Multisourcing Best Practices

Sound outsourcing management-always critical to success-is multiplied in importance when several outsourcing partners are chosen.

Sound outsourcing management—always critical to success—is multiplied in importance when several outsourcing partners are chosen. Here are some best practices for managing multiple outsourcers:

Market forces matter, but relationships are still important. Dealing with multiple outsourcers with the goal of reducing outsourcing services to the level of commodities might appear to be a valid cost-cutting strategy, but doing so ignores the ever-present requirements of competent vendor management. Taking the time to develop each relationship in a multisourcing arrangement is important and can pay off in smoother communication, better execution and avoidance of unnecessary expenses. "Best-practice organizations are trying to establish strong relationships with a few outsourcers," said Julie Giera, an analyst with Forrester Research Inc., in Cambridge, Mass.

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Think ahead about possible conflicts. "The biggest single mistake in multisource is that companies dont take into account how the vendors will have to work together," Giera said. For example, if one vendor is running operations and another vendor is responsible for applications, the operations provider, with responsibility for hardware, may stand to gain a bonus if hardware usage is minimized. However, the application provider may be deploying a new application that requires faster processing and twice the disk space.

Develop a standard worldwide contract. Working with a variety of contracts can soak up costly legal fees for little in return. Refining a single standard contract can create an airtight deal, as holes are discovered and eliminated over time. General Motors Corp., a global company with a fully outsourced IT strategy, has developed a standard worldwide contract, Giera said. In any outsourcing contract, the parts covering SLAs (service-level agreements) are probably the most important. Make sure these parts are well-crafted and are clearly understood by both the providers and the customer.

Use accurate measurement tools. Methods such as the Balanced Scorecard should be used to evaluate the outsourcers performance. In measuring cost, strive to establish a unit-based price, said Tim Murtha, a self-employed consultant with Infrastructure Transformation Visioning & Execution, but, until recently, manager of IT infrastructure services at Philadelphia-based Sunoco Inc. This will be helpful in discussing continued IT investment with corporate executives, Murtha said.

Specialized software may be helpful in managing multiple providers. GM Vice President and CIO Ralph Szygenda has said that GM was looking for software to help manage its providers. Giera said GM is close to making a decision on a suite of applications.

Whatever management techniques are employed, users must take care not to let their management costs spiral out of control. Although the right spending level may differ for every customer, Giera said the cost of managing any outsourcing contract is 3 to 6 percent of its value. George Jannino, director of contract and vendor management at Starwood Hotels & Resorts Worldwide Inc., in White Plains, N.Y., told an audience at the Gartner Outsourcing Summit in Los Angeles last month that 3 to 11 percent of contract value should be committed to governance costs. However, there is no fixed rule, and companies may measure their management budgets in different ways, creating apples-to-oranges comparisons. Sunoco was spending 14 percent of its outsourcing budget on management, a number with which former manager Murtha said he was pleased: "Many companies are surprised by the amount of work they have to retain."

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