To Multisource or Not to Multisource

by John Berry, Senior Consultant, Cutter Consortium

To multisource or not to multisource? This is a question that will grow in importance as the size of sourcing and the varieties of processes sourced marches upward. In true, two-handed fashion -- on the one hand, on the other hand -- let's consider multisourcing's value first, then some of its risks.

Multisourcing Value

• Leveraging multiple vendors creates the best-of-breed thinking so common in the software industry. Is any one service provider equally adept at managing enterprise IT as well as financial, HR, and logistics business processes to the same quality and level of innovation the customer seeks? Organizations are often better served teaming up with a vendor that offers specialized expertise in a process or service domain, rather than shooting for one-stop shopping.

• Using many vendors can mean that any relationship risk the organization would have been exposed to with one or a couple of vendors is reduced. If one service provider is managing six sourcing projects, then all six are equally exposed to such risks as service disruptions from a vendor acquisition or merger; deterioration in the relationship from the defection of key executives; compromises in quality from defection of staff; and the general distractions created by questions about the financial viability of a vendor. The more sourcing eggs placed into one vendor basket means that for certain risks, all sourcing projects are exposed, which just heightens the total risk.

• Multisourcing injects some consistency in the relationship management cost structure. An organization might find that managing one vendor sourcing relationship represents 10% of the total sourcing expenditure profile. In another vendor sourcing relationship, it might be 4%. Companies can even out the percentage cost that relationship management represents as a component of all the costs in a sourcing relationship.

Multisourcing Risks

• Minimizing the number of vendors reduces complexity -- some relationship management activities can be standardized, which is more difficult in a multisourced environment. For example, a sourcing service provider might offer a relationship portal where the customer can capture a global snapshot of all the business process initiatives or IT services under vendor management. A portal could include SLA information, changes in the composition of project teams managing each initiative, future project plans, and other project management details like issues resolved, unresolved, scheduled calls between vendor and company, etc. Contrast this with managing multiple vendors in multiple formats. One relationship in one business unit leverages a project management software suite, another a vendor portal, yet another some legacy version of Lotus Notes.

• The more service providers in the organization's sourcing stable, the less opportunity to leverage purchasing any power by virtue of throwing the vendor lost of work. Giving more sourcing work to one or two vendors means the sourcing company can at least make an attempt at preferred pricing for the volume of work.

• Vendors can work at cross purposes creating unneeded conflict. Supposing one vendor has been given incentives to lower hardware costs by making existing assets more productive by working as hard as possible. Vendor two is managing software. A new application is deployed requiring measurably more computational power. What does the sourcing organization do?

• Maintaining harmony amongst multiple service providers when vendors must collaborate to deliver a complete, integrated service to the customer. As we just saw in the last bullet, some companies have no trouble splitting up related services among multiple vendors so that the company's vendor A manages apps on vendor B's hardware platform. This is a situation potentially rife with conflict and finger-pointing over the course of the contract unless the terms of this three-sided relationship are hashed out up front. At a minimum, how much direct communication between vendors should the sourcing company permit? How does the organization establish the terms of collaboration and coordination?

The takeaway? Multisourcing for the sake of multisourcing offers value or not depending upon the aspirations of an organization and the capabilities of the service provider. It is probably safe to say that organizations should count on sourcing with more than one vendor but fewer than seven or eight. If an organization can achieve the business value objectives it seeks in sourcing with two vendors, then it should be grateful for not having to manage relationships with five. However, five vendors might possess unique domain expertise that can translate into quality and innovation an organization desires in sourcing its portfolio of processes from financials to R&D. Today, the question of whether to multisource is proving to have a multidimensional answer.

I welcome your comments on this issue of the Cutter Edge and encourage you to send your insights on the market in general to me at jberry@cutter.com.

-- John Berry, Senior Consultant, Cutter Consortium