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There is Safety in Numbers

Divide and Conquer Your Outsourcing Projects

Published: January 9, 2007

John Bostick provides helpful advice for successful outsourcing.

Outsourcing is a fact in American business. The problem facing top companies is no longer whether or not to do it. Instead, the queries are: What? How? With whom? These are not black-and-white issues. They involve value judgments, which force businesses to confront the bigger question: Why?

If the answer is “to save money,” then the course seems to be clear. Turn over any and all processes that can be “commoditized” to a single, large supplier that can take advantage of economies of scale.

But what if the answer is “to create competitive advantage,” or “to create greater value in our services,” or “to transform our business for new opportunities”? The way forward is a bit cloudier because the company may need multiple relationships engaging a team of specialized outsourcing providers. This means outsourcing today requires a bit more soul searching for managers than managers searching for sole providers.

Sole-sourcing, also called holistic sourcing, appears to be the much easier path to take – the expedient course. After all, the supplier is expected to take responsibility for a whole array of management tasks and responsibilities, effectively taking them off your organization’s plate. You are able to throw a wide array of processes and functions into a large outsourcer’s contract vehicle.

Indeed, it’s popular to say that consolidating one’s outsourcing activities with a single provider means having just “one throat to choke.”

Whose Throat is Getting Choked?
But who is really getting strangled in the long-run?

Consider the impact that sole-sourcing – the most common outsourcing arrangement at present – appears to have had on the current state of the industry:

• MIT’s Center for Information Systems Research (CISR) found that “only 50%” of these so-called “strategic partnerships” (based on large, sole-sourced, outsourcing arrangements) are judged successful by either client or vendor.
  
  
• Deloitte Consulting released a study in 2005 arguing that “outsourcing is not delivering its expected value to large organizations.” One key finding: 70% of study participants had “significant negative experiences with outsourcing projects and are now exercising greater caution in approaching outsourcing.”

Clearly, something isn’t well in the outsourcing world. And yet, companies continue to pursue sole-sourced, outsourcing relationships even as the evidence mounts that sole-sourcing is one of the primary causes of the industry’s widespread disappointment.

The Case for Multi-Sourcing
A recent study by Web news portal Supportindustry.com and consulting firm McGarahan & Associates found that more companies are pursuing multi-sourcing and selective sourcing arrangements rather than the big multi-year and multi-million dollar deals – also known as sole-sourcing arrangements.

The survey discovered that, in the past year alone, almost half of the respondent organizations that were contracted for outsourcing services have prematurely ended their arrangement. Forty-three percent of those companies have actually brought the work back in house, which begs the question: Did these businesses have a business-driven sourcing strategy?

In their executive summary, the researchers offered this advice: “You want to avoid the exercise of ‘back-sourcing’ at all costs – mainly because of the costs and the disruption of services, business impact and timeframe necessary to get the resources, technology and processes back where they need to be to properly service the business.”

I couldn’t agree more, and here is more advice for strategically managing a multi-sourced operation.

Critical Success Factors in Disciplined Multi-Sourcing
A good rule of thumb is to keep experienced IT managers and teams in-house that will ensure that outsourcers are aligned with your company’s business objectives and meet expectations. Think of it as an alliance that helps both sides remain agile and effective. Such an alliance blends internal and external resources in order to meet demanding business objectives.

Moreover, in a good multi-sourced IT structure, all operations – internal and external – should report to a “director” of the alliance. In such an arrangement, relationship management and contract management functions will be enhanced by an overarching and solid understanding of a company’s business objectives. This is the key in keeping all IT outsourcing projects on track.

There are a number of other critical success factors for embracing disciplined multi-sourcing. Among them:

• Maintain the Strategic High Ground – Companies should outsource activities that are not competitive differentiators or core competencies; however, retaining and maintaining the strategic aspects of IT management and architectural design is vital. These high-ground activities contribute value, differentiate companies and should not be surrendered to outsourcers. Senior IT people – experienced in value-creating elements of the enterprise – must remain in-house to ensure the enterprise – organization plus outsourcers – meets business objectives, acts consistently within technical architecture and creates a standardized and integrated (as opposed to silo-style) infrastructure.
  
  
• Vigorously Manage the Vendor Portfolio – If a muscle isn’t exercised, it tends to atrophy and deteriorate. That can be one of the problems with single-sourcing – the increasing dependence on one vendor. This inevitably weakens the capacity to manage an outsourcer actively, hold it in check and hold it accountable. There’s safety in numbers – just as risk is best managed through diversification.
  
  
• Clearly Define Processes before Outsourcing – This point is as true for all outsourcing as it is for multi-sourcing. Companies shouldn’t expect positive outcomes when poorly defined processes are figuratively thrown over a wall to an outsourcer. Successful outsourcing – and multi-sourcing – depends on ensuring a business process is carefully defined and delineated before it is handed off to an outside party for management. Diligent process definition also helps in setting the objectives, milestones and metrics that must be met in order to ensure the outsourcer has delivered a successful outcome.
  
  
• Demand Vendor Accountability – This may seem like an obvious element in any outsourcing contract. But as the scope of a contract creeps, focusing on clear measures for success and performance becomes increasingly difficult. Large, powerful outsourcers may start to lose the incentives that can drive smaller, specialized outsourcers. In multi-sourcing environments, scale makes clarifying and measuring performance with multi-sourcing vendors easier. Plus, it’s less costly to replace smaller vendors when expectations are not being met.
  
  
• Get the Quick Wins – As research from MIT’s Center for Information Systems Research (CISR) has clearly demonstrated: It’s easier to obtain near-term success from “transaction outsourcing” – i.e., well defined, straightforward and tightly focused relationships – than from more expansive and all-encompassing “outsourcing partnerships.” These transactional arrangements represent a quick win – something that demonstrates rapid value and provides a foundation for more far-reaching endeavors.

Companies that become locked into rigid, multi-year and monolithic arrangements with big outsourcers hope for long-term returns; however, as the recent SupportIndustry/ McGarahan evidence demonstrates, their hopes are all too often dashed.

This fact means more and more leading companies see the future of outsourcing as disciplined multi-sourcing. The era of sole-sourcing has played out and the results have not been impressive. While companies will continue to employ large outsourcers for big projects, they are now refraining from loading those partners up with added tasks and responsibilities that are not central to their business models. Instead, they are turning to a portfolio of specialized outsourcers to meet these objectives in a defined and demonstrable way. Multi-sourcing, in other words, is the discipline of tomorrow’s market leaders, proving the power of an age-old maxim: Divide and conquer.