Outsourcing is a fact in American business. The problem facing top companies is no longer whether or not to do it. Instead, the queries are: What? How? And with whom? These are not black-and-white issues. They involve value judgments, which force businesses to confront the bigger question: Why?
If the answer is to save money, then the course seems to be clear. Turn over any and all processes that can be commoditized to a single, large supplier that can take advantage of economies of scale.
But what if the answer is to create competitive advantage or to create greater value in services offered or to transform business for new opportunities? The way forward is a bit cloudier because the company may need multiple relationships engaging a team of specialized outsourcing providers. This means outsourcing today requires a bit more soul searching for managers than managers searching for sole providers.
Sole sourcing, also called holistic sourcing, appears to be the easier path to take - the expedient course. After all, the supplier is expected to take responsibility for a whole array of management tasks and responsibilities, effectively removing them from your organization's plate. You are able to throw a wide array of processes and functions into a large outsourcer's contract vehicle.
Indeed, it is popular to say that consolidating outsourcing activities with a single provider means having "just one throat to choke." But who is really getting strangled in the long run?
Consider the impact that sole sourcing - the most common outsourcing arrangement at present - appears to have had on the current state of the industry:
- MIT's Center for Information Systems Research (CISR) found that only 50 percent of these so-called strategic partnerships (based on large, sole-sourced, outsourcing arrangements) are judged successful by either client or vendor.1
- Deloitte Consulting released a study in 2005 arguing that "outsourcing is not delivering its expected value to large organizations." One key finding: 70 percent of study participants had "significant negative experiences with outsourcing projects and are now exercising greater caution in approaching outsourcing."2
Clearly, something isn't right in the outsourcing world. And yet, companies continue to pursue sole-sourced outsourcing relationships even as the evidence mounts that sole sourcing is one of the primary causes of the industry's widespread disappointment.
Discipline versus Expediency
The evidence suggests that most large outsourcers are taking on activities and responsibilities that don't fit cleanly into their business models and practices. That happens as companies choose to keep adding new processes to a large outsourcing contract for the sake of convenience.
Research suggests that they end up paying a severe price over time. Rather than exercising and eating right to lose excess weight - an analogous personal choice that also involves value judgments - companies have sought the immediate convenience of the diet pill. While such actions may seem expedient at the time, they often lead to disappointment - unmet expectations, costly contract renegotiations, lost competitiveness and other ills. Their overextended outsourcers end up failing to deliver specific capabilities and promised results.
But this state of affairs may be changing. Recognizing a linkage between sole sourcing and poor performance, there is now a backlash underway against outsized outsourcing arrangements. At the same time, many companies are implementing what they believe to be a more dynamic and agile alternative. Gartner calls it "strategic multisourcing" and Forrester Research calls it "selective sourcing."
Rather than put all their eggs in the basket of a single IT outsourcer, companies now are doing the requisite soul searching and managing a portfolio of specialized outsourcers. Business processes that top companies are outsourcing to these types of providers include security management, help desk management and production database support.
If American business is going to be forced down the tougher path, what rewards will they find at journey's end? There are several to consider.
- Maximized business value. As companies embrace disciplined multi-sourcing, they become skilled at identifying which best-of-breed, cost-effective outsourcing providers can deliver solutions that most directly align IT to business strategy. Large, single-sourced arrangements tend to lack this level of clarity and focus - a key factor in their underperformance.
- Minimized risk exposure. When companies sign enormous deals with outsourcing providers, they take on tremendous strategic and financial risks. Multisourcing enables them to spread these risks around and manage them more vigorously. It also reduces risk by enabling IT groups to more actively respond to market developments, new business priorities or changes in the health of a supplier over time.
- True outsourcer accountability. Too often, sole sourcing leads to an unhealthy dependence on a single, powerful outsourcing vendor. When companies add new business tasks and responsibilities to existing outsourcing contracts out of convenience, they are liable to find their vendors unqualified to deliver. Disciplined multisourcing, in contrast, helps ensure they engage deeply focused and accountable outsourcers that generate measurable results.
As a growing number of companies see it, the future of outsourcing will depend on disciplined multisourcing. This is how companies heighten the likelihood of success while achieving safety in numbers. The era of sole sourcing has played out, and the results have not been impressive. While companies will continue to employ large outsourcers for big projects, they are now refraining from loading those partners up with added tasks and responsibilities that are not central to their business models. Instead, they are turning to a portfolio of specialized outsourcers to meet these objectives in a defined and demonstrable way.
Multisourcing is the discipline of tomorrow's market leaders. When leaders set out to find answers for the whats, hows and with whoms, they leave equipped with the answer to why.
- Jeanne W. Ross & Cynthia M Beath. "Sustainable Value from Outsourcing: Finding the Sweet Spot." Center for Information Systems Research, Sloan School of Management, Massachusetts Institute of Technology, March 2005.
- Kenneth M. Landis, Somnath Mishra & Kenneth Porrello. "Calling a Change in the Outsourcing Market: The Realities for the World's Largest Organizations." Deloitte Consulting, April 2005.
Register or login for access to this item and much more
All Information Management content is archived after seven days.
Community members receive:
- All recent and archived articles
- Conference offers and updates
- A full menu of enewsletter options
- Web seminars, white papers, ebooks
Already have an account? Log In
Don't have an account? Register for Free Unlimited Access