multisourcing

by Professor Ilan Oshri, Loughborough Centre for Global Sourcing and Services and Professor Julia Kotlarsky, Aston Business School

Research support was provided by Xiaowei Jin, PhD Candidate, Loughborough Centre for Global Sourcing and Services.

Multisourcing arrangements – or multivendor sourcing, where a client deliberately outsources various interdependent functions and tasks to more than one supplier – have become the dominant sourcing setting for many recent outsourcing contracts.

The benefits of multisourcing include increased competition among suppliers in terms of price, quality and degree of innovation; lower operational risks and dependency as each supplier becomes less critical, and; lower strategic risk as sensitive information is split among different suppliers.

Among the risks are lower incentives to make customer-specific or supplier-specific investments as well as often lower investment in relationship building that may lead to a transactional attitude among the suppliers. Undoubtedly, multisourcing increases management overhead for the client and suppliers.

Consider Royal Dutch Shell’s multisourcing contract with AT&T, T-Systems and EDS signed in 2008. Cliff Saran, the managing editor (technology) of Computer Weekly 1 , commented on the complexity of Shell’s multisourcing contract:

"How does EDS exercise control over AT&T and T-Systems, especially given that certain desktop support functions, such as a rollout of Windows Vista, is predicated on AT&T's network service? Similarly, how does EDS exercise control over decision support desktop software, which needs to take a data feed from the SAP system, managed by T-Systems. The other dilemma for Shell is how it can trust EDS to deliver the outsourced service if EDS faces a default by one of the other parties?"

Clearly, Shell’s multisourcing deal creates interdependencies between the various suppliers. As a result, additional effort is invested in contracting, monitoring and coordinating work, but that amount of investment may vary depending on the role that the client and suppliers play in the multisourcing setting. Our examination of the professional and academic literature tells us that both academics and practitioners tend to treat multisourcing as a single type of approach in which the client firm, suppliers and service integrator experience similar coordination effort. Is that really the case?

Four multisourcing configurations Let’s start by figuring out what multisourcing configurations exist out there. Based on Loughborough Centre for Global Sourcing and Services’ ongoing study of multisourcing settings, we identified four main configurations that client firms and suppliers have applied in recent years.

Let’s first describe them and then consider the effort involved to invest in governing and coordinating work. In essence, we claim that in multisourcing there are three main actors:

the client a network of suppliers and a service integrator (SI), which may be the client, one of the service providers or another third party.

Our configurations consider the role of the service integrator as one key element that affects the effort needed by the three actors. (Note: dotted arrows represent responsibility for the management of interdependencies; smooth lines represent contractual agreements.)

[click to enlarge] In configuration A , the client firm plays the role of a service integrator. The client is therefore responsible for the coordination and integration of the work while suppliers focus on delivering services according to service level agreements (SLA). Interdependencies between outsourced tasks require suppliers to interact with each other to ensure the smooth delivery of the entire service (as captured in the SLAs).

In configuration B , the service integrator is a supplier, often a lead party of a particular function. In this configuration, also known as the guardian model, the service integrator (one of the suppliers) is playing two roles: first, delivering service as part of its SLA commitment; and second, monitoring and coordinating delivery from the remaining suppliers to ensure that the SLA for the integrated service is met. The client in configuration B is involved in managing commitments of the individual suppliers against SLAs as part of a network governance approach, but also in paying particular attention to the service integrator’s performance.

In configuration C , the service integration function is outsourced to a third party specialist. The service integrator is monitoring, coordinating and integrating services delivered by individual suppliers.

In configurations B and C, suppliers that do not perform a service integrator role tend to focus on delivering the services allocated to them while ensuring that both operational level agreements (OLAs) between them and client SLAs are met. The client firm is involved in monitoring performance of individual suppliers, according to the contractual agreements it holds with them; however, it also relies on the OLAs monitored by the service integrator. The main difference between configuration B and configuration C is that under configuration C the client has an additional supplier to manage (i.e. the service integrator).

In configuration D , a client is contracting one supplier to act as a prime contractor who, in turn, is (sub)-contracting interdependent services to other suppliers and then integrating their work to ensure seamless delivery. The prime contractor is responsible for coordinating and integrating work delivered by multiple suppliers it selects and contracts, while the client firm is only managing the relationship with the prime contractor. There are no direct contractual agreements between the client firm and sub-contractors.

Multisourcing Configurations: Common Challenges for Clients and Suppliers

Challenge number 1: Client firms are often tempted to pursue either configuration B or configuration D.

The reason for this is clear: these configurations offer client firms an easy opportunity to detach themselves from the daily management of the supplier network while assuming responsibility for monitoring the service integrator’s performance rather than the true network performance2. The danger in this approach is that the client loses sight of individual supplier performance and contributions and becomes dependent on the service integrator’s capability to both integrate service and assess individual supplier performance. One outcome of this is the formation of a two-tier relationship circle in which the client firm gradually drifts to the second tier, weakening its relationship with its suppliers.

Challenge number 2: In configurations B and C, suppliers supervised by the service integrator may abuse information asymmetry between the client and the service integrator in order to spur a "blame game" when things go wrong.

Since the client firm is not involved directly in the management of OLAs, it has little direct exposure to information about individual supplier performance and it relies on information provided by the service integrator. Therefore, the client may not be in the position to objectively assess the source of a problem when something goes wrong. The end result of that is similar to Challenge 1: worsening relationships within the network that often results in reluctance to collaborate and exchange information and knowledge between the suppliers, critical for the coordination of interdependencies.

Challenge number 3: Both client and suppliers seek remedy for managing interdependencies between outsourced services through additional control mechanisms in the form of OLAs.

The expectation is that the formalisation of such interdependencies will improve awareness among the suppliers. However, the exchange of information and knowledge required to develop awareness around such interdependencies cannot be substituted by a formal clause. OLAs should serve as a guide that encourage information exchanges rather than substitute them.

Multisourcing Configurations: Coping Strategies How can client firms and suppliers cope with such challenges?

First , the role of service integrator should not be seen as "the outsourcing of the multivendor governance to a third party". Instead, the parties should clearly define areas of responsibilities and communicate those to the other suppliers in the network. Furthermore, in order to deal with information asymmetry between the client, service integrator and the rest of the suppliers, it is imperative to establish both procedures for dealing with situations when there is a breakdown in service provision and protocols for investigating which supplier is responsible for the breakdown.

Second , the governance of multisourcing settings needs both individual and network governance approaches to be adopted by the client form. While the individual governance approach is typically supported by SLAs and individual incentives and penalties, a network governance approach involves setting joint objectives that require suppliers to collaborate and consider team incentives and penalties. Moreover, in addition to the role of the service integrator in managing interdependencies between the services, the client firm has to maintain some degree of control over the supplier network simply because, in the end, the client firm is the prime client, regardless of sub-contracting.

Third , as a balancing act to the fairly heavy investment in formal governance on the client side, we suggest that client firms assess their supplier relationship strategy and consider investing in developing strong relationships with suppliers that deliver transformative services while maintaining workable, well-structured but somehow less intense relationships with suppliers of transactional services.

What Have We Learned? The practice of treating multisourcing settings as "one size fits all" is risky. Our research shows that there are at least four types of multisourcing models that client firms and suppliers can consider choosing from when setting up such a relationship. Each multisourcing type bears a different contractual structure but also a different approach to managing interdependencies between tasks outsourced to different individual suppliers.

Our advice is simple :

First, do not outsource the accountability for managing the supplier network; and second, make sure you are applying both individual and network governance structure and mechanisms.

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[1] http://www.computerweekly.com/news/2240085620/Shell-offers-lessons-on-outsourcing-contracts

[2] Though Configuration C also presents an opportunity to reduce the burden of day-to-day management of multiple suppliers, it is less popular because it requires a client to engage in additional efforts of selecting a new supplier (service integrator).

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