Choice matters. no one knows that more than companies that choose to outsource their IT operations. To maximize the benefits of choice, companies that outsource are increasingly electing to sign deals with multiple providers simultaneously in a process called multisourcing.
But finding the right providers for different parts of IT operations, whether its the data center, business processes or the network, is not an easy task. No easier is finding the right number of providers: enlarging their population while preventing their number from ballooning out of control.
Nonetheless, experience has taught companies its best not to put all their outsourcing eggs in one basket. When companies hand over all aspects of their IT infrastructure to a single outsourcing provider, customer leverage tends to be diminished because the provider has a monopoly over the customers account.
The most extreme example of this kind of relationship was General Motors Corp.s acquisition of Electronic Data Systems Corp. in 1984. Replacing GMs own internal IT with that of an external provider merely cloaked the same management problems in a different garb. GM reacted by spinning off EDS in 1996 and launching a bold initiative to dramatically increase the number of providers in its 100 percent outsourced IT business model. As a result, GM now is often mentioned as the quintessential multisourcer.
“Multisourcing discipline is the answer. … A single contractor is not optimized” as a business model, said Gartner Inc. analyst Linda Cohen at the Stamford, Conn., companys recent Outsourcing Summit in Los Angeles. Multisourcing may be the answer, as Cohen urged, but the price of benefiting from the forces of market competition is diligent management. Instead of relating successfully to only one outsourcer, many relationships must be maintained. Further, relations among the outsourcers, often liable to friction, must be watched closely.
“It does work, and you can create a new internal organization to manage it,” said Tim Murtha, a self-employed consultant with Infrastructure Transformation Visioning & Execution, of Haddonfield, N.J. Murtha, who was until recently manager of IT infrastructure services at Philadelphia-based Sunoco Inc., also spoke at the Gartner summit.
Murtha helped overhaul a troubled Sunoco IT operation several years ago, consolidating a hodgepodge of IT systems and outsourcing to a variety of providers for key technologies. He said Sunoco was able to turn the management trick without hiring any new management staff; instead, the company found the expertise within.
Although a total of 17 companies perform outsourcing tasks, only four are primary points of contact. Sunoco signed Dallas-based CompuCom Systems Inc. to handle client services; USinternetworking Inc., of Annapolis, Md., to handle Internet hosting services; Verizon Communications Inc., of New York, for network services; and iStructure, of Broomfield, Colo., to handle mainframe and open-systems services. Of the 17 providers, only nine submit monthly bills to Sunoco, Murtha said.
Among companies executing a multisourcing strategy, none is watched with greater interest than GM. With two-thirds of its IT business being handled by former subsidiary EDS in an agreement set to expire in mid-2006, GM is seeking to significantly broaden its base of outsourcing contractors.
“We have a number of RFPs [requests for proposal], and were getting responses and are starting to analyze them,” said GM spokesperson Dan Jankowski in Detroit. “All the business is being competitively bid on quality, service and price.”
Two years ago, GM Vice President and CIO Ralph Szygenda told eWEEK he was seeking to break large tasks into smaller ones to gain maximal benefit from competitive bidding among providers. His goal, Szygenda said at the time, was to encourage providers to compete and, after the bidding stopped, to cooperate with one another. Jankowski, however, is mum on the progress of this process. “Were not speculating on where its going right now,” he said. In GMs fully outsourced model, the company has about 2,000 IT managers around the world managing different projects. “Theyre management, not code writers,” Jankowski stressed.
Julie Giera, an analyst with Forrester Research Inc., in Cambridge, Mass., said GM might have let its quest for many outsourcers get out of hand. “What weve seen over the last couple of years is that GM went too far,” Giera said. “They are trying to consolidate the number of suppliers.”
Giera said GM officials have told her the companys number of suppliers might have ballooned to as many as 300, a figure that is too high, even for GM, to manage effectively. Over the next couple of years, Giera said, the automaker will reduce its outsourcer list to a more manageable number. “My guess is 60 to 80, and it might take five to seven years to do that,” she said.
More modest has been the approach of Starwood Hotels & Resorts Worldwide Inc., of White Plains, N.Y., which has split its outsourcing work between IBM and Hewlett-Packard Co. Starwood had previously contracted exclusively with IBM for IT infrastructure management but last fall switched to HP in a seven-year deal worth $100 million to build a new global reservation system. IBM still handles some IT services.
“In our first relationship, there was a lot of blame going on. But we realize its not about blame, its about teamwork,” Bill Oates, senior vice president and CIO of Starwood, told the Gartner Outsourcing Summit audience. “It boils down to emotional intelligence and relationship management. Both IBM and HP will be with us for a long period of time. Each of the partners needs to trust me.”
Working with multiple suppliers has helped Starwood learn more about its suppliers costs and prices, something that outsourcing customers call transparency. “We can now explain to the business units what were getting,” said Oates.
Starwood IT managers have learned some lessons the hard way, and success still doesnt come easy. “Its amazing the time we spend,” Oates said. “Its little things. You can just see it coming; its so much better if you can nip it in the bud and smooth the waters.”
Two years ago, Cincinnati-based Procter & Gamble Co. sliced its operations into four parts: IT infrastructure, human resources, financial applications and facilities management. HP won the IT infrastructure component with much fanfare. IBM Global Services snapped up the HR outsourcing contract, and Jones Lang LaSalle Inc. won the facilities management piece. HP had to re-enter the arena of competition to win the financial processing work a year ago.
Linda Clement-Holmes, P&Gs director of infrastructure services, is the point person for the HP IT relationship and confirmed that keeping the peace among different providers is at the top of her to-do list. “The IBM apps run on the HP infrastructure. If there are issues, we want them to work together,” Clement-Holmes said.
HP has developed a technology plan that shows where P&Gs technology is headed, she said. “It includes all the business units. It would be helpful to share those plans with IBM,” she said. “It would help IBM to be better prepared for whats coming.”
The answer, Clement-Holmes has found, is to hold regular meetings. “We get the suppliers together with us once a quarter. When we get everyone together across all four [contracts], thats a good place to understand if theres an issue,” she said. “We also talk about issues between the suppliers, and we want the suppliers to talk about [issues] without P&G in the middle.”
The meetings are having an effect, Clement-Holmes said, noting that service levels have been increasing steadily for the past six months.
As with Starwood, the notion of transparency plays a pivotal role in many of P&Gs discussions.
“If you say you want transparency, then they think you want to see the margins and salaries of every person. But when we say it, it means we want some idea of what makes up the bid,” Clement-Holmes said.
She said that sometimes the word “transparency” is itself the bone of contention and that HP is more comfortable with the term “visibility.”
At P&G, relationship management is becoming something of a science. Clement-Holmes said she works with other P&G leaders to share common practices and establish clear measurements of SLA (service-level agreement) performance and end-user satisfaction.
Another company that has chosen the multivendor path is chemical giant DuPont, which divided IT work between Accenture and Computer Sciences Corp. way back in 1997. In a pair of 10-year contracts, CSC handles the infrastructure, and Accenture handles SAP AG software deployment.
“We have learned that managing two suppliers doesnt mean twice as much work, even though theres more overhead,” said Steve Laskowski, global operations manager for DuPont Information Technology, in Wilmington, Del. To make it work, Laskowski said, DuPonts CIO meets quarterly with CSCs CEO and an Accenture vice president. DuPont may add a third supplier in the future, Laskowski added.
Still another approach is being tried by the United Kingdoms Ministry of Defence, which awarded a $4 billion to $7.6 billion, 10-year IT networking contract to a group of vendors forming the so-called Atlas Consortium. Leading the alliance is EDS, which serves as a single point of contact but preserves the benefits of a best-of-breed approach by calling on a variety of suppliers. In addition to EDS, the partners are Fujitsu Services, General Dynamics Corp., EADS Defence & Security Systems and LogicaCMG.
“In my mind, [that is] multisourcing,” said Dane Anderson, an analyst with the Meta Group unit of Gartner. However, Anderson said that many outsourcers use subcontractors and that it remains to be seen how much governance control the Ministry of Defence will have over alliance partners. “How will they hold EDS feet to the fire for the performance of the subcontractors?” Anderson asked.
Although outsourcing providers are accommodating themselves to the reality of multisourcing and the necessity of getting along with their peers, most would still, if possible, prefer to be the sole provider. “[Multisourcing] forces them to compete with others rather than solely against their SLA,” said Forresters Giera.
Its that very discomfort that works to customers advantage. “Over the last 15 years, it became clear that single sourcing is not price-effective, and the vendor can get complacent,” Giera said. “Theres plenty of research showing having more than one outsourcer is more successful.”
Corporate converts to multisourcing have developed their convictions through hard experience and are not about to turn back.
A 40-year IT veteran, ITVEs Murtha said he had an epiphany in 1996 about outsourcing. “I came to believe that to be able to do the job well, you have to use the marketplace in your strategy,” he said.
Now, as a consultant, Murtha aims to work with clients who share that view. “If youre an internal provider and youre not bringing in the marketplace to be part of the solution, then management should be asking why,” he said.
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