Opinion: Beware the multi-sourcing pitfalls

With the dust barely settled on the outsourcing mega-deal obituaries, the hype around the trend for using multiple suppliers - multi-sourcing - continues to gather pace. There are clear benefits to this approach but beware the dangerous pitfalls that such complex deals can bring, warns Mark Kobayashi-Hillary.

Happy days - the outsourcing conference season is upon us once again. There's no time to stare out of your window at the primroses bursting into their spring glory - assuming you can see a park from your window that isn't a car park - when every conference organiser in town is trying to entice you to yet another discussion on India versus China in the Flat World Olympics.

From here through to the lazy days of August, it's death by PowerPoint all the way, starting with Gartner's annual outsourcing bash in London this week where the focus is on the new trend for multi-sourcing, whereby CIOs opt to divvy up their IT services among a selective group of suppliers rather than put all their eggs in one giant mega-deal basket.

Of course, most companies already use multiple suppliers so it could be argued that everyone is multi-sourcing anyway but this new focus is all about the benefits that could be unlocked from multi-sourcing in IT services.

Recent deals, such as the €1.8bn infrastructure and application development outsourcing frenzy at Dutch bank ABN Amro, demonstrate that disciplined multi-sourcing has arrived. If companies such as ABN Amro think partnering with the likes of Indian companies such as Infosys, Patni and TCS - along with the usual suspects Accenture and IBM - is better than just working with one of them, then there must be something in it.

Elizabeth Sparrow, chair of the British Computer Society working party on offshoring recently told me: "The mega-outsourcing deals of the past rarely delivered innovation and significant service improvements. Smart CIOs today are selecting world-leading specialist suppliers to derive the most from their outsourcing relationships."

The strategic deployment of a multi-sourcing approach can result in several key benefits and it leads to an improved focus on the outcome of outsourcing rather than on the problem that created a need to outsource in the first place.

One major benefit is the best of breed effect, which is encouraged through a process of choosing suppliers based on their specialised expertise and execution capabilities, rather than an ability to service every possible function, regardless of quality.

Multi-sourcing can also reduce outsourcing risk. Businesses can hedge their bets by utilising a basket of expert suppliers, rather than a single behemoth. It's a lot easier to replace a supplier failing in a single service than to negotiate with a large supplier failing in key areas but satisfactory in others.

This increases the scope for more competitive pricing for services provision - before selection and once service commences - and for supplier comparison whereby a vendor can be tried out on a smaller less-critical function before being handed a bigger chunk of business in future.

The multi-sourcing approach also gives organisations more flexibility to take advantage of fast-changing industry developments such as service oriented architecture or open source.

But the danger lies in organisations rushing to create a basket of vendors ready to serve their every whim. The problem is that multi-sourcing is a complex beast. Professor Phanish Puranam of London Business School says the choice between multi-sourcing and single-sourcing turns on the trade-off between competition and co-ordination.

He said: "Using multiple vendors can create competition and lowers the risk of delivery failures, escalating fees and inflexible services. However, this approach also creates enormous co-ordination complexity for the client and for the vendors themselves. How do you get multiple vendors to deliver a seamless integrated service? How easy is it to switch to another vendor when one vendor does not perform? Who is ultimately accountable?"

This is especially true with smaller-scale outsourcing contracts where it is just not cost-effective to break up the sourcing approach across multiple suppliers.

There are also several other issues that can cause multi-sourcing to be a poor option. If the market does not include enough suppliers with the specialist skills needed by the buyer then there is no competition anyway, and if the buyer doesn't already have a culture of strong IT governance - or the will to install modular processes for dealing with multiple suppliers - then multi-sourcing will cause chaos.

It's also likely to fail if the suppliers selected are not happy about working with their competitors, or they have never tried working in this way before. What happens if some of the companies in a multi-sourcing basket are home grown local technology players and some are the new Indian upstarts?

In my other day job as head of research for global sourcing at Indian outsourcer TCS here in the UK, I've been asked by people on both the buy and sell side of the outsourcing decision about these risks, and I have to honestly say it's all about the old chestnut: risk versus reward.

Governance frameworks and standard processes are getting mature enough to now consider multi-sourcing as a real option for IT services - it's been around in other industries for a long time. However, in an IT department that considers governance as something best left for someone else, then multi-sourcing will only multiply the potential for disaster.

Mark Kobayashi-Hillary is author of 'Outsourcing to India: The Offshore Advantage' and a director of the National Outsourcing Association