On September 1 2005, when Dutch banking giant, ABN Amro, announced a five-year, multi-provider $2.2 billion deal to overhaul its global IT organization, it highlighted the growing use of multi-sourcing in the outsourcing arena. It is now apparent that single mega deals are making way for smaller multiple contracts. And quite contrary to the popular belief, in this case, it seems too many cooks don’t spoil the broth.

According to a Datamonitor report, the average size of contracts announced by IT and BPO services providers globally in the first quarter of 2005 (January-March) fell by 18 percent to $68.9 million, compared to the corresponding period last year, partly due to the growing trend of multi-sourcing. With this, the average deal size is showing a decline, partly due to the growing trend of multi-sourcing.

Multisourcing has two advantages. One, you can get the best-in-class service provider for the particular process that you want to outsource. In the case of ABN Amro, for example, rather than outsourcing both infrastructure maintenance, and application development and support, to one provider, it chose to give infrastructure maintenance (desktops, servers, storage) to IBM, application support to Indian providers, Infosys and TCS, and application development to Accenture.

Two, you can expect to get the best service at competitive cost from providers because going forward there will continue to be competition amongst them. This is something that Harvey Golub, Chairman and CEO, American Express, had done over a decade ago, though in a captive capacity. He build three financial resource centers, one each at Brighton (UK), Salt Lake City (US), and Delhi (India), and got them to compete, during which the one at Brighton got pushed out.

But, like most things, good things come with bad. In multi-sourcing, the difficult part is managing multiple relationships since the likelihood of finger pointing if something goes wrong is very high. This is costly, complex, and extremely demanding, requiring you to put in place a team exclusively for managing the relationships. Procter and Gamble (P&G), which has outsourced to HP and other providers, for example, has a governance team of 100 for this purpose, which took two years to be put in place. While Gartner estimates that the management and governance cost in the case of single-provider deals is usually between 3-11 percent of the total cost of the deal, in the case of multi-provider deals, according to TPI, this can vary anywhere between 15-50 percent depending on the complexity of the process. So, for a $500 million deal split between many providers, you will need to budget for between $75-250 million for management and governance.

In spite of such complexity, Gartner predicts that by 2007 multi-sourcing will remain the dominant sourcing model. However, fewer than 30 percent of enterprises will have formal sourcing strategies and appropriate governance in place. And governance issue, it seems is the order of the day. Most of the experts we spoke to, stressed on effective governance to managing multiple providers. In 2004, a survey conducted by EquaTerra of 130 CIOs, revealed that 42 percent were dissatisfied with their sourcing relationships. And the primary reason cited was a poorly developed, underbudgeted, and under-resourced governance model.

Governance Holds the Key

To ensure better service, customers need to dedicate time and staff to oversee vendors’ performance. And to avoid losing control of service levels or the scope of an outsourced project, they have to make sure that there are enough qualified people on board to manage the contracts and create a governance structure. Sid Pai, Partner, TPI, and Country MD, TPI India, is of the view that governance could also be ensured by four key processes: contract management; performance management; ability to have third parties come in and benchmark the work done by the supplier not just in the cost basis, but also on the operational and organizational basis; and constant maintaining of an account by the clients of the decisions taken in the framework.

Importantly, managing outsourcing relationships also requires a whole new set of skills like staff training and setting up a new management structure. And none of these could be done with an immediacy which enterprises demand. So what does a customer looking to multisource do?

Adopt Correct Sourcing Strategy

Robert Zahler, Partner, Pillsbury Winthrop Shaw Pittman LLP, says that in order to successfully manage multiple providers, customers should focus on adopting the correct sourcing strategy given the particular objectives sought by the customer; using the right form of contract which should be a prime-sub relationship, and staying attuned to potential intra-provider issues so that the customer could properly protect its interests at the appropriate time and in the right manner.

Importantly, in any outsourcing contract, the parts covering service level agreements (SLAs) are probably the most important. Therefore, in a multi-provider deal, it is important to make sure that these parts are well crafted and are clearly understood by both the providers and the customers. In general, in the single provider environment, there is a significant experience and best practice with respect to the drafting of SLAs for the proper development of an appropriate set of SLAs. When errors are made, typically they involve specifying too many SLAs and not structuring the SLAs as end-to-end specifications, lack of clarity in exactly how the service levels are to be measured and reported, or failure to include a set of liquidated damage for the most critical service levels.

What in a Multi-sourcing Environment

According to Zahler, in the multi-sourcing, “the key to success factor for an appropriate set of SLAs is ensuring that each supplier’s SLAs are properly integrated and coordinated with the SLAs for each of the other providers.” Since this is a difficult task, it requires that the scope of service for each supplier be clear and to the extent possible, each provider has end-to-end responsibility for its portion of scope. However, in practice, this often occurs, and accordingly,“service levels among the various providers might be overlapping or conversely, miss important items, and there is a high potential for ‘finger-pointing’ between different providers when specific service levels are not met,” says Zahler.

To minimize the effect, Sid Pai suggests that customers should get vendors to sign operating level agreements (OLAs) and use RACI (responsiveness, accountability, consulted, informed) metrics. Zahler recommends that the service levels for all providers be ‘plotted’ in a visual manner against the entire scope of work and this ‘picture’ be shared with all providers so that they understand for which SLAs they are responsible and for which SLA other providers are responsible.

Cathy Hyatt, Client Executive, EquaTerra, suggests that clients and their providers invest the time needed to fully document the data sources, calculation methodologies and carve outs for each service level prior to the end of the transition period. “A dashboard-type tool can be used to capture this documentation, or it can be included as part of the Policy and Procedure Manual. No matter how the documentation is captured and maintained, using a standard template for all providers increases transparency, auditability, and comparability of performance metrics,” she says.

So, as we see, while using different providers might be beneficial for improved service and decreased cost, it also creates a confusing web of service providers.

In Brief Multi-sourcing has two clear benefits-one, you can get providers who are best in class for that particular service and, two, because many vendors are involved, they compete with each other to give better service and lower cost. The downside, though, is that there is a high possibility of vendors pointing fingers at each other if things don’t go right. To pre-empt this you need to spend considerable money and time to put in place a sourcing management team and governance structure. If you are considering outsourcing to multiple vendors, here is a checklist that you may want to discuss with your sourcing, governance, and legal teams Have you built in OLAs between providers? While SLAs are signed between the customer and providers, OLAs are multi-party agreements signed between providers. They clearly define what each provider must do-for example, who will provide application maintenance and who will provide infrastructure maintenance. Are your OLAs built around RACI? For example, a particular vendor may be responsible for ensuring 99 percent uptime for a network. But, a network can go down because of several problems-application, infrastructure, or operating system problem. In a case where different vendors are providing services for each of the different processes, simply having an OLA that defines areas of responsibility can lead to a blame game. RACI goes a step further and breaks down a potential problem into smaller elements and assigns responsibility and accountability to specific providers. Hence, OLAs account for very little if they are not backed by RACI (responsiveness, accountability, consulted, informed). Have you built in knowledge sharing in the OLAs? Since many providers will be working together, there will be a need to share proprietary knowledge. For example, the application development vendor will need to know the infrastructure architecture, where the application will be running, how many users will be using it, and so on. So, the OLAs must stress on this need for information sharing. Have you built in a financial penalty clause in the OLA and SLA? The extent of financial penalty will vary from deal to deal. If the vendor is handling a mission-critical process, you may want the contract to go in for an immediate revocation if an OLA or SLA is breached. In other cases, the financial penalty may be less severe. Have you budgeted for a largish governance team? Managing multiple providers requires setting up teams and putting in processes. Though there is no one cost estimate that will apply to all, governance and management cost can vary anywhere between 15-50 percent of the total cost of the deal depending on the complexity of the process. Do your service teams have a say in creating contracts? Legal teams write often contracts with some input from service teams. Service teams know their processes inside out; their requirements must be reflected in the contracts