The Reality of Outsourcing to Multiple Service Providers


    You may come into work one day to discover that you have multiple contracts or agreements with multiple vendors, each handling a different aspect of your function — IT, HR or some other — and that it’s not working out as well as you expected.

    Forrester explains why that is in its recently published report, "Reality, Risks, and Best Practices for Managing Multiple Service Providers," by Paul Roehrig and others.

    There are wonderful — theoretical — reasons to go the route of multiple service vendors: You’re diversifying your risk; you’ll gain an "all-star" delivery team; the vendors will constantly be vying to compete on price.

    But few companies, according to Forrester, have the people with skills or the processes in place that are necessary to manage multiple service providers.

    As the report says, "Customers tend to overestimate the benefits of multiple providers and underestimate the challenges of implementing."

    How could this be? As one section explains:

    The multivendor tax. Contrary to expectations, the overall cost increase of service management in a multiple-provider environment can offset any reduction in service price. Firms should generally expect to spend between 4% and 8% of the total contract value to govern a single, large sourcing deal, including people costs, external services, audit firms, and benchmarking.5 This additional complexity can drive governance costs up an additional 30%. If poorly managed, this goes up even higher as additional time is spent negotiating the statement of work rather than executing the contract. In addition, using a single vendor can generally get about a 10% lower price due to economies of scale that are lost when a customer moves to a multiple provider scenario.

    Although that "4% and 8%" sounds low to me (I’ve heard up to 15% more often as the total expected spend for managing an outsourcing agreement), the principle makes sense: You’re going to spend more due to the hassle factor of sorting out disputes between vendors, sorting through multiple forms of reporting, explaining to users whom to go to for what problems or requests…

    The report has good advice (yes, one bit of advice says to bring in experts to help you figure things out) that make it worth reading.

    One note: The report costs $349, unless you’re a Forrester client. But you can view slides from a Webcast based on the findings here — which duplicates much of the content from the report.