BP has reduced the number of IT suppliers it works with from 40 to five in a bid to lower costs and simplify its supplier relationship management.
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It expects to make savings of around $500m over five years through the supplier consolidation, which will see Accenture, IBM, Wipro, TCS and Infosys take over application development and maintenance, service desk and SAP across the BP group.
Frank Ridder, research director at Gartner, says that many companies are now changing their supplier relationship strategy to consolidate suppliers in a bid to reduce costs. "Multi-sourcing is about finding the best strategic fit. Consolidating suppliers reduces the expense of procurement and vendor management."
BP will use Accenture to manage and develop its SAP system, IBM will support its service desk, while the Indian providers will support and develop applications for business units in the BP oil and gas supply chain.
"A company like BP is too big to allow it to consolidate everything. Instead it has used a mix of traditional outsourcers and services from Indian outsourcers, separating the contracts by business unit." Ridder says this makes sense for BP, because each business unit is very distinct, so the structure of the company makes it simpler to split the work.
Companies are using strategic multi-sourcing through supplier consolidation to cut costs, but making a success of strategic multi-sourcing agreements is notoriously difficult, Ridding warns. In fact, many businesses fail to succeed with contracts involving multiple suppliers. A recent Gartner benchmark study found that 55% of global organisations manage their sourcing activities tactically and at an operational level, failing to add a strategic management layer and invest enough in developing critical multi-sourcing competencies.
Lee Ayling, managing director of Equaterra, says multi-sourcing contracts make sense in terms of risk, control and internal management overhead. It also maintains competition. However, BP may struggle to complete its supplier consolidation strategy. "I doubt that they will remove all the other suppliers as numerous issues will be identified in transition by the strategic suppliers, and BP may find that this erodes benefits," he says
BP is not the only company taking this route.
Last April Shell signed three IT outsourcing deals with EDS, AT&T and T-Systems. In this contract EDS is effectively a prime contractor, providing end-user computing services and integrate Shell's infrastructure services AT&T provides network and telecommunications and T-Systems supports datacentre computing including hosting, storage and most of Shell's SAP services. However, Shell retains overall control of the other suppliers and its IT strategy.
Businesses like BP and Shell are attempting to cut out costs from their companies by simplifying supplier relationships. Strategic partnerships with a few key suppliers is clearly better than managing several, but to succeed in strategic multi-sourcing, governance becomes critical.