| Multisourcing, the way ahead? |
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The 5-year, $2.24 billion deal won by TCS (Nasdaq: TSYS), Infosys (Nasdaq: INFY), Accenture (NYSE: ACN), Patni Computers (NYSE: PTI) and IBM (NYSE: IBM) from ABN Amro in 2005 signaled the beginning of a larger trend of multi-sourcing. Since then quite a few major outsourcing deals have been awarded to multiple vendors with distinct skill sets, one of the recent ones being the $610 million contract given by Dutch Insurance giant Achmea to Atos Origin, KPN and Getronics. Multi-sourcing of IT requirements is a strategic decision taken by companies, primarily for distributing risks. Another strong reason is that third party vendors are increasingly developing niche areas of expertise, and companies leverage this by outsourcing the IT functions where the vendor has a demonstrated success rate. Moreover, in the ‘global sourcing’ era, companies look for different and better alternatives to lower costs and increase efficiency geographically too. Outsourcing to China, Russia or Brazil has their own advantages, alongside alternatives like India. Companies are also looking to marry a variety of options for better coordination and quick accessibility. Such requirements again lead to multi-sourcing deals, especially where offshoring is being used. ABN Amro reportedly took more than two years, to plan their multi-sourcing strategy, and finally planned a deal which would give them the highest cost advantage and best quality, with IBM handling the IT Infrastructure, Accenture handling application development and Indian vendors Infosys, TCS and Patni handling application support and maintenance. The company also strategically kept a major chunk of new application development open to bids to drive competition among vendors. ABN Amro expects to save $322 million every year through the contracting. Multi-vendor sourcing is different from outsourcing While they may appear to serve similar purposes outsourcing and multi-sourcing have very different objectives. The primary driver for outsourcing has been lower costs. However, ‘multi-sourcing’ or ‘strategic sourcing’ is a relatively new approach which requires the company to be fully in charge and responsible for all the IT activities. This is a more mature approach as companies can align their IT strategies better with their business strategies. Multi-sourcing deals often have a defined ‘hierarchy’ where one provider in the list of vendors takes the role of a ‘Guardian service provider’. In the case of the ABN AMRO deal, IBM is playing the big brother. Alternatively the company’s internal IT department could also play that role, bearing the sole responsibility of final delivery. To successfully manage multi-sourcing deals companies generally keep the strategic planning and architectural design responsibilities in-house and outsource services as per vendor capabilities. The future? Robust internal planning is the key to success of such deals. Though multi-sourcing is likely to be the way ahead, it is not easy for companies new to outsourcing to follow this path. Only after a company has mastered initial challenges like vendor evaluation, coordination and management can it think of the next level – i.e. multi-sourcing. Though it is still early to judge the success or failure of the strategy, understanding the suppliers’ capabilities, effective transitioning of responsibilities from the company or an earlier vendor to another and coordinating work are a few apparent challenges in this strategy. Not recognizing the inherent risks and managing these properly could end up increasing costs and risk. ValueNotes Outsourcing Watch: Insights for Investors is a unique news and analysis service from the ValueNotes Outsourcing Practice, focused entirely on outsourcing; This weekly publication analyses events in outsourcing, outsourcing companies, trends in the sector, impact of global competition from offshoring to established US companies, and emerging investment opportunities. Related Items: |
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ValueNotes’ research indicates that the domestic BPO industry stands at an inflection point, with the growing scale of Indian buyers as well as the emergence of significant vendors with greater capabilities