The dangers of multi-sourcing

Outsourcing is back on the agenda, with a multiple-supplier model. But as Jonathan Cooper-Bagnall says, a holistic approach is vital

The last recession, in the early years of the last decade, fuelled considerable debate on the value of outsourcing. Many organisations saw it as an opportunity to secure cost reductions by awarding large and often complex outsourcing contracts to the world's leading service providers. Although outsourcing was not a new phenomenon, the scale of deals signed, the number of jobs moved to offshore locations, and the speed of the change, provoked concern as to whether this was sustainable and appropriate.

Today, the outsourcing debate is raging again. Public and private sector organisations are looking to strip more costs from their operations by further outsourcing and offshoring. Many already have experience of outsourcing, but that experience has been mixed. The scale of the earlier outsourcing and offshoring has proved sustainable. However, some contracts have not delivered as a result of rushed contract execution and underinvestment in the transition to new suppliers, and the management of those suppliers. Those mistakes need to be avoided this time round.

Any organisation considering outsourcing needs to answer the question of how the delivery of operations can be restructured so that it takes advantage of the outsourcing provider's skills. According to PA's 2009 International Outsourcing Survey, organisations are planning to break up the large, complex contracts and move to a set of smaller contracts with multiple suppliers. The perception is that this will deliver much-needed cost reduction, and that this multi-sourcing approach enhances competition and offers a more flexible and agile delivery of operations.

Despite the variety of benefits required from outsourcing, it is the focus on cost reduction with the need for immediate and significant cash savings that is dominating the thinking and behaviour of project teams. Therefore, leadership teams need to ask: does my project team understand the need to balance cost saving with the investment required to manage a multi-sourced contract successfully?

Leadership teams often underestimate or overlook this question. For example, when a global life sciences company moved to a multi-sourcing arrangement, it failed to realise that it needed to integrate processes across its five major suppliers, threatening the success of the project. It must be recognised that investment is vital in making an effective transition to a new and more complex portfolio of suppliers; to integrate and manage this multi-sourced service delivery model; and to deliver the benefits, including the cost savings.

If the lessons of history are not learnt, the investment required to make these new arrangements work will be watered down. Outsourcing failures of the past have occurred because when the business case reaches the final analysis and savings are insufficient, project leads are trapped in what we have termed the "sourcing manager's dilemma".

The dilemma is a simple one and not uncommon in other types of project. The business case can be made to work if the portfolio of investments is scaled back. It is not the right thing to do, but it is more palatable than explaining that months of investment to position the organisation to outsource a particular set of operations has resulted in a business case that is not viable.

In the outsourcing world, that scaling back of investment manifests itself in reductions in the number of people available to work with the service providers and with the business. In addition, a whole list of elements that are important to the success of the operation are cut. This includes failing to create and rework the processes that underpin the services being delivered, reducing the capacity of the service management team so they cannot be proactive in managing the relationship, and limiting the availability of skill and competency development. This is not good practice and certainly not a recipe for success, but in the mind of the project team this lack of investment can be compensated for by the service provider.

In the single supplier and large contract environment, many of the cracks caused by underinvestment were, and still are, papered over by the outsourcer. While outsourcing providers are not without blame for some of the failures and poor behaviour over the years, many of their achievements in holding the service together have gone without notice. Equally, organisations procuring services are quick to criticise service failure or escalating costs, but are less forthright in examining their own role and obligations.

With the push to multi-sourcing, the paper is going to be peeled back, and the cracks revealed. Many organisations will find themselves struggling with their new-found role of integrator of services and suppliers, and, unless it is planned for, the investment necessary to be strong in this discipline will come as a financial shock.

For those organisations that recognise the need to invest and to take end-to-end responsibility, multi-sourcing can deliver real qualitative and quantitative benefits. Organisations that evaluate their outsourcing arrangements effectively from the outset are better placed to realise the benefits. One financial services firm realised the challenges of integrating and managing its outsourcing up front, and appointed a third party to manage this on its behalf. Pre-empting the challenges of multi-sourcing helped to secure the successful delivery of the project. Organisations must ensure that the balance between saving and investment is achieved by putting the right governance in place when the project to outsource or to re-work existing outsourcing arrangements is conceived. In this way, the "sourcing manager's dilemma" can be avoided.

There are enough businesses losing money by not thinking through the consequences of their actions. This is not the time to join them by failing to consider the true implications of multi-sourcing.

Jonathan Cooper-Bagnall is head of sourcing consulting at PA Consulting Group