Sourcing Insights with a Dutch Twist

This post is the third in a row in which I write on a methodology I created to improve the effectiveness and efficiency of managing regulatory risk when outsourcing. The first two posts are here and here . Below I write on translating the risk/value ratio’s of the outsource contracts into the optimum control strategy. The starting point is the contract portfolio in which the value and compliance risk of the outsource contracts are plotted. The position drives among others the resources spend by the compliance function on monitoring a contract. The control and monitor activities are typically described in a so called Compliance Program which is the overarching framework that encompasses the different activities and responsibilities performed by the compliance function. Compliance cost can be reduced further by applying only a ´golden´ control and monitoring approach when it is really necessary (for example at high risk and value) and select a ´silver´ or ´bronze´ approach elsewhere (se

One of the key issues of the financial crisis was banks not knowing the value of their assets. This lack of insight has numerous reasons, but to me the main ones are: too much focus on short term profit, not being able to understand your own financial products anymore and inadequate control over your back-end business partners. In this post I want to put some of my thoughts on this last topic: the importance of monitoring the ‘health’ of the other financial institutions the bank does business with. Banks got hit by Madoff and Leman Brothers because they did not appreciate the risk they ‘imported’ by extending their value chain beyond their own borders. This issue was broad to my attention again in n a recent interview of Z24 (Dutch internet news channel) with the Chief Risk Officer of Fortis Bank Netherlands (3 billion revenue 2008, 184 billion in assets. In this interview the risk management practises of the bank were discussed and the CRO stated that the board is closely involved wi

In the previous post on this topic I wrote that the control framework created by compliance functions within financial institutions for outsource contracts are often inadequate and too expensive. The main reasons for these observations are that compliance officers often do not understand enough the scope and dynamics of the contract in order to create a lean but adequate compliance chart. By requiring all regulations to be in-scope they hope not to miss out on anything. Furthermore are compliance officers not trained well enough in translating an internal control framework into an external one. This often results in either requiring the vendor to copy the internal control framework of the bank (very expensive option as the bank does not leverage on the best practises of the vendor) or they just resort to letting the vendor sign a yearly ‘in contol’ statement (too simple as the vendor mostly does not know what it signs for). My third reason for the initial statement was that compliance

There are several best practises, standards and other types of models & methodologies around aiming to structure complex acquisition and outsourcing engagements. Others are useful when thinking of designing the contract management/ sourcing governance framework. A couple of the models which are out there in the field: CMMi for acquisitions (Carnegie Mellon University) ISO/IEC 12207 (International Standards Organisation) Information Services Procurement Library (European Community) e-Sourcing Capability Model (Carnegie Mellon University) ISlite (Gartner) CMMi for acquisitions, ISO/IEC 12207 and ISPL were created to provide a structured approach to get: the right service/product, for the best price, at the desired quality levels, from the best vendor, at or within the risk appetite of the company In other words, these standards/methodologies provide companies insight in procuring/acquiring/sourcing products and/or services from an external vendor. The two other models are related to

This post continues my views on the long term damage which might result from sourcing decisions which are based on emotions than rational decisions (‘Behavioural Sourcing’). In the previous post I looked at the subject from the client perspective while I use this one to provide my thoughts on the supplier perspective). Supplier perspective As mentioned in this post do I expect that some service providers will not make it through this economic winter as their shrinking revenue and margin are not matched by the amount and speed they can loose redundant employees and get fresh capital. That service providers are signing contracts in order to get some new revenue in (the gain), which most likely cannot be made profitable during the contract term (the loss) is reflected by the Dutch IT entrepreneur (owner of SME service provider Centric) Gerard Sanderink. In an interview with the Financial Dagblad (Dutch financial newspaper, article here ), he states that some large scale layoffs can be exp

This post provides some of my thoughts on the effects the economic situation has on the (ir)rationality behind sourcing decisions, also known as ‘Behavioural Sourcing’. In other words, one expects that (like with Behavioural Finance) sourcing decisions are made by rational people which have complete information about alternatives, unlimited capabilities to process information, been driven by individualism and are without emotions in their decision making. The Behavioural Finance theory teaches however that in reality people are inconsistent, subject to cognitive illusions, and often biased in their judgements (example: if the competitor outsources process XYZ, it must also work for the own company). In my experience, and especially when under pressure like now, are people not always rational in their decisions to outsource. As the aim of this post is not to provide a lot of detail regarding the background of Behavioural Sourcing, just some key points. Behavioural Sourcing aims to: unde