Multi-sourcing – the Death of the Prime Contractor Mega-deal?

April 7, 2008

According to the apocryphal story, after the army of former Roman slaves, led by Spartacus, was defeated in battle by the Roman army, a Roman general stood before the captured surviving members of the slave army and demanded that they turn over Spartacus or else all of the former slaves would be executed. Upon hearing this and not wanting his friends to be executed, Spartacus stood up and said ‘I am Spartacus.’ However, within a minute every member of the slave army was on his feet shouting ‘I am Spartacus!’ Although impressed by this display of loyalty, the Roman general nevertheless ordered the crucifixion of the slaves along the Appian Way leading to Rome.

The audience at the SCL seminar was presented with a model (amongst others) for a multi-supplier outsourcing that creates a relationship between the relevant suppliers that is in a sense analogous (though not quite so extreme) – in the level of commitment required of the suppliers to the shared vision for their particular joint venture given their skin in the game – to the loyalty of the comrades of Spartacus to the vision he had inspired. The seminar, held at the London office of Pinsent Masons LLP, focused on the origins of multi-sourcing, different multi-sourcing models and their governance. This article highlights some of the issues raised.

The speakers provided useful perspectives based on their diverse experiences in the field of outsourcing. Andrew Walker, of TPI, played the part of the customer; on the other side of the table, representing the views of suppliers, was David Ireland of Fujitsu Services; whilst Iain Monaghan (who has extensive experience of advising customers and suppliers) of Pinsent Masons LLP played the role of ‘mediator’.

To Single or Multi-Source?

Single sourcing involves contracting with an external supplier to provide services that were traditionally carried out by the customer in-house. Multi-sourcing (also known as multi-vendor partnering), on the other hand, is where a customer receives services from a number of suppliers, normally on the basis that each is a specialist in a particular area such as end user computing, managed network services, and/or hosting and storage.

Both David Ireland and Andrew Walker appeared to agree that some of the key perceived disadvantages associated with a large long-term prime contractor outsourcing include the following:
• poor long-term value
• lack of flexibility to deal with a rapidly changing marketplace and changing customer business objectives
• no single supplier can provide the consistent service levels, quality, cost reduction, skills availability and flexibility required by a large global company
• inability for a single supplier to support a customer’s international footprint in respect of the largest geographically spread transactions.

Andrew Walker went on to discuss some of the benefits, to a customer, in multi-sourcing:
• multi-sourcing can be used to take advantage of competitive supplier behaviours – customers avoid being locked-in to a single supplier for a broad range of services and the insulation from the market that may arise from an ‘indispensable’ single supplier can be removed, thus maintaining cost efficiencies
• ability to exploit a ‘best of breed’ style of approach by assigning different activities, tasks or products to different suppliers based on their individual strengths and charges
• better deals can be negotiated with the suppliers concerned because of the competition offered by other specialist suppliers
• flexibility to take advantage of fast-changing industry developments such as service-oriented architecture.
However, overseeing a diverse assortment of suppliers is no easy task. Some of the challenges faced in managing a multi-sourced environment include:
• an increased danger that issues/services may fall through the cracks and the potential for finger-pointing, due to poor communication between the parties
• possibility for unhealthy competition between suppliers, which could be a distraction from delivery of services and the achievement of objectives
• potential for exponential growth of the customer’s service management and governance organisations.

Will Multi-Sourcing Bring Home The Bacon?

David Ireland pointed out that, if multi-sourcing is to achieve the desired results, it must ‘change or supplement the normal point-to-point flows between the contracting parties with flow between the suppliers’. He explained this may involve changing the traditional behaviours and relationships between suppliers, which could involve a three-pronged approach.
1. Through use of operating level agreements (OLAs) at a persuasive and prescriptive (ie binding) level. An OLA defines how otherwise distinct suppliers will share the responsibility for delivering a set of services to a customer. The OLA should be set up so that if a problem arises each party’s immediate focus is on fixing it, leaving arguments over responsibility and payment of remedial costs until later.
2. Through use of governance arrangements at a persuasive and prescriptive level. A governance structure is also used to bring the various suppliers and the customer together to work to minimise gaps and risk. The customer may now have to take a much more active role in governance activities than if it was using a single supplier since there will be more elements in the outsourcing structure to be managed. It is important for the company to take a lead role in service management and to minimise its involvement in day-to-day governance. Moreover, the customer should aim to reward the performance of the suppliers as a single team and provide disincentives for suppliers to perform independently.
3. Venture-style agreements (see below) in which everyone has a stake.

Alternative Structures

One of the first steps for a customer to take in the planning phase of a multi-sourcing will be to consider how its services will be segmented and then grouped into bundles. Suggested divisions may be made on the basis of the following considerations:
• region
• type of IT work
• technology
• hybrids of the above (probably the most common method).

Iain Monaghan and David Ireland next outlined some different multi-sourcing models. In a ‘system integrator model’ the customer enters into direct individual contracts with suppliers. One of these suppliers will be liable for the integration and management of the multi-sourcing and each supplier remains directly liable to the customer for their services.

A joint venture-based ‘Spartacus’ model promotes a higher degree of co-operation between the parties than more traditional sourcing structures since it involves a sharing (to varying extents) of the ‘pain/gain’ of the venture. Two main sub-divisions within this model were distinguished by David Ireland.

The first was internal/external supplier joint venture. Here, in the case of service failure the suppliers are collectively responsible, depending on the nature of the agreement in place (for example via OLAs and joint service credits), to the customer rather than being subjected to an individual fault-finding approach as is more likely to exist in a ‘system integrator model’. The second sub-division was described as ‘total venture’. With ‘total venture’, the customer and suppliers set up a joint venture, where each party contributes certain assets, know-how and capital to a newly created entity that performs the services for the customer. In this scenario, the customer shares more of the risks of the outsourcing with the suppliers.

Lessons Learnt

Andrew Walker recommended that testing the multi-supplier hypothesis with suppliers before releasing a request for proposals (or indeed a request for information) can help ensure more efficient progress to contract closure. Secondly, he emphasized the importance, for a customer, of ensuring that it had access to world class sourcing management and governance skills for the handling of integration, governance and service management. Finally, he suggested that communication between the parties is vital to manage expectations, help to engage people and to facilitate the processes of transition and transformation.

If customers are looking to move beyond single sourcing to multi-sourcing then, as underlined by Gartner Inc.’s vice president Linda Cohen, they must have an integrated holistic sourcing strategy across all services and focus on creating a governance structure that is appropriate to the organisation and service needs. In addition, as Andrew Walker pointed out, top tier legal advice is also necessary.

The SCL seminar provided some interesting food for thought for those considering pursuing this form of supplier model.

Kieran Jolly is a solicitor in the Outsourcing, Technology and Commercial Group at the London office of Pinsent Masons LLP.  © Pinsent Masons LLP 2008