by Stephanie Overby

IT Outsourcing: Don’t Get Caught in Multi-Sourcing’s Costly Trap

Jan 06, 2010
IT LeadershipIT StrategyOutsourcing

Many IT outsourcing customers and analysts praise the potential merits of multi-sourcing, but one sourcing advisor warns that exiting such arrangements can be prohibitively expensive.

Multisourcing, or spreading work among several service providers, can offer many advantages to IT shops, from competitive pricing and increased flexibility to access to a deeper pool of talent. But working with multiple vendors can also mean exit costs are multiplied if the arrangement doesn’t work out, warns Bob Mathers, principal consultant with Compass Management Consulting.

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“The problem is that the cost to exit any single small deal is not that different from the cost to exit one big deal,” Mathers says. “As such, while multi-sourcing can potentially optimize flexibility and responsiveness, the costs of transitioning multiple agreements can be paralyzing.”

The end-of-life complications for a multi-sourced environment are no different than a single-sourced deal. They include resolving contractual issues, knowledge transfer costs, software licensing fees, re-training and start-up costs for the new deal, and the expense of internal resources needed to manage the change. With multi-sourcing, such costs are compounded by the number of parties involved.

“The cost and business disruption involved in exiting a single $20 million deal is often comparable to the cost of exiting one $100 million sole-source contract,” Mathers says. “As a result, clients in a dysfunctional multi-vendor arrangement often find themselves essentially trapped.”

Most outsourcing customers are well aware of the increased complexity of managing multiple IT service providers simultaneously and getting those competing providers to work in concert. Some estimates say managing a number of different vendors—including onshore and offshore providers—can require two to three times more oversight than working with a single provider.

“If you needed five people to manage one vendor, you might expect to need ten to fifteen to manage multiple vendors assuming a mix of onshore and offshore delivery,” says Mathers. “Clients are recognizing that multi-sourcing requires a level of management maturity to succeed [and] are paying increasing attention to governance mechanisms, internal process improvement, and to preparing retained staff for management roles.”

But few customers consider the added expense of ending their relationships when signing contracts with several vendors.

Mathers doesn’t advise abandoning the multi-sourced model altogether; it remains an attractive choice for IT leaders seeking flexibility and responsiveness. Rather, he encourages those considering the approach to factor the costs of transitioning out of these relationships into their outsourcing business case.

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