A movement to best-in-class providers and the emergence of multi-supplier integrators | Holland & Knight LLP
While the primary goals of strategic outsourcing deals continue to revolve around focusing on core competencies and capitalizing on cost savings, ongoing technological innovations, shifts in global labor markets, and global security concerns are driving significant trends in the size, frequency, and structure of outsourcing deals.
change of strategy
In recent years there have been a number of changes in customer acquisition strategy. It used to be common to see large integrated IT outsourcing (ITO) and business process outsourcing (BPO) engagements that spanned multiple service towers. Customers preferred these large integrated outsourcing solutions because they allowed the customer to manage a single vendor, which reduced the overhead of retained governance, offered a single source of accountability for service delivery, and gave the customer significant leverage due to volume procured the service provider of the conducted business. These integrated outsourcing transactions with preferred vendors have slowly given way to a more segregated sourcing strategy where customers select the best vendors for each service category. This trend towards a decentralized sourcing strategy is due in part to the lack of a single provider that excels in every service category, the desire to maintain some competition among service providers, and the emergence of software-as-a-service solutions (SaaS). have replaced certain traditionally outsourced functions.
As the outsourcing market has shifted from an integrated to a separate model, the number of outsourcing transactions has increased significantly and the size of the transactions has decreased. Transaction size reduction has been driven primarily by the breakup of integrated deals, but also by cost reductions through automation, falling hardware prices, migration from multiple data centers to a cloud environment, and transformative process improvements.
While the decentralized model allows customers to select best-in-class service providers for different functions, the model also presents challenges. First, customers are tasked with managing multiple suppliers and ensuring that disparate outsourced solutions work together effectively for the benefit of the business. Second, the multi-supplier model results in redundant administrative costs embedded in each service provider’s pricing and requires customers to bear retained administrative costs to monitor services provided by multiple service providers. Third, the multi-supplier model brings heightened data security and compliance concerns for customers due to the increased number of systems, employees, and locations with access to customer data, the increased number of endpoints that need to be secured against intruders, and the increased complexity Regulatory compliance across multiple vendors and global service delivery locations.
The multi-supplier integrator model
These challenges have led to the emergence of a multi-supplier-integrator (MSI) model, where an MSI is hired by the customer to manage the service delivery of the various service providers in the customer’s environment. Typically, the MSI provides a common technology platform into which service providers integrate their systems and provide performance data to the MSI. This platform allows the MSI to effectively manage multiple suppliers on behalf of the client and ensure consistent and integrated service delivery between the suppliers, often involving the establishment of operational level agreements between the service providers to eliminate dependencies and ensure coordinated delivery between the ensure service providers.
In essence, the MSI takes over the governance function traditionally retained by the customer and delivers many management functions that would otherwise be priced into each service provider’s solution, which should result in better service delivery and lower costs for the customer. Despite the cost of deploying an MIS, the cost savings that result from eliminating duplicate functionality at service providers result in net savings for the customer, with savings increasing over time as additional process efficiencies and automation further reduce costs.