When ABN Amro signed a $2.2 billion, 5-year deal with Accenture, IBM, Infosys, and Patni Computers in 2005 it signalled the start of a new trend: multisourcing. Since then, the approach has gradually gained in popularity, and it could become the dominant model for medium and large organisations. FSN contributing editor, Lesley Meall considers the reasons for and against it.
“We are seeing more and more that multisourcing is a developing trend,” says Jonathan Cooper-Bagnall, a member of the management group at PA Consulting. Its IT Outsourcing Survey 2009 (based on research undertaken in late 2008) found that 75 per cent of respondents expect to consider multisourcing contracts over the next three to five years.
With the wide-ranging outsourcing deals of the past, one service provider was often expected to cover myriad areas of Information Technology, from application development, through infrastructure management, to service and support, and cost cutting was their pre-eminent aim. “They struggled to deliver innovation or the significant service improvements expected of them,” observes Sanjiv Gossain, VP and managing director, UK & Ireland for Cognizant Technology Solutions, because “no real emphasis was placed on adding value to the business.”
When you consider this in conjunction with the the risks highlighted by the Satyam scandal, the emergence of myriad new offhsore locations, lots of early outsourcing deals reaching (or nearing) their end, recessionary pressures (ranging from exchange rate fluctuations to increasingly competitive pricies), and the possibilities offered by new technology developments, it is no surprise that analysts are advising organisations to eschew the big contracts of the past. “The days of the ten year deal are long gone,” says Linda Cohen, Gartner analyst and VP.
“Don’t sign any long terms deals,” she cautions, no matter how appealing the current economic conditions make them look, because “you will be bound by them when things pick up,” and they could compromise your flexibility. “There won’t be any enduring value for you or your service provider,” she adds, and Gartner is suggesting that organisations investigate the possibilities offered by developments such as Software as Service, cloud computing, new payment models (such as pay per user and per unit) and multisourcing.
Instead of one huge über deal, multisourcing breaks IT up into a number of chunks, which are then provided by multiple service providers, each a specialist in an area such as application hosting, end user computing, or managed network services. As a practice, it has been around for decades, but Gartner introduced the phrase in 2005 in Multisourcing: Moving Beyond Outsourcing to Achieve Growth and Agility. The book was co-authored by Cohen and Allie Young and defined multisourcing as: “The disciplined provisioning and blending of business and IT services from the optimal set of internal and external providers in the pursuit of business goals”.
Great expectations
Since then, organisations have become more familiar with the consequences of their tunnel vision, and the benefits of multisourcing (aka multi-vendor partnering) have become increasingly apparent. “One of the obvious advantages is the best of breed effect,” says Gossain, as it enables the deployment of a mix of outsourcers for individual projects, individial services, or finite parts of a function. “This makes more sense than offering a contract to a single supplier based on its ability to service every possible function at an acceptable level,” he adds.
“A multisourcing relationship places the business back in control,” suggests Gossain; because the customer is no longer dependent on the performance of a single supplier, they are in a stronger negotiating position (thanks to competitive supplier behavior), and failures are easier to deal with. “Suppliers are kept on their toes,” he says, “and vendors are forced to deliver the highest level of service.” The flexibility to meet changing business needs and exploit emerging technology trends, are also pluses, and not putting all of your eggs has a lot to recommend it. “The reduction in risk is an obvious benefit,” suggests Gossain; but Cooper-Bagnall is not convinced.
“By breaking up big contracts and allocating key elements to different suppliers, organisations hope to improve competition, maximise suplier skills and expertise, and drive down costs by achieving better contract pricing,” he says, but the reality can be a little different. “IT outsourcing contracts bring with them massive business risk, and cost,” adds Cooper-Bagnall, and this becomes more difficult to assess and control, as more suppliers become involved – particularly if the customer is responsible for holding everything together. “Organisations rarely have the skills, expertise or knowledge to manage these multi-vendor relationships,” he warns.
It is a good idea to remember that the Gartner definition of multisourcing included the word “disciplined”, and a bad idea to underestimate the implications of not approaching the process with the necessary vigour. “Multisourcing is not a passing fad that superficially tries to make up for the mistakes of the past,” says Cohen. “It’s a way of making sourcing decisions that align with business goals that have been examined rigorously and are governed effectively.” So as Gossain adds: “Firms looking to move beyond outsourcing to multisourcing must have an integrated sourcing strategy across all services, and linked to the overall business strategy.”
Ready or not?
This demands a different approach to a single outsourcing arrangement, but the research undertaken by PA seems to show that too few organisations are ready for this, or the scale of the challenge. Of those contemplating multisourcing, only 25 per cent of the survey respondents prioritised integration, and even fewer were aware of the need to underpin its management with strong internal governance. “They fail to accept that a transition from single to multisourcing requires a significant and sustained programme of change,” asserts Cooper-Bagnall.
Multisourcing arrangements can also introduce an additional level of technical complexity. “In the traditional single source model the vendor typically undertakes a significant amount of work to cover the gaps between defined areas,” he asserts, and while it may not be reflected in contracts and service level agreements, it is essential to the consistency and continuity of services. So the business will need to make this the clearly defined responsibility of one multisourcing contractor (or appoint a service integrator), and put strict framework contracts in place - or ensure that it has the resources to handle the process in-house.
Either way, as Cooper-Bagnall observes: “Client organisations must manage the integration of the different agencies and define how they are to work together, without duplication of work or gaps being left,” yet few seem equipped to do so. Two years ago a PA survey found that 50 per cent of organisations had no idea of the cost of the retained organisation they needed to manage their outsourcing relationships, and the figures are not much better today. “Given the endemic poor management of single outsourcing contracts, it is extraordinary that so many organisations are attempting to embrace multisourcing without even considering the operational impact,” he says.
So, although multisourcing promises a brighter future, where the failures caused by ad-hoc, tactical outsourcing arrangements can be replaced by service relationships that can successfully deliver long term value and support business strategies, it is not for the faint-hearted or organisations that are new to outsourcing. “Instead of saving money and reducing the risk profile, this strategy is actually exposing organisations to unprecedented levels of risk,” warns Cooper-Bagnall. But the proof of the pudding is in the eating; so it will be interesting to see what ABN Amro does when it’s 5-year contract expires in 2010.
