Fwd: Crying need for leadership in multiple sourcing

By Richard Milne                        

It seems a strange business strategy to think about doing more of what you know you are not doing well enough already. But that is what is happening with outsourcing.

According to a report by Ernst & Young, the professional services firm, a quarter of companies are considering outsourcing as a way of cutting costs in the recession. But only a third that have done so think their IT rationalisation has been effective.

The latest trend in IT outsourcing is for multiple sourcing: big contracts are broken up into smaller pieces that are then split between different suppliers. Companies are trying to to break up unwieldy contracts, rather than adopting a "one-size-fits-all" approach.

But this approach presents its own issues. "There was a view that multi-sourcing is a panacea [but] that is simply not true," says Jonathan Cooper-Bagnall, head of sourcing at PA Consulting. "Companies could not manage it with one and now they are going to break it up and manage it in a more complex environment."

His concern is also shared by executives. "The idea of multiple sourcing and looking for best in class is back en vogue [but] it does allow you to spread the risk," explains Robin Barrett, the former senior vice-president for technologies at American Express. "The mistake that is often made is that companies are letting everything go but they are not paying enough heed to how important it is and how complex it is to manage an outsourced deal."

Management – or the lack of it – is central to the problems with multiple sourcing. According to a survey from PA, 84 per cent of companies do not have what they regard as a mature governance model for their outsourced services.

Mr Barrett says the answer is that companies need to strengthen internal oversight and leadership to oversee the outsourcing relationships. "When you outsource, you actually need to manage the network of suppliers even more than when they were in-house," he says.

Mr Cooper-Bagnall says companies need to focus on two broad areas: integration and governance. On integration, he points out that five suppliers are likely to have five different ways of dealing with problems from how they are recorded to who deals with them. "If you can imagine the environment where the customer has done no integration and each provider has its own rules, then that is when it breaks. Doing integration in real time is a disaster," he says. Instead, he suggests that companies deal with integration at the time the deal is negotiated.

Equally, good governance calls for improved communication. Mr Barrett says even simple matters such as calling one party "customer" and the other "supplier" are fraught with danger when companies should be striving for partnerships. "You need to make sure these are people you can work with."

Mr Cooper-Bagnall recommends setting up collaborative governance forums so that all suppliers and the company communicate formally with one another. "If you treat each of your suppliers in a silo and they never come together, then there will always be an element of finger-pointing and distrust among them," he says. "You need to make sure things happen and that everything is implemented."

He describes the previous approach to outsourcing as the "black box" one, of just throwing everything in the contract and then not worrying about it. What companies need to do with multiple sourcing, he argues, is not have several black boxes but a "glass box" so that all parties have visibility and the customer can intervene when necessary.

Otherwise, companies in survival mode and cutting costs may be sorely disappointed if they fail to put money into the right leadership and oversight functions. "Without an investment, multi-sourcing will either cost them more than they thought or will cost them so much they will want to exit the agreement," he warns. "That is pretty serious if you are doing this in order to survive."

Copyright The Financial Times Limited 2009