Can You Trust One Outsourcing Provider to Manage the Rest?

Big IT service providers are offering up their skills as service integrators, promising to help CIOs reign in their multi-sourcing messes. But can this "fox watching the henhouse" model really work?

Even as CIOs continue to pursue the multi-provider model for outsourcing IT, the question remains as to how to do it successfully: amassing the necessary vendor management skills needed, avoiding vendor finger pointing, and achieving intended results.

There are a few options for managing a portfolio of providers. You can build your own provider consortium à la GM's Ralph Szygenda—an effort that's not for the faint of heart. Or you can go the traditional prime contractor with subcontractors route, but those margins on top of margins add up. Or you can hire someone—a service integrator—to manage it for you.

In the past such multi-sourcing management was the purview of full-service outsourcing consultancies. But today, many major IT service providers are nominating themselves for that job. HP made the biggest splash with the launch of its service integration business earlier this year. But they're not alone in going after the role of top outsourcer on campus. Capgemini, Accenture, CGI, Unisys, CSC, and Indian providers such as Infosys, Wipro and HCL all offer similar propositions, even if they don't exist as a separate commercial business or service offering.

"It is a matter of competitive necessity and advantage," says Forrester Research principal analyst Bill Martorelli. "Outsourcing suppliers have learned that it is good to have the capability to serve as a coordinator for multi-sourcing engagements."

Outsourcing management work provides the vendors with a more stable revenue stream than project work or consulting gigs, says Gartner vice president and distinguished analyst Claudio Da Rold. And they can use the extra face time to win more work from the customer.

The biggest benefit to customers of anointing one of their outsourcers to manage the others is access to the qualified personnel and repeatable processes required to guarantee end-to-end service delivery. "If [customers] haven't developed the proper skills, governance, or discipline around managing outsourced providers from an internal perspective, then an existing IT service provider may seem like a better option," says Steve Martin, partner with outsourcing consultancy Pace Harmon.

Anointing an experienced vendor top cop can also help companies transition to a multi-sourced environment for the first time or consolidate their existing portfolio of IT providers. Indeed, many customers end up backing into a service integrator deal with an outsourcer once they realize how tricky managing multiple outsourcers is, says Tony Filippone, executive vice president of research for outsourcing analyst firm HfS Research.

But the prospect that an IT outsourcer, put in charge of managing and reporting on direct competitors, might abuse or misuse that position puts many customers off. While HP, for example, is touting service integration as a separate offering from its IT outsourcing business, it's hard to know if such Chinese walls provide much protection.

"Part of the selling proposition for suppliers like HP that have established multi-sourcing as a separate service line is that they are facilitators of customer relationships with other suppliers, not inhibitors in the sense that they will actively undermine other participating suppliers," says Martorelli. "But I am not sure there is a real barrier between them or not. This remains a concern to some customers who wonder how it is possible that a service integrator would not think of themselves first."

"It is impossible for a company to know whether its services and service management activities are being handled entirely separate and free of bias," adds Martin. "While the managing provider organization may go to great lengths to establish an objective framework with high-integrity reporting and full separation of duties between the delivery and services management teams, it is very difficult to create real objectivity."

Then there's the issue of how much service integration should cost. "One of the limitations of the service integrator model is the fact that customers do not know how to pay for it or what it is worth in any intrinsic sense," says Martorelli. "Most often it is the case that customers pay for these services on the basis of the staff required to perform the service in one way or another."

Multi-sourcing integration can cost anywhere from three to 10 percent of the contract value of the deal, according to Da Rold. But a more effective pricing scheme for customers would be to create a mechanism for tying some relevant outcome or tangible result to service integrator payment.

"It's a choice out there to have them manage on your behalf to achieve certain outcomes, and certain customers will find it a good solution," Filippone says. "But in the end, it's a suboptimal solution."

Why? Because if an outsourcer claims they can come in and help you manage all those other providers so well, why not just have them take over the whole portfolio of services and remove a layer of overhead, Filippone suggests.

Da Rold and Martin advise outsourcing customers to retain as much of the multi-sourcing integration in-house as they can. "It's a very important role that ought to be part of the clients core competencies," Da Rold says. "Only if there are severe limitations—skills, ability to recruit, company culture, speed—[do] we recommend using a multi-sourcing integrator as a transformation engine toward [giving] a client better internal capability."

If a CIO has the luxury of building up a multi-sourcing scenario from scratch, says Martorelli, it might make sense to call upon an experienced provider like HP or Capgemini to set it up the right way from the beginning, if not keep them on board full time.

For those that are considering hiring an outsourcer as a service integrator, it's important to approach the selection diligently. Make sure you understand your supplier's real capabilities. "Insist on substantial interaction with reference clients, as multi-sourcing success stories are not that numerous in the industry at this point," says Martorelli. "Make sure to ask about the ability to integrate in services from the cloud. Cloud orchestration and IT service integration are on a collision course."

It's also important to put some governance in place to ensure objectivity. "If a company is planning to outsource its IT service management, it should establish specific controls around the division of responsibility within the provider company, as well as controls to test the veracity of reporting," says Martin. "Customers should setup objective incentives for both the provider performing the management and the providers being managed. These types of governance initiatives are critical for ensuring objectivity across the board."

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