Whether to outsource IT functions and which service providers to use are among the more important decisions CIOs and other senior executives face. The right choices can result in cost savings, service improvements and other gains. The wrong ones can lead to runaway costs, a decline in service levels and unhappy customers and employees.
More often than in the past, organizations are employing multiple service providers to handle different functions, rather than hiring one outsourcing company to provide multiple services. This strategy can pay off nicely. But it can also create headaches for IT and business managers.
Clearly there’s a move toward using multiple service providers rather than awarding a huge outsourcing project to a single provider .
Gartner Inc., in a report published in June, says the number of awarded “megadeals” — which the firm characterizes as being worth more than $1 billion — declined from 12 in 2006 to 10 in 2007.
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“Multisourcing is more than a trend; it’s here,” says Kurt Potter, research director, Outsourcing & IT Services, at Gartner . The firm’s research shows that 57 percent of organizations worldwide use two or more IT outsourcers or external service providers (ESPs) and 55 percent of organizations plan to increase the number of ESPs in the next year, Potter says. Only 4 percent of organizations plan to reduce or decrease the number of ESPs.
What are the advantages of going with multiple providers? “Organizations move to multisourcing or best of breed sourcing strategies to create a competitive environment between providers in hopes of increasing service quality, putting pressure on providers to keep costs low, and to get better services than would be the case when one provider delivers all services,” Potter says.
Also, as services become more mature and commodity-like in some instances, the standards that come along with this market maturity make it easier to combine the solutions and services of different providers, Potter says.
But the multisource strategy can have its problems. “Many organizations discover that they are not organized [for] nor have the governance to successfully manage multiple providers,” Potter says. “We see this often when leadership or staff who were good at service delivery and service quality now have to move to a softer-skill approach to managing providers.”
Without the right governance, organizations will have problems with the handoff points between providers, and may lose track of which provider is responsible for certain end-to-end service levels, Potter says. Also, it costs more to manage multiple providers; 1.5 percent to 5 percent of internal IT budgets are devoted to managing IT outsourcing, he says. Heavy multisourcing will increase this to 10 percent.
“Multisourcing as a phenomenon is nothing new,” Potter says. “Organizations worldwide have used more than one supplier or service provider to meet the demands of their organizations. What has changed is that with outsourcing, few organizations have the right expectations or experience to manage multiple service providers, who are de facto integrators of many sub-IT services.”
The addition of more service providers means more handoff points between competing service providers, which creates a governance nightmare when organizations are trying to ensure that problems are corrected and service levels are met, Potter says. When IT outsourcers come into conflict, organizations must ensure that all affected service providers are charged with correcting the problems for the benefit of their ultimate and shared client.
Operating-level agreements (OLAs) are one mechanism organizations should use to set the ground rules where provider responsibilities overlap. “Some organizations will enter outsourcing without the necessary skills to manage multiple providers and should evaluate whether they should outsource or contract with one provider to manage the other providers who deliver IT services,” Potter says.
