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Multi-sourcing: When One is Not enough

The trend in outsourcing and BPO deals towards smaller deals continues. In managing smaller deals multi-sourcing offers significant benefits but there also challenges. The greater number of additional  vendors involved increases the level of complexity and management resources required to ensure the different parties work effectively together.

Businesses are no longer willing to sign up large outsourcing deals that span multiple years due to concerns over vendor lock in 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 may require additional management resources that some companies may not have.

Additionally, outsourcing lets organisations convert a fixed cost into a flexible expense, and transfer risk and management to another party

Multi-sourcing allows organisations to employ the best vendor in terms of price and capacity for a particular activity. Multi-sourcing promotes competition among various providers.  Best-of-breed sourcing recognizes that providers have different strengths and weaknesses and carves out work best suited for each of several providers.

It can cut costs related to repetitive service contracts and improve quality. Vendors must bid more frequently because contracts are shorter, suppliers face more competition because smaller-sized deals mean that more vendors qualify to bid, and suppliers need to attract more customers in order to meet growth targets.

Scott Feuless, principal consultant with outsourcing consultancy Information Services Group, recently said, “The number of service providers each company uses will grow dramatically, driven by growing popularity of cloud in general and Software-as-a-Service [SaaS] in particular”.

These multiple companies need to be managed and monitored. The job is made more difficult if they are off shore and hard to travel to.  Governance requirements can greatly magnify in multi-vendor BPO and outsourcing environments.

In multi-provider environments the resources needed to manage outsourcing can cost between 4-15% of total contract value.

Organisations pursuing a multi-sourcing arrangement should craft strong internal governance strategies with regard to vendor relationships and share the details with all of their service providers to promote better cooperation and more seamless delivery of services across organisational lines.

There is more risk in depending on one or two providers as much depends on their capabilities and their financial strength, for example. With multi-sourcing the risks move into other areas, including cracks between service, security issues,  hidden costs with continued monitoring and renewal of contracts, and possible replacement of providers.

Multi-sourcing can limit the scope of innovation you can expect from an outsourcing relationship in regards to a particular business function or IT service. IF there’s a range of vendors who are focused on their small bit of the equation there’s unlikely to be enough incentive for any of them to view what they do from a broader perspective.

Partnering with a single provider who can assist in reshaping an entire business process from end-to-end, will offer greater scope for innovation. Rather than a series of smaller contracts focused on transactions.

Moving from a single provider to a multi-sourcing environment or vice versa requires some considerable adjustment to how you manage your outsourcing relationships. You must change your contract negotiation strategies, procurement practices, and the governance models for you outsourcing contracts.

I recently consulted with a client who had a single vendor for the lion’s share of the work that they outsourced. As additional projects were being outsourced they asked the vendor to become a ‘master’ vendor and manage (for a fee) the other smaller vendors. The problem was that they constructed a complicated and very legalistic contract that was never going to achieve what was intended. They basically set and forget and were relying on a legal document that ended up making the parties adversarial. In the end when it came around to renewal time the whole process broke down with the vendor having to be dragged kicking and screaming to the table to honour a deal that it was getting smashed on. Malicious compliance was the end result and it did not end well.

Multi sourcing provides companies with lower cost options to get their outsourcing service delivered. However multi-sourcing relationships’ must be maintained and closely monitored to deliver the best possible outcome.

Originally Published in the Sauce eNewsletter – theOutsourcing-Guide.com

theOutsourcing-guide.com is the ultimate reference guide for the BPO and outsourcing industries and it will become the most comprehensive resource for organisations looking to engage BPO and outsourcing providers. As well as providing a range of eBooks, articles and whitepapers explaining the various aspects of BPO, theOutsourcing-guide.com provides an online directory of providers segmented by category and location.

theOutsourcing-guide.com is a vehicle for vendors and service providers to showcase their organisations and the outsourcing services they provide. Visit theOutsourcing-guide.com for more information.

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