Rethinking contracting frameworks for effective multi-sourcing

Sourcing trends go in cycles. For most of the past three decades customers of outsourcing services heavily favoured relying on a single provider to perform all related functions.

Sourcing trends go in cycles. For most of the past three decades customers of outsourcing services heavily favoured relying on a single provider to perform all related functions.

Interspersed during this time, however, were periods when customers believed it was better to hire multiple providers to perform related tasks.

Customers reason that each supplier is most able to perform the specific task instead of hiring one provider that may good at some functions and poor at others.

During the 1990s this trend was called "best-of-breed" outsourcing. Today people refer to it as "multi-sourcing".

Regardless of the name, these arrangements present significantly different risk profiles than deals sourced to a single provider.

Often companies that are in their second or third generation of outsourcing believe they no longer require the integrator role that a single provider brings to the transaction, and that they can do it themselves.

Often these customers are ill-equipped to govern in a multi-provider environment where suplier co-ordination is required to avoid the "cross-blame" game.

Creative supplier management is the key to avoiding substandard overall service in multi-provider arrangements. Finger-pointing among providers in a multi-sourced environment can be dramatically reduced through use of operating level agreements and customised governance structures.

Operating level agreements

The operating level agreement (or OLA) is a contractual arrangement among the customer and providers that identifies operational and service level dependencies among providers and encourages the providers to focus on the customer's overall business needs.

These service level dependencies can be associated with a single "dependency service level" under each of the outsourcing contracts between the customer and the individual provider.

A dependency service level failure, to which credits would attach, would occur where one provider causes another provider to fail a service level.

Tying OLA dependencies to the service level structure creates inter-provider accountability to the customer in a risk structure that the parties understand and can quantify.

Although the OLA seems like the optimal solution to solving provider finger-pointing, they too can be difficult to design and administer.

Customers must have a well-conceived plan for structuring this arrangement before entering into any of the supplier agreements.

Once completed, customers must be diligent in enforcement and management of provider dependencies, otherwise the structure will have little effect on behavior.


Another method to manage multiple providers is to include enhanced governance structures designed to create accountability among the providers.

Customers should establish a separate committee comprised of representatives of the customer and each provider.

This joint committee would be vested with responsibility for multi-provider issues.

Members would be assigned and internal processes established with a view to encouraging collaboration among providers to further unify their view of service delivery.

The customer should always be in control of this committee and consequences should ensue if any of the providers fail to act in accordance with its committee obligations.

Multi-sourced transactions also require a distinct dispute resolution process for multi-party disputes.

Likewise, the OLA should include a unified change management process to manage changes that affect multiple suppliers and a special confidentiality agreement to facilitate the sharing of information among providers.

Although customers of outsourcing services deem themselves prepared to effectively manage multi-sourced arrangements, they may find themselves in an on-going battle with several providers (instead of one) to ensure that they are receiving quality services.

Instituting some or all of these measures may help to avoid the problems.

Regardless, customers must retain a talented organisation to supervise and administer these arrangements.

Chris Ford and Scott Stevenson, Morrison & Foerster LLP

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