operations. This could be standardised low value items such as office supplies and machine lubricants to more complex products and services like heavy equipment and consulting services.
Insourcing
This is a business decision that is made to maintain control of critical production or competencies by delegating operations or jobs from production within a business to an internal ‘stand-alone’ entity that specialises in that operation.
Joint Venture
This is an agreement between two or more organisations to set up and operate an independent organisation. This can often be used to set up and deliver shared services.
KPI
Key Performance Indicators
Knowledge Process Outsourcing (KPO)
This is a form of outsourcing, where knowledge-related and information-related work is carried out by workers in a different company, usually in a different country. This typically involves high value work carried out by highly skilled staff, and the KPO firm often makes many low level business decisions.
Legal Process Outsourcing (LPO)
This refers to the practice of a law firm obtaining legal support services from an outside law firm or legal support services company. This can be in the form of providing services such as document review, legal research and writing, drafting of briefs and providing patent services. When the outsourced entity is based in another country, this is a form of offshoring.
Low-cost country Sourcing
This is a procurement strategy for acquiring materials or services from countries with lower labour and production costs in order to cut operating expenses. This is a form of global sourcing.
Multisourcing
This refers to large outsourcing agreements, and involves a framework to enable different parts of the client business to be sourced from different suppliers. It requires a governance model that clearly defines responsibility and communicates the organisation’s strategy. This is also known as the “best of breed” approach.
Near-shoring (also known as nearsourcing)
This refers to sourcing service activities to a foreign, lower-wage country that is closer in geography than offshore locations. This is seen as a reduced risk and less complex than offshoring.
Offshoring
This is the relocation of a business activity, for example production or delivery of services, from one country to another in a foreign location. It can be perceived as complex due to different languages and cultures, long distances and different time zones, the need to spend more time establishing trust and long-term relationships to override communication barriers. However, it can prove highly cost-effective where labour costs in the service delivery country are significantly lower than that of the recipient country.
Onshore
This refers to work that is carried out in the same country as an organisation but at a different location.
Outsourcing
This is a method that is used as part of overall sourcing strategy for services, for example the transfer of staff and assets to a company who then provide them back as a service.
Procurement
This is the acquisition of goods and/or services at the best possible total cost, in the right quantity, quality, time and location; generally via a contract. It is possible for this to take the form of repeat purchasing, simple procurement; or a long-term relationship with a supplier, complex procurement.
Based on the consumption purposes of the acquired goods and services, procurement activities are split into direct (production – related procurement) and indirect (non production - related procurement).
Procurement Lifecycle
The procurement lifecycle typically involves seven steps:
1. Information Gathering
2. Supplier Contact (includes RFQ, RFP, RFI and RFT)
3. Background Review
4. Negotiation
5. Fulfillment
6. Consumption, Maintenance and Disposal
7. Renewal
Procurement Outsourcing
This involves the transfer of specified key procurement activities relating to sourcing and supplier management to a third party; to reduce overall costs or to re-focus on the Company’s core competencies.
Requests for Information (RFI)
This is a proposal requested from potential service providers to determine what products and services are available in the market to meet a buyer's needs. This is typically used in the initial stage of procurement where a requirement could be met through several alternative means, and is used to assess the capabilities of various suppliers. It also allows a potential buyer to assess the capability of a seller in terms of offerings and their strengths. This is not an invitation to bid, is not binding and may or may not lead to an RFP or RFQ.
Requests for Proposal (RFP)
This is an invitation for suppliers to submit a proposal on a specific service. It often involves a bidding process, and allows the risks and benefits to be identified clearly upfront. It can be a lengthy process. Effective RFP’s reflect the strategy and short /long-term business objectives, which allows for a better fit between client and provider. For more information on RFP’s, please see the separate document on the insight page.
Requests for Quotation (RFQ)
This is used when discussions are not required with bidders, as the specifications of a product or service are already known, and the cost is the main factor in selecting the successful bidder.
Requests for Tender (RFT)
This is a structured open invitation to suppliers for the supply of defined products and/or services, most commonly used in the public sector. The equivalent in the private sector is a RFP. Please see other definition.
Second-tier sourcing
This is a practice of rewarding suppliers for attempting to achieve their customers’ minority-owned business spending goals.
Single Sourcing
This is the purchasing one specific service, such as IT, from one provider.
Supply Chain Management
This is a cross-functional approach to the efficient planning, implementing and managing of the activities involved in sourcing, procurement, conversion, and logistics management activities.
Strategic Sourcing
This is a procurement process that improves and re-evaluates a Company’s purchasing activities. Strategic Sourcing typically has six stages, from assessing the Company’s current spend, to developing a sourcing strategy and finally implementing the new supply structure. It is one component of supply chain management.
Shared Services
This refers to the combined provision of a service that had previously been found in more than one part of the organisation or group. Thereby the funding and resourcing of the service is shared and the providing department effectively becomes an internal service provider. Sometimes these shared services can be offered to external organisations to increase the economies of scale and reduce costs. This can involve onshore, nearshore or offshore locations.
Shared services can streamline a Company’s functions to ensure that they deliver the services as efficiently and effectively as possible; enabling the appreciation of economies of scale within the function. An example of this is the centralizing of back office functions such as HR and Finance. In order to measure this, an organisation will need to benchmark its activities. See Benchmarking for more information.
It should be noted that shared services can take one of three forms:
i) Unitary (single organisation consolidating and centralising a business service)
ii) Lead Department (organisation consolidating and centralising a business service that will be shared by other organisations.
iii) Joint Initiatives (see definition)
Sourcing
Sourcing is most simply defined as identifying, evaluating and implementing the most effective service delivery models for securing strategic objectives. It encompasses a wide range of practices including supply chain management, outsourcing, shared services, joint ventures and insourcing. Other terms you may here in connection with sourcing are: global, strategic, corporate, second-tier, low-cost and co-sourcing. Please see their individual listings for more information.