Multi-vendor strategy, or multi-sourcing as it is

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1 November 2006 Offshore Insights Market Report Series Volume 4, Issue 9 RESEARCH SUMMARY: Maximizing Value and Avoiding Pitfalls of a Multi- Vendor Services Globalization SM Strategy Multi-vendor strategy, or multi-sourcing as it is commonly called, is a strategy that fosters competition and increased specialization. Companies which signed up the largest global services deals have successfully engaged multiple vendors to reduce costs and risks, and increase operational efficiency. As companies move from sourcing from a single vendor to many vendors, the entire globalization process becomes increasingly complex. This report focuses on the importance of the right implementation approach while using a multi-vendor strategy. It also analyzes the pitfalls of moving from a single-vendor strategy to a multi-vendor one without adequate planning and implementation. How to Maximize Value and Avoid Pitfalls in Multi-Vendor Services Globalization SM Strategy Key Questions How can an organization manage multiple suppliers and implement a sound multi-vendor services globalization strategy? What are the typical pitfalls of a multi-vendor strategy in a services globalization arrangement? How does one maximize the returns from a multivendor services globalization engagement?

2 Page 2 of 11 Introduction Companies that multi-source distribute their global services requirements to a number of suppliers. Each of these suppliers may have different competencies and pricing structures. There are many advantages of multisourcing it leads to increased throughput due to specialization, ensures competitive pricing, reduces vendor risk and provides access to a larger base of resources. Most large companies start with sourcing from a single vendor and then graduate to multi-sourcing. This report aims to impress upon the reader the importance of the right implementation approach towards multi-sourcing from service providers. It uses a case to identify the common pitfalls in a multi-sourcing strategy. It discusses the pros and cons of global multisourcing and provides a structured path for a typical global services multi-vendor implementation. Discussion Points Is there an ideal way of dealing with global services suppliers to maximize returns from multi-sourcing? How are dependencies between services performed by different suppliers managed and tracked? How can an organization prevent shared or mixed accountability while dealing with multiple vendors? How can it ensure that the increased overheads of managing multiple suppliers do not wipe out the savings attributed to specialization and competition? Case: Acom Inc. A US-based Fortune 500 company Acom Inc. has an outsourcing arrangement with a top-tier global IT services vendor Oldven Ltd. based in India. Over 500 FTE have been outsourced on a regular basis to Oldven for the last seven years. Roughly 40% of the outsourcing has been based on fixed price contracts and the remaining 60% on time and material. With time, Acom realized that the vendor was not providing the optimal service at that cost. There was an apparent need for cost savings and reduced dependency on the single supplier. Acom saw Newven Ltd. as a prospective vendor for fostering competition with Oldven. Newven has global services operations in India with a head-count exceeding 500 persons, offering services similar to those offered by Oldven. Incidentally, a few of Newven s employees had worked with Oldven and had enjoyed a good rapport with Acom in the past. Acom s CIO, already aware of the lack of control on costs due to a virtual monopoly being enjoyed by Oldven, saw this as a good opportunity to put pressure on Oldven to rationalize its rates. He saw the same people at Newven with whom he had worked with in the past. Newven s proposal was instantly accepted and it started a pilot project at Acom premises with a couple of its resources billed on a time-and-material basis. Acom started seeing better results from Newven s resources in comparison to what it used to get from Oldven s. The opinion about the preferred vendor tilted towards Newven. Meanwhile, a few more Oldven employees shifted to Newven, strengthening its business know-how of Acom. Acom invited fixed price bids from both Oldven and Newven for undertaking enhancement on its Internal

3 Page 3 of 11 Systems, rightly chosen as this was not exposed to Acom s customers, and had the least business impact. Oldven decided not to lower its rates, and Newven clinched the deal quoting a rate which was about 25% lower than Oldven s. All the other aspects of the contract remained the same as it would have been had it been signed with Oldven. As had been the case earlier with Oldven, all lifecycle stages of the project, from Requirements Analysis to System Testing, were assigned to the Newven team in India. Acom assigned an IS program manager (PM) to review and sign-off requirements and to track the progress with Newven. Due to the sudden demand for resources at Newven it chose to assign one of its employees working on other T&M engagements at Acom facilities to double up as a part-time onsite point of contact (POC). The Newven team created the Requirements documents based on discussions with the POC and exchanges with the Acom PM. The requirements were documented with the same level of detail as Oldven used to do it, and was promptly signed by the Acom PM. The Newven development team used the Requirements document as the single source of design inputs. After four months of development, the enhanced system was delivered by Newven. The initial review of the system by the Acom PM immediately highlighted the gap between user expectations and the actual output. The PM raised a red flag, and firefighting was quickly started to get the systems into independent QA. The project implementation was delayed twice, by a fortnight each time. To accelerate the pace, Acom added a full-time dedicated subject matter expert (SME) at its own cost to assist the project teams. After four weeks of extra effort the system finally went live. Acom s IS policy requires all production updates to go live on a single day every quarter, so the other projects being worked on by Oldven were also delayed by the same duration. Oldven billed Acom for retaining the team for an entire four-week period after they had delivered their applications. Acom could not charge Newven for the delay because the contract did not have any explicit dependent liability clause. Due to vague requirement documentation done by Newven, most problems with the deliverables were seen as requirement changes and not as defects, with no liability coming on the vendor. Overall, Acom spent much higher in absolute costs than was originally budgeted, while Oldven enjoyed a month of free ride. Acom also had to bear the implicit costs because of the delay in sending out the system to the stakeholders, and the extra management overhead involved in firefighting a project in red.

4 Page 4 of 11 Figure 1: Multi-Sourcing Experience Single Supplier Sourcing Multiple Supplier Sourcing Acom Oldven Problem Areas: Lack of control of costs Optimal service not delivered at the costs being charged Oldven Newven Problem Areas: Project delayed by four weeks Delayed other projects as well Higher absolute costs Higher implicit costs because of delay in delivery, and involvement of management for firefighting Lessons Learnt New vendor selection needs to have an objective, structured evaluation. Services contracts need to be re-looked at for each new vendor to cover expenses incurred due to delays and dependencies. Transition should be made in a phased manner with the least business critical or least complex processes being sent out first. A detailed project management and governance structure (for example, the neoit M5 governance model) should be used to track projects closely and identify pitfalls early on. Source: neoit Case Analysis Typical Pitfalls From the facts of the case, it is clear that we need to find a better way of handling a multivendor global services engagement with relatively fewer delays and lesser pains. The key areas that could have been handled differently are: Supplier selection process Acom selected the supplier based on a subjective and unstructured evaluation and not on the basis of a due diligence process. new supplier. Apart from the resources visible to Acom, the rest were not experienced with Acom s business and systems. An objective due diligence process would have brought out the key strengths and weaknesses of the supplier. This would have helped Acom structure the engagement governance more effectively and regulate the pace of transition to the new supplier. A reverse due-diligence exercise would have also assisted the supplier in understanding Acom s expectations to deliver more effectively. Acom selected the supplier based on its comfort level with the senior resources of the

5 Page 5 of 11 Contract Structure and Negotiation The services agreement was a replica of the agreement with Oldven, with no additional clauses to indemnify Acom from the impact of one vendor on another s execution schedule and costs. The contract negotiation process that comes right after due-diligence and reverse due diligence was skipped. There should have been more discussions to identify dependencies and contractual gaps. The contract should have included a clause to clearly identify acceptance criteria, and to keep the acceptance rights exclusively with Acom, and the liability of any expenses resulting from delays by either party on the erring party. This could have saved Acom the extra amount spent on employing an additional SME and retaining the Oldven team for concurrent implementation. Engagement Planning Acom failed to plan for periodic milestone reviews and contingencies. The project status was not tracked effectively. Due to the lack of intermediate deliverables and milestone reviews in the project plan, Acom realized at the eleventh hour that the deliverables were not ready for implementation. Additionally, there were no contingency plans for reducing the impact of the delays in deliveries of this engagement on the other projects. A detailed contingency plan on the possible fallback options, if the system is not found ready for implementation at the time of delivery, would have helped Acom identify impending costs upfront, and to take corrective measures. Transition Management Acom engaged Newven at the same terms as it used to work with Oldven, with all phases of the engagement transitioned immediately to the Newven team. In the first few engagements, business-specific lifecycle stages such as requirements and test planning should have been managed by Acom or by a dedicated subject matter expert (SME) located in proximity to the users. This was required until Newven s team acquired adequate knowledge about Acom s business and systems. Not having a dedicated point of contact and SME onsite was also a key reason for the failure of this engagement. Signing off on the requirements documented by the vendor almost always misses some vital item or the other in scope. In this case the vague Requirements documentation aided the vendor in turning real defects into expensive change requests. Companies which source globally must invest in defining outsourcing requirements, instead of leaving it to the vendor to understand and document. The transition should have followed a phased approach, with the least business critical and the least complex processes being sourced in the first phase, and subsequent phases with increased outsourcing of business requirements and critical processes. This is usually referred to as the wave strategy for services globalization. This must be implemented even while going with a second vendor. A wave strategy covers the risk that is caused by lack of domain knowledge with suppliers. A well-planned training and knowledge transfer program is also an indispensable part of any services globalization engagement. An independent transition management service would have identified these key transition issues and risks upfront.

6 Page 6 of 11 Governance and Tracking The engagement tracking methodology was similar to what was being followed with Oldven. Newven could not have had the implicit understanding that Oldven had with Acom. Acom should have tracked this engagement much more closely in comparison to how it used to while working with Oldven. Every document prepared as part of this engagement required to have more details as compared to the Oldven engagement. This would have helped in preventing costly scope creep and requirements redefinition in later stages of the project. An independent PMO to track and control deviation from scope, schedule and costs is an indispensable part of any services globalization engagement. A detailed project management and governance structure along the lines of the neoit M5 governance model would have helped track the projects more closely and identify pitfalls in the early stages itself. Implementing Multi-sourcing Ideally a multi-vendor strategy should be implemented using a structured and proven methodology, with every phase carried out literally by the book, until the engagement has reached a steady state and all gaps have been plugged. In this section, we discuss a framework to implement multi-vendor services globalization. Planning This is the first phase of multi-sourcing, where the key project sponsor and stakeholders are identified and a business case created for the transition. This phase addresses the need for a structure, schedule and a driver or a champion for successfully taking the engagement forward. A portfolio analysis is conducted to identify business processes that make a clear case for the move to a new supplier, based on the experiences with the present supplier and availability of the services in the market. A portfolio analysis is essentially the aggregation of processes that are interdependent but do not have dependencies outside of that group of processes. In the first stage of engagement with the new supplier, only transactional low business-impact processes are identified for globalization. They are clearly defined independent processes with little or no inter-dependency with other processes. This minimizes the risk on other processes in case of failure to deliver the identified process. At the conclusion of portfolio analysis, a process transition roadmap and a high-level transition schedule is prepared to take the new vendors through the next stages of outsourcing. Based on the culture within the organization, it also involves creating a good communication strategy to ensure buy-in from the various stakeholders inside the organization. Sourcing This is the most crucial phase for a multisourcing initiative that results in the identification of a supplier and culminates with the signing of an outsourcing contract. Based on the process portfolio identified for services globalization, information about intent and capability is requested from a pool of prospective suppliers. A structured supplier evaluation is conducted based on the strengths, weaknesses and pain-points of each of the prospective suppliers, and that of the

7 Page 7 of 11 existing suppliers and the internal production team. The process is called down-select and results in the identification of four or five bestfit Negotiations are conducted with the qualified suppliers based on the internal assessment of the service cost. Suppliers are benchmarked cases. against the market and labor rates, and renegotiated with to finalize the cost of the Ideally, the selected suppliers should have outsourcing contract. complimentary skills with respect to the existing suppliers and the internal staff. The sourcing process ends with the signing of the outsourcing contract, also called a master The selected suppliers have to qualify a duediligence exercise which involves a supplier evaluation on an independent framework and services agreement, since it acts as a blanket contract for all subsequent contracts signed with the supplier(s). usually requires on-site supplier visits to verify the results. The entire planning and sourcing process framework is shown in the diagram below: Figure 2: Multi-sourcing framework Existing Supplier (s) Market Data Market Data Core Competence RFI Response Proposals Cost / Pricing Data Signed off MSA Engagement Performance Areas of Improvement Labor rates and Costs Portfolio Identification Supplier Pool Selection Supplier SWOT Evaluation Cost-Benefit Analysis Negotiations and Pricing Master Services Contract Agreement Supplier Market Short listed Supplier Pool (20) Down-selected Supplier (5) Preferred Supplier (2) Contracted Supplier Source: neoit

8 Page 8 of 11 Transition The first few projects in this phase help build confidence and buy-in within the entire organization for proceeding with the engagement. The transition starts with knowledge transfer and culminates in a steadystate services globalization engagement. A transition plan is created using the results of the portfolio analysis exercise, with roles and responsibilities assigned to the respective supplier teams. A pilot process is also identified for transition to the service provider. After creating a transition plan, the globalization of a pilot-process or service is initiated. A transition steering committee formed with the key stakeholders from the supplier and the buyer teams, ensures cooperation and manages the conflict of interest between suppliers. Based on progress of the transition and learnings from the transition cycle, the plan is fine-tuned for the next round of transition. This cycle continues until a steady state is achieved. The transition lifecycle is shown in this diagram: Figure 3: Transition Lifecycle Capture Learning for Next cycle Portfolio Sequencing and Mapping to Offshore Models Steady state Maintenance Plans kick-off Develop Transition Model and Transition Plans Monitor Transition Progress Develop Transition Timelines, Roles, Responsibilities Fine Tune Model and Roll-Out Complete Portfolio Transition Pilot Transition Kick-Off Onsite and Offshore Source: neoit

9 Page 9 of 11 Governance A services globalization engagement in its steady state requires constant monitoring of the processes and tracking of the plan, schedules and SLAs. A governance framework ensures tracking across various vital indicators of the health of an outsourcing engagement. In most cases a globalization program management office (PMO) is formed with the key project stakeholders and process owners. Figure 4: M5 Governance Framework Resource Management Retention, buffer, training Vacation, holidays Onboarding, resource transitions Conserve knowledge transfer Skills update Performance Management Service levels monitoring, reporting Schedule management Issues in quality Offshore workload management Process flow for onsite/offshore delivery Financial Management Invoice review Budget to actuals Expense allocation Invoicing procedure Change management to base model Relationship Management Client of choice initiatives One team Track issues to closure Bridge culture gaps Contact Management Key personnel Staffing, attrition Background checks, insurance DR/BCP plans, readiness Reformulate service levels for relevancy Source: neoit The globalization PMO is responsible for most of the tactical activities. For example: Identify resources for control and tracking Identify milestones and inter-supplier dependencies that need to be tracked Create outsourcing health check and status reporting process Create an outsourcing dashboard with a clear visibility of relative supplier performance to the stakeholders Recommend new suppliers to engage directly in projects with increasing level of complexity and business impact Track invoice generation and payouts against budget Ongoing engagement health-checks, trend analysis, performance benchmarking and globalization process tailoring form the long term goals of the governance PMO.

10 Page 10 of 11 Conclusion There is plenty of evidence to show that multisourcing strategy helps optimize operations. However, the importance of proper planning and implementation cannot be understated. Planning a multi-sourcing initiative involves a structured sourcing approach, a detailed portfolio assessment and a well thought out work allocation and distribution among the suppliers. The engagement governance structure should hedge the outsourcer s risk from supplier interdependencies, help measure relative performance and proactively identify bottlenecks. There is no right or wrong way of global services multi-sourcing, but the chances of failure are significantly reduced if all aspects of Planning, Sourcing, Transition and Governance are well taken care of in a multi-sourcing engagement.

11 Page 11 of 11 More information about the offshore outsourcing industry can be found within neoit s research center at For more details about neoit s offshore advisory and management services, please contact: Juliana Gidwani Marketing Manager San Ramon, California juliana@neoit.com No part of this report may be reprinted/reproduced without prior permission from neoit. neoit Global Offices Contributors Pareekh Jain Manager Praveen Gupta Manager Sabyasachi Satpathy Research Director Editors Atul Vashistha CEO Eugene M. Kublanov Vice President neoit Global Headquarters 2603 Camino Ramon Ste. 200 San Ramon, CA Telephone: Facsimile: Asia Headquarters Phoenix Towers, 5 th Floor No 16 & 16/1, Museum Road Bangalore , India Telephone: Facsimile: neoit Philippines 8/F Pacific Star Building Senator Gil Puyat Ave. cor Makati Ave. Makati City, Metro Manila, 1200, Philippines Telephone: +63 (2) Facsimile: +63 (2) Camino