Friday, July 20, 2007

Time to spread your outsourcing risk

Source: Zdnet

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 — multisourcing. In 2006, the central theme of one of the industry's biggest shows, the Gartner Outsourcing Summit, was the new trend of multisourcing. This year the central theme remained the same as many companies now have experience of implementing and managing multisourcing 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 appears to have failed.

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 rethink 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 focused on transactions to such an extent that suppliers became "slaves to SLAs [service-level agreements]". Whatever the investment made in RFPs (request for proposals), 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 chief information officers selecting specialist providers to make the most of the available outsourcing options. One of the obvious advantages is the "best of breed" effect. A chief information officer 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.

Gaining a multisourcing mindset

However, to implement a successful multisourcing approach, a new mindset is required from an organisation. Gartner describes multisourcing 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 multisourcing approach is the creation of an outsourcing strategy that is linked to the overall business strategy, enabling the customer to meet strategic goals and win market share.

Firms looking to move beyond outsourcing to multisourcing 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 multisourcing is about building relationships, not just signing contracts and "throwing it over the wall".

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; rather the customer should see it as a way to maximise on 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 multisourcing 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 on the cost-saving capabilities of a global delivery model, and providing an in-depth local consulting presence with on-site teams focused on the customer's business applications, suppliers can invest in and deliver innovation.

As the multisourcing 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 chief information officer and the supplier, the importance of forming and nurturing deep relationships between the two parties has never been more important.