Why should sourcing professionals embrace multi-sourcing approaches? There are several key reasons, including exerting competitive pressure over suppliers, gaining access to specialised skills, and compelling better performance from providers.
Of course, using multiple providers is nothing new, but taking a systematic approach to multi-sourcing governance is. However, before embarking down this road, there are several factors sourcing professionals need to consider, which when combined, present challenges in achieving multi-sourcing success:
- Suppliers prefer a direct line to the customer and resist subcontracting roles. Unlike prime-sub engagements, today’s infrastructure and application services providers prefer a direct line to the customer to be able to sell more services. As a result, prime-sub relationships are less frequent in today's outsourcing deals, and organisations are often left with the challenge of managing a broad range of supplier relationships themselves.
- Contractual mechanisms and OLAs remain in their infancy. Techniques such as the use of operating-level agreements promise to assist customers in managing multiple providers. But in reality, relatively few customers use OLAs to govern multisourcing transactions, particularly in the applications arena, so the effective use of OLAs for multi-sourcing remains a challenge. Additionally, standards like ITIL v3 and CMMi for Acquisition (CMMi-ACQ), although equipped with new capabilities intended to facilitate sourcing, are only now beginning to make an impact.
- Patterns of multi-sourcing vary, presenting additional complexity. Several high profile outsourcing engagements like General Motors' have successfully transitioned from single-source models to multi-sourced models on contract renewal. But there are many ways for companies to move to the multi-sourcing model, making no single path the "right" approach. Those who are new to outsourcing may be starting essentially from scratch, or adding new suppliers over time as outsourcing activities expand.
Despite these challenges, Forrester has heard from many sourcing professionals who are making progress in their multi-sourcing efforts:
- Firms believe they are making progress. Many of Forrester’s clients report that their multi-sourcing efforts are resulting in improved access to specialised skills and reduced costs through increased supplier competition. For example, 31 per cent of recent survey respondents said that their efforts to gain access to specialised skills through multi-sourcing were highly successful, and 27 per cent said they were successful in reducing costs through encouraging competition between suppliers. These results likely correlate with the use of staffing-based resources for applications and infrastructure tasks where billing rates and skill sets are the most obvious elements of service delivery.
- Improved quality and innovation are possible. Forrester's data signals that with a multi-sourcing approach, clients can achieve improved quality in service delivery and innovation in service delivery. Some best practices for driving innovation include using innovation and making participation an element of measuring service provider performance — as well as a prerequisite for awarding suppliers additional work.
- The role for the "service integrator" is gaining increased importance. Faced with the complexity of managing multiple providers, many organisations are beginning to understand the clear need for an external service integrator. This role essentially consists of an outsourced program manager, who is responsible for integrating services from multiple providers but does not provide any outsourced services. Many service providers are in fact eager to embrace this role, even through some customers struggle to justify the overhead cost of engaging with an additional provider.
Multi-sourcing success is ultimately all about improving governance
Despite the inroads some sourcing professionals have made, multi-sourcing remains a challenging and potentially costly undertaking. Five of Forrester's 10 key steps to multi-sourcing success deal explicitly with supplier governance, highlighting the importance of strong governance programs for multi-sourcing success.
To improve multi-sourcing efforts, sourcing professionals must remember that the choice of outsourcing models will influence the governance approach. For example, firms should be aware that governance in the managed outcome approach requires a different approach, including setting a well-defined interface between supplier and customer and additional oversight responsibilities.
Additionally, clients should focus on comprehensive governance efforts that involve the suppliers whenever possible. For example, to improve supplier contribution to innovation objectives, they should be involved in dedicated innovation councils. In multi-sourcing, organisations should strive to encourage meaningful cooperation between suppliers even if the use of OLAs and other mechanisms are beyond their reach.
Bill Martorelli is principal analyst at Forrester Research, serving Sourcing & Vendor Management professionals, with primary research responsibility for application sourcing strategies.