Managing Multisourcing

By Jodi Mardesich

A growing number of organizations are adapting a multiple provider outsourcing strategy, contracting with a variety of service providers for different functions and services. While this strategy can deliver some benefits -- including diversifying risk, working with experts, and delivering cost savings -- some liken multisourcing to "herding cats" for its complexity.

As more organizations outsource IT services and business processes, CIOs and IT managers need to understand how to juggle working with multiple vendors. The answer is to develop a multisourcing strategy.

In traditional outsourcing, IT delegates responsibility for performing a significant business function to a third party. Multisourcing expands that idea into relationships with multiple vendors.  Research firm Gartner, Inc. defines 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."

Outsourcing is dominated by six firms: Accenture, ACS, CSC, EDS, HP, and IBM. But almost $100 billion in contracts are due for renewal through 2007, according to TPI, a sourcing advisory firm. And those big six are involved in 72% of the contract value to be renewed.

According to TPI, there is a trend toward a larger number of smaller deals. Organizations signed 293 contracts in 2005, more than any other year, and 70% of those were small to medium sized contracts of $50 million to $200 million.

In the past two years, the world of large outsourcing contracts declined somewhat. According to David Tapper, director of IT outsourcing, utility and offshore services research at IDC, the IT research firm, there have been a "reduced number of megadeals valued at $1 billion and higher, an increase in the number of players competing in this segment, and a shift to more business process outsourcing deals as part of the mix."

According to another research firm, Forrester Research, Inc., almost six times as many firms are managing multiple service providers as those that use a single provider.

When managed well, working with multiple providers can make companies more competitive and agile.

"Disciplined multisourcing can turn average organizations into world-class competitors," write Allie Young and Linda R. Cohen in a Gartner report, Adopt Multisourcing as a New Management Discipline. In addition, multisourcing allows companies to diversify risk by eliminating a single point of failure. It allows organizations to work with experts in different areas. And in theory, at least, working with multiple providers sets up a market in which they must compete on price, lowering costs.

The problem is that managing multiple providers is more difficult, and if not done successfully, multisourcing escalates costs.

"There are multiple challenges that, if not handled well, ultimately lead to higher costs and increased enterprise risk when dealing with multiple providers," says Paul Roehrig, senior analyst with Forrester.

Expect to spend between 4% and 8% of the total contract value to govern a single, large deal, says Roehrig. Managing multiple providers costs firms as much as 30% more. "If poorly managed, this goes up even higher as additional time is spent negotiating the statement of work rather than executing the contract," he says.

Analysts recommend the following tactics for managing multiple providers:

• Make an initial assessment Not all firms are ready to juggle multiple sourcing relationships. Be brutally honest, Roehrig suggests. While it may be tempting to jump into multisourcing, "in the short term, it may be best to retain the scope of business while getting ready to move to a single provider to develop sourcing management skills and knowledge," he says.
• Develop interdependencies between providers Have a holistic view of all the providers and their relationships to each other, as well as business goals. "Clients need to have a full understanding of the entire service supply chain, treat it as a complete system, and establish consistent metrics for each link of the chain across providers," Roehrig says.
• Use collaboration tools Set up common tools, meetings, forums, and processes across all providers so that providers can communicate and collaborate with the client and each other. "All business and operational forums should be open, regularly scheduled, mandatory, and include all providers to help plan the work, manage issues, and deliver on obligations," says Roehrig.
• Document a structure for governance Set up a governance model and ensure that providers conform to it. "Make sure that the model is on paper for every participant to see," Roehrig says.
• Define roles Spell out roles and responsibilities, possibly putting it into the contract. Even better, make one provider the leader.

Multisourcing is risky, but when managed well, it can be the ideal solution in some cases to help organizations control costs, work with best-in-breed providers, manage a variable work force, and diversify delivery risk, Roehrig says.  "But success here requires that the client organization has the skill sets to manage the providers in line with a well-articulated sourcing strategy across multiple lines of service."