How to Keep Your Outsourcing Provider Hungry for Your Application Development Business

More IT leaders are spreading their application development and maintenance work among several outsourcing vendors. Multisourcing, as the practice is called, increases competition, breadth of resources, availability and management overhead.

IT leaders are increasingly turning to multiple outsourcing vendors to obtain application development and maintenance services. They're finding that spreading their application development and maintenance work across, say, three vendors makes more sense than having a single provider perform all of the work.

Indeed, multisourcing, as the practice of using multiple vendors for one function is known, offers a number of benefits to the customer, says David Rutchik, partner with outsourcing consultancy Pace Harmon. For one, a portfolio approach to sourcing provides access to a wide, deep bench of resources that may not otherwise be available from a single provider. Moreover, it encourages competition among the vendors, which benefits the customer's bottom line. It also keeps the vendors honest and hungry for the customer's business.

"By avoiding minimum commitments of spend or services with any one vendor, each provider earns the business by providing ongoing, compelling value," Rutchik says. "This can be more important than any outsourcing contract provision."

Of course, using too many providers would spoil this outsourcing secret sauce: It would increase governance challenges and require the customer to smooth the ruffled feathers of vendors who might feel marginalized. That's why the typical multisourcing recipe includes ongoing relationships with a couple of Indian providers and one U.S.-based multinational supplier. The domestic provider can perform the work offshore or access a pool of U.S.-based resources if necessary, whether for customer comfort, ease of collaboration or security reasons, Rutchik explains. And with potential changes to the H-1B and L-1 visa programs looming, having an American provider in the mix may become even more important.

As for the two offshore providers, clients should opt for vendors of different sizes--one large firm and a Tier 2 or 3 vendor, advises Rutchik. The smaller provider should keep pricing competitive, may offer specialization in certain verticals, and offer more individual focus and attention.

The Mechanics of Multisourcing

Here's how a multi-sourcing agreement works. The client enters into agreements with the three providers upfront, establishing terms, service levels and pricing either for a specific project or projects in the future. However, these contracts should not guarantee future work to any provider.

Each time new development or maintenance needs arise, the client determines its requirements and issues a statement of work on which the vendors may bid. "As a best practice, a company should not award projects in a de facto manner," says Rutchik. "A competitive process ensures the right pricing, skill sets, et cetera are secured for the particular project.

Multisourcing requires more work upfront, admits Rutchik. And no one wants to put together statements of work for every little project. "However, the structure and attention on the front end—which does add incremental resources and effort from groups such as IT and sourcing—actually enables less overhead on the governance side because projects requirements are scoped and resourced more appropriately," Rutchik says.

Over time, the customer gets to know his group of select vendors—the quality of personnel, price points, risk, flexibility and quality—and can make better decisions about which provider is best equipped to perform each job.

The two-parts India-based provider, one-part U.S. supplier approach doesn't mean all the work is divided between the two countries alone. Some customers, hoping to mitigate political, currency or natural disaster risk in a specific location, will take advantage of support that the trio of providers can offer in other parts of the world. More often than not, however, the driver is something more concrete, such as the need for services to be performed in a certain time zone, available language skills or overall costs. Vietnam may be cheaper than India. Or the Latin American subsidiary can provide Spanish language skills.

"It is less about risk and more focused on support requirements," Rutchik says.

Copyright © 2009 IDG Communications, Inc.

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