The mega-deal, single supplier outsourcing arrangement has been replaced over the last couple of years with a trend towards multiple supplier relationships. As companies have started to get to grips with this changing dynamic, Sanjiv Gossain, UK MD of Cognizant, discusses the implications of this move for IT departments.
The mega outsourcing deals of the past struggled to deliver innovation or the significant service improvements expected of them. Not all have been catastrophic, headline-hitting failures, but many simply did not live up to their billing. A new trend in outsourcing has developed as a result - multi-sourcing.
In 2006, the central theme of one of the industry's biggest shows, the Gartner Outsourcing Conference, was the new trend of multi-sourcing. This year the central theme remained the same as many companies now have experience of implementing and managing multi-sourcing relationships. But before the implications of this new approach can be analysed, it is first important to discover why the long-term single supplier approach appeared to fail.
Initial outsourcing engagements barely went beyond performing functional tasks more cost-effectively and productively. While costs may have been reduced in the short term, no real emphasis was placed on adding any value to the business. When inadequate results were delivered, the outsourcing suppliers had to go back and re-think the implementation strategy and any short-term cost savings tended to disappear.
Traditional contracts spanned anything from five to 15 years but work was often poorly defined and so focused on transactions that suppliers became 'slaves to SLAs'. Whatever the investment made in RFPs, due diligence and the like, the risk from a lengthy project was incredibly high and companies realised they couldn't afford to put all their eggs in one basket.
The outsourcing landscape has instead moved towards using one of multiple suppliers, with CIOs selecting specialist providers to make the most of the available outsourcing options. One of the obvious advantages is the 'best of breed' effect.
A CIO can now deploy an outsourcer for individual projects, individual services, or outsource finite parts of their function, which clearly makes more sense than offering a contract based on an ability to service every possible function at an acceptable level.
The reduction in operational risk is an obvious benefit of such an approach; no longer is a business reliant on the performance of a single supplier. It also makes the process of removing a failing supplier far easier than having to completely renew a single vendor outsourcing arrangement.
A multi-sourcing relationship places the business back in control, the arrangements are more flexible and vendors can be tested on less business-critical engagements before proving themselves.
This, of course, introduces an element of competition amongst suppliers. The end result being the customer is in a far better position to negotiate on price and demand higher levels of service - a major bottom line business benefit.
Suppliers are kept on their toes and forced to deliver the highest level of service; it becomes much easier for the business to evaluate a vendor’s performance when their closest competitors are also engaged within the same organisation.
However, to implement a successful multi-sourcing approach, a new mindset is required from an organisation. Gartner describes multi-sourcing as an innovative discipline that takes organisations beyond 'quick-fix' cost cutting to enable capability building, global expansion, increased agility and profitability and competitive advantage.
Central to a successful multi-sourcing approach is the creation of an outsourcing strategy that is linked to the overall business strategy, which enables the customer to meet strategic goals and win market share.
Firms looking to move beyond outsourcing to multi-sourcing must therefore have an integrated sourcing strategy across all services, and to reap the benefits an outsourcing team with specific skills and experience is required, as well as a supplier that understands the business structure and commercial environment in which they work.
Companies must remember that multi-sourcing is about building relationships, not just signing contracts and 'throwing it over the wall.'
The best outsourcing providers are defined by their ability to combine the finest industry skills available with superior on-the-ground project management, it is essential for providers to begin by gaining a deep understanding of the client's business and invest heavily in customer service. When businesses are able to compare the performance of suppliers so closely, the strength of customer service becomes even more important.
Vendors need to ensure that relationships are developed across the client's business: it is no longer enough to have one point of contact with the customer. This is not purely so that vendors can sell more, but rather the customer should see it as a way to for the customer to maximise the vendor's capabilities, making the vendors work for their department and the company as a whole to drive business success.
Innovation is another crucial component to successful multi-sourcing arrangements. Companies can look to outsourcing to deliver major service improvements and business benefits, rather than simply solving a problem.
Reduced cost is almost a given, but companies should be aware that the lowest cost option may not be the best for innovation. By maximising the cost-saving capabilities of a global delivery model, and providing in-depth local consulting presence with onsite teams focused on the customer's business applications, suppliers can invest in and deliver innovation.
As the multi-sourcing market matures, the most value and strategic business impact will be seen in those engagements where a real partnership exists. From the perspective of both the CIO and the supplier, the importance of forming and nurturing deep relationships between the two parties has never been more important.