Outsourcing Buyers in for the Short Haul

Ann All

I am nothing if not hasty in calling trends. Exhibit A: a blog from August in which I insisted that "single-supplier deals (were) becoming an outsourcing anachronism."


Such deals do appear to be on the decline. A recent article in The Economic Times, citing information from Everest Research, notes that buyers increasingly prefer to work with multiple outsourcing providers rather than a single supplier.


Seen in tandem with the move toward multiple suppliers is an increase in shorter, smaller-value contracts. The number of mega-deals, which Everest defines as contracts valued at $1 billion or more, is dropping and will continue to do so. The article quotes an Everest VP:

A decline in mega-deals is likely irreversible any time soon as few Fortune 100 companies remain that could sign new mega contracts.

And the value of such big contracts is shrinking. According to TPI, the average size of billion-dollar-plus outsourcing contracts fell from $9.6 billion in the first quarter of 2006 to $2.4 billion in 2007's third quarter.


As the outsourcing market continues to mature, buyers feel more comfortable with this model, says Gartner Research Director Kurt Potter, who is interviewed in a recent vnunet.com article. But should they?


Many companies "have fundamentally sound procurement organizations to initiate outsourcing contracts," says Potter. "But many IT sourcing strategies and governance structures are still immature, and are lacking altogether, or misaligned with, enterprise objectives. "


The pendulum may swing back -- at least a bit. Gartner predicts that some early adopters of multisourcing will consolidate their outsourcing relationships in 2008 to "reduce their service-integration costs and harvest the benefits of better relationship management with fewer strategic suppliers."


There are certainly benefits associated with multisourcing, says EquaTerra Managing Director Charles Collier in a recent IT Business Edge interview: "Complexity Still Calls for Longer Outsourcing Agreements."

He says:

... Clients are seeing that rather than having one company doing all of my infrastructure or all of my services, I can go to more of a best-of-breed strategy and usually the buying of the service is more commoditized now, which means it doesn't take as long or it's not as costly to say, "Please take over my help-desk services" or "Please take over my network management" or my desktop management or my data center. It's easier to move those things so you do not have that chunk of expense of transitioning people and process and getting the service moved from the client to the outsourcer.

But there are possible pitfalls as well. Shorter outsourcing contracts work best, says Collier, when they involve services that are relatively straightforward. They don't make much sense for buyers who are seeking a sweeping business transformation.


Echoing Gartner's comment about governance, Collier says shorter contracts and multiple suppliers require process maturity and effective management strategies.

If you have good process maturity, you'll have those handoffs well documented and it will be very clear who should be doing what, and you should be able to write very specific contracts that outline who is responsible for what responsibilities. If you aren't that mature and you add in multiple players, it can become very chaotic.

A realistic evaluation of process maturity is one of the keys to determining the optimal length for an outsourcing contract, says Collier, along with a good understanding of your company's internal company culture and what it hopes to accomplish by outsourcing.


Somewhat surprisingly, cost can also be a "gotcha" in working with multiple suppliers, says Collier.

If you have to generate an RFP and send that out to a multitude of providers, go through a rigorous evaluation and then execute that, if you do that every three years versus every five years or seven years, there's a lot of internal time, effort and associated expense with shorter arrangements.

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