Multi-sourcing offers benefits, but complex to manage

Mega IT outsourcing deals spanning multiple years are no longer a fad due to business concerns over vendor lockin and lack of transparency, but multi-sourcing models are also challenging to manage and require additional resources that companies may not have.
Written by Eileen Yu, Senior Contributing Editor

Businesses are no longer willing to sign up mega IT outsourcing deals that span multiple years due to concerns over vendor lockin and the lack of transparency, among others, and best-of-breed solutions emerge as the better option. However, while a multi-sourcing model may offer benefits such as higher flexibility and less dependency on a single vendor, it can be extremely complex to manage and will require additional resources that some companies may not have. 

At a discussion held Thursday, lawyers from Pinsent Masons touched on key issues enterprises will need to think about when they choose the multi-sourcing route and underscored the need for a SIAM (service integration and management) co-ordinator, either internally or through an external contractor, to oversee the relationships with the organization's various suppliers. 

Anthony Fielding, senior associate of technology and telecommunications practice at Pinsent Masons, who specializes in outsourcing and implementation projects for banks and telcos, noted that the drivers for IT outsourcing have remained unchanged. It frees up resources and allows organizations to devote more time to their core business as well as buy expertise that they may not have the bandwidth to support internally, Fielding explained. It also enables the company to improve performance and efficiencies, and reduce its overall IT costs while adding value to the business, he said. 

In addition, outsourcing lets organizations convert a fixed cost into a flexible expense, and transfer risk and management to another party. These benefits led some to sign mega multi-year outsourcing deals in a bid to achieve better cost savings. In 2000 alone, 24 outsourcing mega deals were inked at a total value of US$54 billion, he noted. 

However, such massive service contracts have tapered off over the past decade as customers are now more willing to disaggregate their needs into chunks of different IT services, or "tower services", and less willing to put all their eggs into one IT service provider. 

Organizations realize these mega deals are inflexible, where the service provider may have a particular approach to IT that may or may not meet their changing business requirements, Fielding said. Vendor lockin also has become a major concern that enterprises are keen to avoid. On top of that, there is a perceived lack of transparency with a single-vendor outsourcing model.

The lawyer further noted that management teams now want to gain a better understanding of their company's outsourcing projects, and dealing with multiple deals that are smaller in size and value makes it easier to understand and manage. 

With a multi-sourcing model, a company's IT deployments are broken up into tower services such as disaster recovery, desktop management, helpdesk, data centers, and application development, where each may be managed by a different outsourcing service provider. 

This model offers greater flexibility and more manageable contracts, making it easier to replace suppliers and contractors since it impacts just one component of a company's overall IT infrastructure, said Arwen Berry, senior associate of technology and telecommunications practice at Pinsent, who has been involved in outsourcing projects for banks and energy companies. 

It provides increased control and visibility through a direct contractual relationship with every supplier. And, of course, customers are no longer tied to a single vendor.

"Procurement departments are becoming more sophisticated and organizations are less willing to put themselves in the hands of one supplier. And as customers become more picky about the services they want and have more complicated business needs, they want best-of-breed offerings," Berry said, noting that IT vendors also have begun developing and offering their solutions based on components to fit the multi-sourcing model

But while this framework may be more appropriate for some companies, it isn't the holy grail and brings along several key challenges.

No "end-to-end responsibility"

For one, there is no single vendor to point your fingers at when things go wrong. There is no "end-to-end responsibility", which is more easily achieved and simpler with a single-vendor outsourcing contract, Berry said. "With multi-sourcing, you need to have fairly detailed service descriptions to ensure there aren't any gaps," she noted. Organizations also will need to understand how each tower service or component across their infrastructure interfaces with others. 

This level of oversight requires a dedicated manager, or SIAM coordinator, to monitor and manage the various contracts and supplier relationships, so all potential gaps are properly addressed, she said, adding that the onus is on the organization to ensure there's seamless coordination between the different tower services.

Companies that adopt a multi-sourcing model should establish a common collaboration agreement, which all suppliers should agree to adhere to if they wish to sign on as the customer's service provider. Fielding added that this should outline a clear obligation on the suppliers' part to "play nice" and jointly resolve potential delivery issues. 

There should also be agreements to govern each tower service and these need to be carefully considered and constructed, clearly describing the actual service being delivered, he said.

Berry further noted the need for an "end-to-end bible", which serves as the overarching document that sets out which supplier does what so all parties involved know what each is responsible for. Operating level agreements also are needed to set out the responsibilities of each supplier including the delivery timeline and service thresholds. 

Clearly, multi-sourcing frameworks can be highly complex to manage and suppliers may be wary of cooperating with other suppliers that are likely their market competitor, Fielding noted. Organizations also lose the economies of scale that they could have achieved with single-vendor outsourcing deals. 

Not only do they need to cover every potential service gaps, they also have to ensure there are no overlaps, he said. 

With more smaller contracts to deal with, the lawyers agree that there are increased risks that these service agreements may contain conflicting delivery terms. And as customers continue to add new service components — hence, new service contracts — to keep pace with market changes, it may prove challenging to keep the various agreements updated and in sync with one another. 

Over time, it could lead to disconnected service agreements. Hence, it is critical that every supplier agrees to the customer's collaboration agreement and tower service agreement before it is engaged as a service provider. This can be included as a mandatory requirement in the project bid, Fielding advised. 

It does imply, hence, that organizations likely would have to be sufficiently large and have the necessary clout for IT suppliers to agree to adhere to such terms, he said. 

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