There is the school of thought led by the likes of Aberdeen Group, McKinsey and Ariba that believe that the generic business strategies – cost leadership and differentiation – propounded by Michael Porter, have outlived their time and that each of these on their own no longer offers competitive advantage. These schools of thought believe the next sources of competitive advantage will be from strategic sourcing. The Chartered Institute of Purchasing & Supply defines strategic sourcing as “Satisfying an organization’s needs from markets via the proactive and planned analysis of supply markets and the selection of suppliers, with the objective of delivering solutions to meet pre-determined and agreed organizational needs”
Having given their arguments some thought, I tend to agree and in this write up, I will attempt to rationalize this assertion. Following the traditional processes for strategically sourcing raw materials or material capital, HR practitioners can leverage the concept Strategic Sourcing to gain competitive advantage from applying this technique.
Current Spend (Employee Costs) Assessment
Most firms benchmark or budget their employee cost as a percentage of either their Earning before Interests & Taxes (EBITDA), Actual Revenues for the Previous Year or Projected Revenues for the Coming Year. This is compared to the current headcount and employment costs. The variance between the current and budgeted costs, if positive, becomes the available budget for attracting and retaining new sta. The size of that available budget determines the kind of value HR can add to the business in terms of future human capital additions.
Supply Markets Assessment (Labour Market)
Here, the HR Manager should be assessing the employment or labour markets seeking to know what the going rate for relevant skills set, competences and qualifications are. They should also seek which ‑rms are targeting the same people and what those competitors are willing to offer. They should be interested in what the size of that market is: – is there a glut or a shortage of skills, are they available in the desired demographics, are the skills transferable across industry?
If they are, what kinds of retention packages are available within the ‑rm, the industry and the labour market in general? It is important for the manager to benchmark such survey results to his own assessment.
Total Cost of Ownership (TCO) Analysis
HR managers should then compare their budgets to the market conditions. The outcomes have a direct bearing on the HR policy and hence recruitment strategy, number of people you can target and attract, the calibre of people to target, the balance of power and how you can or cannot use that power during negotiation etc. There must always be a “landed cost” factor – a formula for determining that for every cent in consolidated salary paid, there is an additional X% of cost associated.
Formulating the Sourcing (Recruitment) Strategy
You then define your go-to-market approach. Design a clear strategy for attracting the best talent with the available budget. Consider hiring directly from the market or hiring through an agency. Do you go for experienced hands or “rookies”? Is personality-job-fit a priority? Is an individual–corporate culture-fit a priority? Should competence override qualification? Real Madrid F.C has a recruitment strategy of going for the big name, expensive players at the peak of their careers without any need for a rigorous development programme. Arsenal F.C on the other hand prefer the rookie regime where they invest in “cheaper” young talents, develop them through a well-orchestrated development programme and sell them later for decent returns and yet consistently maintain their position in the top four. The ‘Arsenal’ case study clearly underscores the emergence of strategic sourcing as a business strategy that delivers competitive advantage. This stage is the most critical stage in Strategic Sourcing as a business strategy because the outcome of this stage becomes the deciding factor for the ‑rm’s competitive advantage. Just as inferior or defective raw materials will most likely turn out sub-standard outputs, so will mediocre HR lead to mediocre results!
This is the market interaction phase where invitation to treat the offer and acceptance processes begin with the applications, going through screening, short listing, testing, interviewing and selection to negotiation of employment contract and conditions of service. If the pre-negotiation preparation is rigorous and well done, the competitive advantage starts from here. Note that above-average performers cost above-average rates.
It is not enough to negotiate a good deal only to give it away in a badly drafted contract or in its implementation. The employment contract and the HR policy document must be comprehensive and contain as little grey areas as practicable and must be effectively communicated. On boarding or induction of new staff is as important as finding and hiring the person. It is imperative that a well-structured induction programme is instituted. Usually, the decision to stay or not is made earlier, if on boarding is not smooth.
Finally, there is the tracking of results i.e. comparing planned against actual. The continuous monitoring and appraising of performance as against the objectives, mission and vision, using the balanced scorecard, KPIs or a dashboard of a sort is the surest way of ensuring that value is derived out of the whole process. The key thing at the end of the day in applying strategic sourcing as a business strategy is that there must be a competitive advantage in the process and some value addition.
It is incumbent on HR managers to ensure that a conscious effort is made to plan, identify and attract the right quality (calibre) of human capital, develop such resources but more importantly ensure a focus on and an alignment of goals.