Outsourcing came into its own in the late 80s and early 90s, when it became feasible to engage third parties in other countries at a lower cost enabling businesses to operate virtually and 24/7. Both vendors and buyers have learned a lot over the last few years about what works when it comes to outsourcing. Many have also experienced hard, first-hand lessons about what doesn’t work. Obviously outsourcing hasn’t “jumped the shark”. That said, we think it’s time to rethink outsourcing.
Beyond cost-reduction, many businesses now look to outsourcing to produce more – more innovation, more efficiency, greater customer satisfaction or, ideally, all three. Though Gartner first coined the term in 2005, there is a renewed effort to define the next generation of outsourcing and top of mind for many is the concept of multisourcing.
What’s Still Working? What’s Not?
Before we go further, let’s survey the current landscape of outsourcing. The 80s are long over but, as Madonna sang back then, “we are living in a material world” where money matters.
Businesses who survived the recession undoubtedly employed a combination of strategies (see sidebar). 
Key among those is cost-reduction. While concerns about sustainability and risk persist, particularly in moving work offshore to areas where labor costs are rising or where political instability may threaten operations (Egypt was recently touted as the next outsourcing hub), the basic economic proposition is that outsourcing, when structured right, does reduce expenses.
In a study of 335 companies outsourcing for the first time, a study of performance two years following an outsourcing announcement showed:
(Source: Lim, Richardson, Zmud, "Performance and Value Implications of First Time IT Outsourcing Arrangements", Information Technology Research Institute, Sept. 2007)
(Source: Bajpai, Sachs, Arora, and Khurana, “Global Services Sourcing: Issues of Cost and Quality”, Center on Globalization and Sustainable Development, Working Paper Series, Columbia University, June 2004)
It’s Time For A Makeover
But outsourcing of the monolithic variety – in which all of a particular end-to-end process or function is handed off in its entirety to a third party – is not a perfect proposition. According to Gartner, over 50% of outsourcing deals are renegotiated preterm (usually following the end of the first year) and 50% of outsourcing contracts signed in a three year period failed to meet expectations. Inherent weaknesses in the monolithic model include:
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Outsourcing is a competency that few possess. Not all companies, or their procurement functions, have had extensive experience within the walls of outsourcers. Lacking “been there – done that” experience, they are challenged to understand how to best buy or manage outsourcing services.
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Business objectives and sourcing decisions are misaligned. We have learned, especially when it comes to moving work offshore, that cheaper is not always better. Aligning economics with desired outcomes improves the odds that an outsourced arrangement will work.
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Failure to manage interdependencies among vendors. As one CIO put it, “our problem is not how the work gets done but what happens when we ask the outsourcer to transfer the work to other vendors in the delivery chain. We spend too much time putting out fires resulting from poor workflow and systems and people that don’t communicate with each other”.
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Relying on service level agreements (SLAs) to manage the relationship. SLAs are, by definition, measurements of service at a granular level, not measures of overall productivity or progress against goals. Managing the outsourcing relationship solely on the basis of SLAs is like driving a car by monitoring only the dashboard without ever glancing through the windshield.
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Outsized expectations for the benefit of leveraging scale. Scale, when done right, is a beautiful thing to behold. But laws of diminishing returns rule and companies that try to wring every last drop of scale from outsourcing can potentially create other problems. When the need to leverage scale over time becomes a primary driver, other equally important objectives, such as customer service, can fall by the wayside.
Multisourcing Comes of Age
Multisourcing, as an emerging alternative approach to traditional outsourcing, can address these weaknesses in the monolithic model, while scaling for flexibility. Essentially, multisourcing is a more mature outsourcing model wherein capabilities are offered to the client as a portfolio of services capitalizing on multiple vendors’ expertise. The key to success is assigning what we call a prime contractor to architect the engagement and orchestrate the various moving parts. The prime contractor therefore needs to possess superior and tested outsourcing competencies that enable it to manage all of the interdependent and specialized vendors as illustrated below:
A Multisourcer Arrangement Has Many Clear Advantages
It enables management to vest in the prime, not service level, agreements thereby allowing management a panoramic perspective on the entire outsourced operation as opposed to getting mired in the details of SLAs which do not present an accurate portrait. It also:
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Offsets scale and “one-size-fits-all” by ensuring specialization
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Can convert negotiations, via gain sharing, into win-win scenarios
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Acknowledges the cyclical nature of operations
A New Era
Traditional monolithic outsourcing has generated billions in savings for the last twenty plus years and will, most likely, continue to do so into the near term, particularly for those businesses where complete outsourcing of selected functions has now become the norm. But outsourcing’s kid brother - its “next gen” successor - deserves a closer look for all the reasons we describe above. Multisourcing can help businesses move along a continuum (illustrated below) from efficiency to true business transformation. Properly managed and directed by a prime contractor/partner, multisourcing can achieve much more than cost-savings. It can also offer vendor innovation and high quality to maximize growth, agility, and bottom-line results.
For more about Maven Wave’s perspective on multisourcing, contact brian.farrar@mavenwave.com
Please note that the illustrations in this article are adapted from Multisourcing: Moving Beyond Outsourcing, authored by Linda Young and Allie Young.