Introduction
Outsourcing of Information Technology has been around for some time now and companies have long understood the benefits of the same. It has become an important basis for competitive advantage and will remain so in coming years forming an integral part of business strategy (Broedner et al. 2009). Outsourcing is essentially an inter-organisational business transaction (Chenlung Yang et al, 2011). The fundamental logic behind outsourcing had been cost arbitrage. But with time businesses have realized that with increasing competitive pressures and rapidly evolving technologies IT outsourcing can’t just be viewed from a cost saving perspective. Instead it has to support the business and contribute to higher end strategic goals. All this has led to what is termed as innovative IT sourcing. Clients have realized that their current sourcing engagements are probably not delivering the desired value that can be essentially attained. Thus, there has been talk of multi-party sourcing concepts and new ways of engagements with vendors.
The traditional model of outsourcing involved engagement between a single client and a single vendor. Although single vendor sourcing has its advantages, there are certain risks associated with it too, such as supplier lock in, bad vendor selection, and limited domains of competence. Hence firms have started to source their requirements from multiple vendors. Multisourcing provides option. By design, this approach to IT sourcing gives organisations the opportunity to ‘pick and choose’ amongst service providers and select ‘best-of breed’ sources for IT services, lowering costs resulting from vendor competition and improved agility and adaptability to dynamic environments (Cohen and Young, 2006).
Though multi-party sourcing is a rapidly increasing trend, there also multiple risks associated with such a strategy. These risks stem from issues such as interdependencies among various vendors, integration of the various services from the multiple sourcing partners, formal incentive structure, and the alignment of metrics (in the contracts that govern these multi-party relationships) with the client’s overall objectives. Unlike single sourcing engagements wherein one vendor is responsible for the entire delivery and hence the client faces moral hazard issues with only a single supplier, multi-party sourcing requires the clients to coordinate the actions of many vendors many of whose tasks are performed across firm interfaces (Shantanu Bhattacharya et al, 2012). Thus, multi-party sourcing introduces governance related issues. Unless effectively managed, the multisourcing engagement could turn out to be expensive and time consuming.
An apt illustration of multi sourcing strategy would be that of General Motors (GM). In 2006 GM became one of the first major global firms to reshape its outsourcing services. Traditionally GM had outsourced the majority of its IT work to a single vendor ‘ EDS. When its contract with EDS came up for renewal GM decided to shift to a multi-source model. This way, it increased competition among a core group of suppliers and reduced overall risks by spreading its risks. The new model comprised the incumbent EDS in addition to HP, Capgemini, IBM, Compuware Covisint and Wipro. As a result, approximately $7.5 billion in five year contracts were awarded with a further $7.5 billion in contracts to be parcelled out as new projects arose.
The transition was expected to take a few months and the main vendors were involved in GM’s strategic planning and in designing the service oriented architecture. GM had to make decisions on performance metrics and payment schemes to incentivize the vendors. The role of GM became that of a ‘systems integrator’ and GM’s strategy of multi sourcing became a model for other large corporations looking to outsource. General Motors forms a good example as to the issues that need to be addressed before changing over to a multi-party sourcing model from a single source model.
Another growing trend in the outsourcing space is that of ‘agile multi sourcing’. Here organisations go beyond the ‘sourcing event’ to an ongoing program that enables capability building, increased profitability and competitive advantage (Bill Huber, Director CPO Services, TPI). Bill Huber of TPI defines agile multi sourcing as ‘an organizational discipline that entails sustained optimization of services from both multiple external providers and internal shared services.’ Agile multi sourcing requires a new level of maturity in the organization that enables it to scale and operate more efficiently.
The next section highlights the research objectives of the paper.
Research Objectives
The present paper tries to answer the following questions:
‘ Why may a client firm choose to work with more than one IT vendor?
‘ What are the challenges of a multi-vendor approach?
‘ What are factors driving the multisourcing trend?
‘ What are the internal competencies a firm must develop to make multisourcing work?
‘ Is a multisourcing approach right for you?
Literature Review
IT outsourcing is defined as the decision on relocating an IT department’s tasks to a third party vendor, who conducts them and charges a certain fee for the service (Apte et al. 1997). For providing the service an inter-organisational link must be established in order to deliver the service. This happens in the form of contracts.
The IT outsourcing phenomenon covers a wide spectrum of services. This ranges from outsourcing specialist functions like technical writing and software testing to the provisioning of services like datacentre facility management and desktop support. Another type of outsourcing is Business Process Outsourcing, in which a complete business function is serviced by an external party. This can range from call desk support to specialized R&D functions (Ilja Heitlaager et al, 2010).
The reasons for outsourcing are primarily constrained in two aspects. Firstly, outsourcing is largely a consequence of a fundamental shift in business strategy (Jens Dibbern et al, 2004). Prahlad and Hamel’s(1990) core competency theory proved to be a game changer in business strategy. Many companies decided to concentrate on consolidating and further nurturing their core competencies i.e. what an organisation does better than anyone else, as they believed therein laid the sustainable competitive advantage. As a result, non-core functions such as IS were outsourced. Secondly companies were unclear in the value delivered by IS. In many companies IS was treated as a cost burden or overhead ‘ an essential one but one that had to be minimized nevertheless. Thus, it proved to many US organisations a convincing business case to shift business processes to offshore destinations like India (Ghemawat, 2007) due to the presence of inherent labour arbitrage and economies of scale and scope.
IT outsourcing was initially a simple dyadic relationship. The client organisation outsourced all its IT functions to a single vendor. But recent trends suggest that due to changing market scenarios and technology innovations, companies are looking for sustainable competitive advantage and have started to look at IT outsourcing from a competitive strategy point of view rather than just that of a cost arbitrage strategy. All this has led to increasingly complex relationships involving multiple vendors working in tandem with each other and sometimes perhaps even with multiple clients. Such collaborative relationships termed as multi-vendor, co-sourcing and complex IS outsourcing make use of the concept of ‘best-of-breed’ expertize rather than relying on a single vendor for all the solutions.
The complexity of IT outsourcing relationships and the need to sustain a competitive advantage has also led to new literature in the outsourcing space. Client firms looking to outsource IT don’t look at it from a point of view of outsourcing to a vendor but are starting to look at it as a ‘strategic alliance’ or a ‘partnership’. Fitzerald and Wilcock (1994) identified five types of relationships and seven attributes which can lead to effective partner relationships. Clients are more and more involving outsourced partners in the strategy formulations of the firm.
Degree of Outsourcing Ownership
Internal Partial External
Total Spin-offs (wholly owned subsidiary) Joint venture Traditional Outsourcing
Selective Selective Sourcing
None Insourcing/Backsourcing Facilities sharing among multiple clients N/A
There are four fundamental parameters that determine the kind of outsourcing arrangement that a firm may enter into: degree (total, selective, and none); mode (single vendor/client or multiple vendors/clients); ownership (totally owned by the company, partially owned, and externally owned); and time frame (short term or long term). The combination of these parameters yield different types of sourcing arrangements such as joint ventures, facilities sharing, spin-off, etc (Dibberman et al 2004).
Source: The DATA BASE for Advances in Information Systems – Fall 2004 (Vol. 35, No. 4)
The combination of degree and ownership is illustrated in Table 1 (Types of Sourcing Arrangements).
Referring to the table, IS could be spun off into a separate unit but the ownership is still very much internal. Sometimes these spun offs could be jointly managed leading to a joint venture. Such joint ventures are based on strategic partnership (Fitzgerald & Willcocks, 1994). If the degree of outsourcing is total but ownership is external then it is termed as traditional outsourcing. If the degree is selective then it is called selective outsourcing. If a firm wishes to have IS entirely inside and also have total ownership then it is called insourcing or backsourcing. There is also the possibility of facilities sharing among multiple clients as indicated in the table.
Table 2 depicts the various types on Vendor-Client sourcing arrangements possible when there are one or more clients or one or more vendors.
Vendor
Client Single Vendor Multi-vendor
Single Client Simple Dyadic (1:1) Multi-Vendor (1:n)
Multiple Clients Multi-Client(n:1) Complex Relationship (n:n)
Source: The DATA BASE for Advances in Information Systems – Fall 2004 (Vol. 35, No. 4)
Simple dyadic relationships can become risky due to vendor opportunism so some companies have resorted to the multi-vendor model. On the other hand several companies in the same industry could have similar IT needs which could be served more economically and therefore come together to form an alliance. This is called multi-client outsourcing or co-sourcing. Also, several client companies can form relationships with several vendors ‘ what is called a complex relationship.
The present paper delves into some of the nuances of multi-party sourcing, its complications, its advantages and how to decide whether the multi-party sourcing strategy is right for a firm. This next section presents a theoretical analysis of the research been done and the practical implementations of multisourcing. Through the discussion, the questions stated in the objective are addressed and answered.
Analysis
A one-to-one relationship is straightforward wherein the client relies on a single outsourcing vendor in satisfying all outsourcing needs (Gallivan & Oh, 1999). Most research has revolved around this relationship, especially the ones which have analysed outsourcing and its risks from a transaction cost economics point of view. This relationship has pretty much been treated default. One reason for this is that for many decades only few vendors have dominated the outsourcing market and have developed knowledge and implementation expertise to deliver a full range of solutions to clients. But over the past few years many outsourcing companies have come into existence especially in developing countries like India where labour costs are cheap and intellectual capital is high.
A multi-vendor or one-many relationship indicates that one client uses multiple vendors to achieve its objectives. For example, in 1989 Kodak fully leveraged the expertise of three outsourcing companies ‘ IBM, Digital Equipment Corporation and Business Land by allowing them to concentrate on their core IT services (Gallivan & Oh, 1999). In 1994, British Petroleum’s Exploration division entered into a similar arrangement with three IT vendors to provide services in data center management, application development, and network installation and support (Cross, 1995).Chevron signed an outsourcing deal with three outsourcing companies ‘ EDS, GTE and Sprint ‘ to make best use of their IT services. Recently, even Government departments in the US are turning to multisourcing as opposed to single sourcing. Examples include – Department for Work and Pensions (DWP) awarded four vendors prime contracts for its application development of procurement process work:
‘ Accenture – Lot 1: customer facing systems
‘ HP ‘ Lots 2 and 5 to support the legacy core benefits systems
‘ IBM ‘ Lot 3: business facilitating systems
‘ Capgemini ‘ Lot 4: business prototyping.
Ministry of Justice in 2011 awarded three lots to different suppliers for various components of its shared services program:
‘ Steria for a common back-office operating platform
‘ Savvis for hosting services on an infrastructure-as-a-service basis
‘ Accenture as lead for systems integration.
In most cases, such a multi-vendor alliance places a huge burden of coordination on each member. Then why do client firms engage in multi-vendor outsourcing. Gallivan and Oh, 1999 identify three enabling forces ‘ vendor specialization, contractual flexibility and technological flexibility ‘ that act as drivers to trigger a client form to choose multi party sourcing.
Enabling Forces
Vendor Specialization: IT vendors typically form long temporary or long term strategic alliances with their competitors. Such an alliance may permit vendors to focus on their core IT services while allowing their non-core competencies to be managed other vendors. This leads to vendor specialization through which vendors are able to reduce their variable costs by increasing economies of scale. Through more experience, vendors are able to enhance their skills further and costs are driven further down as vendors’ progress along the learning curve. Benefits accrued from this experience will be transferred to the client in the form of reduced prices.
Reduced Transactional Risks: The extent to which risks occur can be mitigated when clients opt for multisourcing. Logic being, vendors will have less incentive to behave opportunistically when there are other vendors ready to take their place. Conversely, single vendor sourcing has huge switching costs resulting in a greater risk that IT vendor will behave opportunistically.
Technical Expertise: Clients may be attracted by the fact that a multi-vendor approach enables them to leverage the ‘best of breed’ expertise and technologies by being able to choose the ‘best vendor’ for each IT service or function. Most vendors typically have their own expertise or specialization in one particular function over others. A 1998 Dataquest survey of 191 IT executives (Caldwell & Mcgee, 1998) revealed that technical expertise followed by vendor’s understanding of business goals were the most important criteria for selecting vendors.
While there are some economic benefits of multisourcing there are a couple of potential drawbacks or constraining forces.
Constraining Forces
Coordination costs: Coordination costs include the costs associated with information search, communication and monitoring costs. Monitoring costs relate to the principal-agent relationship. When the performance of the IT vendor fails to meet client expectations it is often difficult for the client to determine "whether a problem is due to negligence on the part of its supplier or to an unforeseeable event" (Aubert, Patry & Rivard, 1998). This responsibility problem gets aggravated when other vendors the opportunity to point fingers at that particular IT vendor for under-performance on their part.
In dyadic relationships such coordination costs are minimized because there are only two parties involved. Such costs can grow exponentially in case of multi-vendor relationships. Thus coordination in a multi-vendor setting become critical as any degeneration in coordination can hamper business performance. Due to this, multi-vendor arrangements prefer few vendors and not many. This is consistent with the ‘move-to-the-middle’ hypothesis posed by Clemens, Reddi and Row (1993) that clients will purchase from multiple sources but at the same time restrict that number to two or three in order to minimize coordination costs.
Contractual Complexity: Contracts become more complicated as the number of parties increase since the rules responsibilities become more complex. This can lead to ‘incomplete’ contracts which refer to the fact that agents typically take less information into account than what is optimal to formulate the contract. Incompleteness of contracts occurs due to the ‘complexity’ in writing and implementing contracts. Legal fees in writing, enforcing and litigating such contracts also increase.
Thus when deciding whether to multisource client firms need to investigate as to which forces are in prominence and take a decision accordingly.
Today’s dynamic business environments and emerging technological concepts such as cloud computing and ‘consumerization of IT’ have changed the way firms are looking at IT infrastructure. Businesses today need greater flexibility and agility to deal with changing business requirements and expect the same from their service providers too. This has led to an alteration in the sourcing model and firms today are looking increasingly at multisourcing to get the best of quality and cost through competition for a larger share of the business. Complex business processes are making multisourcing a preferred option. But as stated before organisations have to look into the costs and complexities of multisourcing before taking a firm stand. Typically, analysts estimate that the cost of managing single service provider deals which range from 3 percent-10 percent of the total cost of the deal can go as far as 15-40 percent in a multisourcing engagement.
Effective multisourcing is all about building partnerships. It is very difficult for two organisations with vastly different cultural backgrounds to work well and easily together. So how does one approach the vendor management problem? Linda Cohen and Allie Young point out that ‘Multisourcing requires new management approaches that recognize the interdependencies and fluid relationships that are created’In multisourcing, there is a far greater complexity due to the number of parties involved, the interdependencies of providers, and the relationships required to ensure success.’ By taking certain basic measures a client organisation can mitigate some of the risks.
Organisations must develop a governance process framework which applies to all sources of supply so that all parties can operate in similar ways. Through a dashboard the governance mechanism must allow organisations to have an overall aggregate level insight as well as drill down to specific services when required. The governance framework should specify key deliverables for each service and provide mechanisms to measure the achievement of goals. An effective governance framework is key for effortless communication and collaboration not only between client and vendor but also among vendors. It also helps align the vendor efforts towards the business objectives.
Multisourcing requires enterprises to develop competencies that did not exist in the past. There are essentially two new types of competencies ‘ demand management and relationship management ‘ that are necessary to manage multisourcing. Demand management means being out there with the business, constantly looking at what they are going to need, how much they are going to need and how fast they are going to need it. Shifting to demand management competencies from supply management competencies is therefore critical.
Relationship management competency is also equally important. Organisations should appoint people responsible for relationship management at two levels: Relationships with external business clients as well as relationship management with vendors. Organisations cannot just be technology heavy; they ought to be good at building and measuring relationships and structuring Operating Level Agreements that are required to make multisourcing successful. It is important that organisations identify and develop these skill sets ensuring successful relationships.
It is important that organisations before plunging into multisourcing agreements have a deep look at their innate competencies and then decide on an appropriate sourcing strategy. It is also important for organisations to consider how many vendors they are ready to handle. In some cases an organisation might have to utilise a prime contractor over a group of sub-contractors in order to learn how to manage multiple vendors. It is also imperative the organisation scrutinizes its internal resources and consider whether it has the right people to handle the complexities of multisourcing. A certain level of maturity is required in order to manage a multisourcing strategy.
Research Framework to study successful multisourcing arrangements
Figure 1: Source: Studying Multi-sourced IT Service Chain Arrangements ‘ The Case of Mission Critical Sourcing (Heitlager I, Helms, Remko and Brinkkemper S, 2010)
The framework depicted in Figure 1 defines the determinants for successful multisourcing arrangements. These determinants depend on each other as defined by the arrows. Some also mutually influence others.
The collaborative behaviour of the patterns determines the success of outsourcing. Not only clients but vendors too must be able to achieve their business goals. This depends on both quality of service and quality of relationship. However these two mutually influence each other. If the quality of service degrades so will the quality of relationship. These two factors depend on the structure of the multisourcing relationship and how they interact. The structure includes organisational, system and contract and the interactions include those at the decision, design and execution level. These influence each other again. Finally, the structure and the interactions are determined by the competency of the parties involved in the arrangement.
Conclusion
In this paper we analysed the various sourcing methods and addressed multisourcing in detail. Multisourcing enables enterprises to leverage ‘best of breed’ expertise and technologies by being able to choose the ‘best vendor’ for each IT service or function. The paper talks about how enterprises are shifting towards multisourcing and the advantages that multisourcing brings along with it. The paper analyses there enabling forces ‘ vendor specialization, reduced transactional risks and technical expertise ‘ that companies benefit from if multisourcing strategy is employed. But there are also a couple of constraining forces (coordination & complexity costs) that need to be analysed which can act as a deterrent to the multisourcing strategy.
The paper through the theoretical analysis addressed questions raised in the beginning as part of the objective. It states that businesses are way more dynamic and business processes are a lot more complex today which are the major factors driving the multisourcing trend today. It is also important to note that a firm cannot just adopt a multisourcing strategy; it needs to have various internal competences and resources to execute such a strategy. Relationship management becomes critical in multisourcing as there are multiple vendors and relationships between the client and the vendor as well among vendors are complex in nature.
It is also important to note that effective multisourcing is all about building partnerships. It is always going to be difficult for two organisations with different cultures to come together and work. It is important that the client and vendor see each other as partners and work towards a common objective. This is where the paper introduces and stresses the importance of an effective governance framework so that all sourcing partners operate in similar ways. The framework should deploy proper metrics for measurement of goals and objectives.
Having many vendors, increases the complexity in the relationships and therefore higher will be the risks associated. It is important for companies to decide the appropriate number of vendors looking at their innate abilities and resources. Towards the end, the paper showcases a framework on how to study whether the multisourcing arrangement is successful or not. The framework highlights the determinants for successful multisourcing and their dependencies. The framework posits that collaborative behaviour of the patterns determines the success of multisourcing.
Lastly, it is important to note that multisourcing is a strategy and an ongoing process that requires businesses revolutionize their approach to IT sourcing. It is important for managers to realize this and recognize the variety of choices available beyond total outsourcing or simple dyadic relationships. Managers should recognize the inherent risks and management challenges before committing themselves to a course of action. The analysis of the enabling and constraining forces would help managers in deciding on whether multisourcing is a viable option.
Multisourcing calls for a new mind-set among managers and stresses the importance of governance frameworks and relationship management. Without effective governance and relationship management multisourcing can be disastrous to an enterprise leading to poor business performance. It also needs to be stressed that contacts management plays a pivotal role in mitigating the risks arising out of multisourcing.
However, if an organisation is prepared to apply the right level of discipline and is able to develop the requisite internal resources a multisourcing strategy can improve IT service delivery vastly along with impressive bottom-line results.