by Donald J. Richards

Outsourcing Strategy: With Application Outsourcing Providers, Fewer is More

Jul 27, 20096 mins

If your company outsources application development and maintenance, you can benefit from concentrating your work with fewer suppliers, says Accenture's Donald J. Richards. Here, he shares new Accenture research on this topic, plus lessons from companies that have used this tactic successfully.

Editor’s Note: Accenture partnered with the Everest Research Institute to analyze the costs and complexity of managing multiple ADM suppliers and how the buyers can benefit from concentrating their work with fewer applications outsourcing suppliers. They interviewed leading organizations that have reduced the number of their supplier mix, as well as leading suppliers that observed the impact of supplier consolidation across their customer base. This article discusses the research and lessons learned that you can take away.

The outsourcing marketplace has matured rapidly during the past two or three years as most Global 2000 companies have outsourced or have considered outsourcing some aspect of their businesses. While these companies have experienced the expected cost savings for outsourcing, they are asking “what’s next?” and are now demanding a measurable increase in business performance through outsourcing.

Companies are seeking ways to rein in costs as a result of maintaining financial footing in the global economy. Similarly, liquidity and preserving capital is paramount today, especially for companies in survival mode. As companies look for ways to reduce costs, Application Development and Maintenance (sometimes referred to as ADM) outsourcing has grown in popularity as an area with significant opportunity.

However, in their attempts to leverage the benefits of ADM, some companies have amassed a complex network of multiple suppliers to meet their needs. And all too often, managing this type of network can create an enduring nightmare. So how are leading-edge organizations achieving more by engaging fewer ADM providers? Recently, Accenture and the Everest Research Institute interviewed companies that have reduced their supplier mix, as well as leading suppliers that observed the impact of supplier consolidation across their customer base to look at how leading-edge companies are meeting these goals.

What is the Motivation?

According to the study, the motivation for using multiple suppliers runs the gamut from variations in suppliers’ capabilities to localized decision-making across an enterprise, or the simple desire to retain competitive tension.

On the other hand, in many cases, the extent to which multiple suppliers are utilized is a consequence of localized decision-making processes across the organization and individual preferences to leverage relationships with suppliers.

In either case, the evidence from experience suggests that organizations really need to be determined to rationalize the number of suppliers in their ADM portfolio before undertaking the effort. While the savings are very significant, so, too, are the challenges.

High Costs of Accumulating Suppliers

The simple reality faced by many companies is that outsourcers of ADM tend to accumulate whole families of suppliers. And as time progresses, there’s a cost to it. A cost is borne for setting up each relationship, as well as managing it, resulting in missed opportunities for economies of scale.

There are also operational hiccups caused by inter-linkages in project management, testing, and so on when there are so many moving pieces across multiple areas (e.g. performance monitoring, reporting, ensuring accountability) that can result in costly project overruns and significant operational downtime. As a result, leading buyers are rationalizing the number of suppliers in their ADM portfolio and attaining financial benefits plus a less complex sourcing environment.

On a Total Cost of Ownership basis, savings of 22 to 28 percent can be achieved by working with fewer suppliers. This includes both one-time and recurring cost reductions. For example, one-time costs can be reduced 35 to 40 percent by working with existing suppliers instead of new suppliers, through savings in specifying, tendering, evaluating, selecting, negotiating, contracting, transitioning, managing and governing the additional work. These are largely hidden costs, since buyers often aren’t aware of them or don’t quantify them. The Everest research does that.

Recurring costs can be reduced 20 to 25 percent as fewer contracts, fewer invoices, and fewer compliance relations are managed, but mostly from economies of scale that enable fewer providers to offshore more and more senior roles into their global delivery networks.

Approach to Manage Complexity Arising From Multiple Suppliers

Where do we start? The first item of consideration involves the buyer adopting several “no regrets” approach for building their ADM supplier portfolio. These include:

  • Limiting the number of suppliers, by achieving consensus on the principle that “fewer suppliers is almost always better”
  • Segmenting suppliers into strategic or specialists
  • Ensuring appropriate scale necessary to build mutually beneficial relationships with suppliers

Three Necessary Steps to Consider

While these approaches for designing a supplier portfolio are applicable across most types of buyer organizations. How to organize and operate the portfolio can take multiple forms.

Buyers must work through three steps to appropriately manage complexity and cost in the organization-specific situations. These include:

  • Decide which organizational entity that will be included. (e.g., enterprise level versus specific business units, geographies)
  • Determine the engagement model
  • Manage and optimize day-to-day operations by carefully managing three key areas: division of work, scope and scale, and governance model

Detailed Steps for Organizing and Operating the Portfolio

First, the details of the approach should focus on the organizational entities included in the optimization as the critical foundation that shapes future decisions. Will they select a truly enterprise-driven approach towards optimization versus starting off in a few major groups and then expanding scope?

These choices are closely linked to the buyers organizational structure, decision-making processes, and culture. Most large buyers are unlikely to start optimizing their ADM portfolios by increasing the scope of entities to include, but rather, deploy a new model in one area and then seek to increase scope to include other business units/geographies.

Second, companies should evaluate and choose between two broad engagement models:

  • Harmonized: acquire talent at the best price and the buyer defines the primary tools and processes for service delivery.
  • Orchestrated: Attaining results from suppliers through defined objectives while requiring the supplier to determine how to attain results.

Third, with the proper engagement model, buyers must manage and optimize day-to-day operations:

  • Division of work: highly interdependent delivery increases the requirement of coordination, thereby impacting productivity.
  • Scope and scale: the scope of work outsourced has implications on the complexity associated with managing the work. Also, the extent to which the buyer provides the supplier scale benefits determines the potential cost savings.
  • Governance model: creates a more predictive environment through re-use of IP/frameworks. This lowers both one-time costs and recurring costs associated with managing performance of multiple suppliers.

Whatever reasons there may have been for using multiple ADM suppliers in the beginning, high performers are now consolidating their vendor base. When a company succeeds at reducing or limiting the number of suppliers in its ADM portfolio, it can achieve significant benefits such as greater business impact, improved quality and productivity, and cost savings.

To learn more, download the report entitled “The Hidden Costs and Complexity of Managing Multiple ADM Suppliers.”

Donald J. Richards is the Managing Director for Accenture’s global Application Outsourcing business. In this role, he is responsible for driving the strategic direction, growth and ensuring delivery excellence of this business across Accenture’s five Operating Groups around the world. During his 28 year tenure with Accenture, Don has served in senior leadership roles for large client engagements and Accenture business units across a number of industries. He has an MBA and BS from Case Western Reserve University.

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