The prevailing IT outsourcing model has shifted from a single provider approach to managing a host of best-of-breed vendors. But the pendulum may have shifted too far in the direction of multisourcing as IT leaders now try to get a handle on their outsourcing portfolios.
Outsourcing to multiple IT service providers has been the predominant trend in the industry for some time as IT organizations have sought to increase leverage with their partners by employing a best-of-breed approach. But managing a stable of dozens of vendors has proven difficult and costly, and outsourcing clients are beginning to rethink the extreme multisourcing approach, says Bill Huber, managing director of IT outsourcing consultancy Alsbridge.
“Traditional multisourcing might well be characterized as ‘anything goes.’ Even a standard ‘best-of-breed’ approach often reflects a series of disparate and uncoordinated sourcing decisions,” says Huber. “What’s been lacking is an overall architecture for services integration and evolution, with capabilities being added and [removed] over time.”
But a new multisourcing approach may be emerging with some IT organizations setting up a smaller number of strategic outsourcing relationships and delegated the oversight of niche solution providers to those key partners. Here Huber discusses this evolving middle ground for multisourcing.
Why are clients moving away from traditional multisourcing arrangements?
Huber: We’re seeing an overall maturation occurring across the industry. At a high level, this trajectory can be described as moving from the extremes of ‘uncoordinated,’ which prevents taking advantage of any synergies, to ‘centralized,’ which stifles agility, flexibility, and adaptability. The new multisourced models are designed to be an optimized balance of both.
New innovations are occurring quickly with improved point solutions frequently replacing others that are only slightly older. A model that can accommodate the integration of the new capabilities on a flexible backbone has become critical. That backbone is, in effect, the primary services framework into which the smaller, potentially shorter-term components need to plug and play.
What new approaches are being developed and what are their benefits?
Huber: In a new multisourced model, a limited number of key providers comprise the services backbone into which niche or point solutions interface. [One] difference in this model is that the contracts are designed to more easily flex to accommodate changes in how the pieces will fit together and how the services will evolve. And I don’t mean Additional Resource Charges (ARCs) and Reduced Resource Credits (RRCs) here [the traditional method for managing outsourcing pricing that accommodates volume fluctuations for the in scope of services], but rather something more fundamental that is designed in the context of business outcomes.
In addition, the governance function must include a very strong service integration and management capability, and must have senior participation at a high enough pay grade to make serious risk and reward decisions.
Is this just a new take on the ‘one throat to choke’ model that once dominated the market?
Huber: The ‘one throat to choke’ model is an archaic procurement term and reflects an adversarial philosophy where the assumption was that the only way to ensure favorable treatment from a vendor was to have a large enough wallet to leverage spend aggregation and to wield a big enough stick to apply the threat of onerous penalty and termination clauses.
Digital is destroying many of the advantages of scale. Today, speed, collaboration, and risk management are the critical differentiators, in concert with keeping your brand relevant. The more sophisticated models that we see now focus on balancing those elements through transparency, analytics, networks of relationships and a relentless fostering of innovation.
What are the challenges of this new multisourcing model for clients and providers?
Huber: The challenge is that many companies and managers at companies have a false sense of control, and they are reluctant to let go of control. [They] still tend to fall back on traditional models to lock down contracts and micromanage the wrong things.
Change is always hard, and it is happening unusually fast right now. Most individuals are only partially aware of the degree to which everything will change in terms of processes, objectives, tools and jobs. Many organizations simply don’t have the right leadership to navigate the implications of change and to build new models that will be more resilient in rapidly changing times.