Is recession and search for discounts reversing multi-sourced IT services?

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Multi-sourcing was a strong theme at the recent Gartner outsourcing summit in London. I attended several presentation about the challenges managing multiple IT service providers. The likes of Syngenta and Old Mutual have created strategies to get more out of their suppliers in a multi-sourced environment.

But here Kit Burden, an outsourcing lawyer at DLA Piper, talks about a trend he is seeing where businesses are moving away from multi-sourced environments.

Swing of the pendulum - sole to multi-sourcing and back again

By Kit Burden

"If we cast our collective minds back to the days pre-Crunch, a marked feature of many sourcing strategies adopted by larger entities was a move to embrace multi sourcing (i.e whereby a service or set of services which could conceivably have been awarded to a single supplier was instead broken up and divided between a number of different suppliers). There were a number of reasons why this appeared attractive to customers and buyers of outsource and IT services, not least being:

- disaggregation of risk (i.e no more "too big to fail" risk, or reliance upon a single supplier)

- increased flexibility (with contract terms usually drafted on a framework basis, the effort and time involved in switching services between different suppliers could be greatly reduced)

- improved service quality (working on a "horses for courses" approach, whereby service providers could be selected on the basis of being the very best in relation to (for example) deskside support services, whilst enabling the customer to select a different supplier who would be perceived to be better at providing application support and development services, and another again to deal with network and telephony)

For a time, then, we were primarily engaged in helping to structure such framework agreements, and thinking up innovative ways of dealing with the imperative of ensuring end to end service delivery and to keep the multi-sourced supplier community incentivised to keep working closely together for the benefit of the customer.

But now.....

Whilst multi source strategies and arrangements undoubtedly still exist and are still be structured for new deals for some customers, we have seen a marked shift back towards the bundling of multiple services and service towers with single suppliers, and even to the extent of it being done on the basis of "sole source" procurement processes during which there is little if any engagement with other potential suppliers. So what has led to such a shift in approach - was the multi source strategy flawed at the outset, or are other factors are work?

The reality is that there will often be a wide array of likely reasons, but there is a notable frequency of a particular set of drivers which is closely associated with today's economic woes. In many cases, with declining/slashed budgets and ever increasing pressure from management to find ways to reduce costs still further, CIO's and their sourcing/procurement colleagues have already "been to the well" with their key suppliers to try to convince them to reduce rates or find ways of reducing scope and/or costs. However, there is a limit to how much blood can be squeezed from that particular stone. Ultimately, then, the realisation will dawn that the only way left to get a particular supplier to offer deeper discounts will be to give it MORE work rather than LESS...and the only way in turn to achieve that end will be to take work away from other suppliers and combine it with that of the successful "survivor" supplier. In one example we have seen, a retail bank has effectively abandoned a "panel" approach for IT service providers in favour of consolidating their scope of work with just one of their legacy providers, and adding in some additional services to boot. In another, a supplier won out on a large bid not on its individual technical merits, but by offering to give a very significant additional cost reduction if it could also be awarded some associated applications support and BPO services.

To this cost-based driver can be added another factor closely linked to the recession; customers will frequently have been forced to make staff cuts as a result of their internal cost reduction exercises, and procurement/vendor management teams have not been exempt from this process. For some of our larger customers, the situation reached has effectively been that they no longer have the effective capacity or manpower to manage multiple supplier relationships; in such cases, the move to a reduced set of suppliers to deal with becomes a matter of necessity rather than choice.

So, the pendulum swings again....it will be interesting to see whether - as and when we emerge from the economic crisis - the attraction of multi-sourcing will re-assert itself, and how this will impact upon the potential renegotiation of some of the larger and longer term deals currently being signed up in the market!"

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This page contains a single entry by Karl Flinders published on October 30, 2012 5:04 PM.

Richard Branson tells CEOs to harness social media was the previous entry in this blog.

Cost cutting primary driver in only 10% of BPO deals is the next entry in this blog.

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