Multi-Sourcing or Bundled Services? An Answer to the Riddle

Admissable Evidence

Multi-Sourcing or Bundled Services? An Answer to the Riddle

By

Professor Leslie Willcocks 

London School of Economics and Political Science

Introduction

Choosing the appropriate sourcing model is a critical component in the planning of outsourcing. Multi-sourcing, or best-of-breed sourcing, is a strategy in which a client organization engages multiple providers.  Best-of-breed sourcing recognizes that providers have different strengths and weaknesses and carves out work best suited for each of several providers. ITO and BPO outsourcing markets continues to grow through multi-sourcing, which for over 20 years has always been the dominant practice, but bundling is now an important and rising trend.  While multi-sourcing helps clients access best-of-breed suppliers and mitigate the risks of reliance on a single supplier, it also means increased transaction costs as clients manage more suppliers. Multi-sourcing also means that suppliers incur more transaction costs. Suppliers must bid more frequently because contracts are shorter, suppliers face more competition because smaller-sized deals means that more suppliers qualify to bid, and suppliers need to attract more customers in order to meet growth targets.

 

Enter bundling. Bundling is a technique for reducing the number of suppliers, and involves defining an optimal mix of business process and/or IT services purchased separately or at the same time from the same supplier where synergies and efficiencies are sought in end-to-end processing, governance, relationship management, cost and performance. On this definition there can be bundling within IT – for example the same supplier for infrastructure, applications, development; within BPO, for example training and development and payroll in the HR function; or  across ITO and BPO services, for example procurement, IT applications, selected HR activities. The possible choices for bundling are considerable, making these complex decisions, with important cost and service consequences. Moreover, there are question marks about how many suppliers have developed sufficient capability to take on large-scale bundled deals. And how can a manager understand the economic payoffs of bundling versus multi-sourcing?

 

The key sourcing issue before all organizations then is – how do we make the optimal sourcing decision, given the range of options now available internally and in the marketplace? I must admit that this question has nagged at me for over 20 years, because it’s such a fundamental one. But we now have, through our research, found an informed answer to this perennial management riddle[i]. Let’s first look at the trade-offs managers typically have to make when looking at the options, then I will report what we have found on where multi-sourcing or bundling is the optimal decision. There are some worrying findings in here, but there is an answer, and, indeed, a summary matrix to help you make the right choice.

 

 

Assessing the Trade-Offs: Myths and Reality

 

What are the common trade-offs clients consider and how far are these based in reality? [1] The major concerns are:

• Control - Does multi-sourcing or bundling give you more control? How?
• Risk - Is going with one provider more risky or less risky?
• Incremental or Big Bang? - Should we grow into bundled outsourcing or can it be done in one deal?
• Tidy then Outsource? - Should we straighten out our technology and processes first, or does bundling obviate this need?
• Cost and Operational Gains? - Is there really a big difference in the costs of management for bundling versus multi-provider and silo outsourcing? Does a primary contractor model solve the problem?

 

Control. Multi-sourcing may well give a client more power and more control over each individual provider, with less dependence on each.  However, increased control comes at a price in terms of increased management cost, time, effort and measurement. At the same time, an argument can be made that bundling makes a client larger and more important to a provider, thus making the provider more responsive.   In multi-provider environments retained management capability needed to manage outsourcing regularly costs between 4-10% of total contract value. Our more recent analysis finds these management costs for offshoring to be even higher - to be between 12-15% of total contract value.  As multi-sourcing governance has been moving up the outsourcing agenda in the last five years, we are seeing these costs also rise further.

 

Risk. There is more risk in depending on one or two providers – much depends on their capabilities and their financial strength, for example. However, with multi-sourcing the risks move into other areas, including cracks between service, security issues,  hidden costs with continued monitoring and renewal of contracts, and possible replacement of providers. One must also ask how big the risks are with bundling or not bundling relative to the other risks a business will take in its main line of operations. In other words, often an organization will impose–inconsistently–a higher standard of risk for a back office deal than even for a strategic business initiative.   

 

Incremental bundling. We found many organizations taking this route over time, but we also found several organizations gaining from making a major one-off  bundling deal, though this was a relative rarity when it came to complex BPO arrangements.  Much depends on the ability of both the client and provider to manage such arrangements and such capabilities are not yet commonly held. A related approach that we have seen in organizations is where they have straightened out their own IT and/or business processes first, sometimes through a shared services route, then sought a bundled outsourcing arrangement. This is a more tactical route and mitigates some of the risk of outsourcing  inefficient IT and processes, though the risk may well be worth taking, if it saves time and cost, as we saw in some cases.

 

Cost. The cost gains of bundling two or more business functions, for example IT and HR, or procurement and HR, rather than outsourcing them separately to different providers, can be of the order of 10-15%.  This may well be more where a provider can bring in a more standardized management and measurement process, and can truly implement standardized business processes and IT. A primary contractor model can be a half-way house but it is unlikely to achieve significant cost savings or process standardization or innovation over a bundled outsourcing arrangement. The primary contractor model also runs its share of risks and has not always had a happy history. Our own research points to cases where management costs were not noticeably lower than other models, and best practices were not shared between the different providers.

 

When, then, does bundled outsourcing make operational sense? The major advantages experienced with bundling include:

• Simplifies and expedites procurement and contracting (sole-source v. tendering)
• Simplifies the governance process
• Reduces duplicate management layers,  processes, and costs
• Reduces operating risk by limiting points of failure
• Standardizes and simplifies operations
• Can achieve operational synergies across business processes and between a business process and supporting IT.
• Mitigates delivery risk through simplified points of contact
• Reduces service provider costs/prices through simplified management and scale economies.
• Supports a pre-existing standardizing technology and process trajectory. A prime example is with ERP.
• Can drive larger holistic back-office change.

 

However, this does not make bundled outsourcing a ‘no-brainer’; far from it. These gains are possible but a great deal really do depend on the maturity and capabilities of both client and provider to deliver on the promises inherent in the bundling deal they go for. Given this, then it is not surprising to find clients display a range of profiles when it comes to bundled outsourcing.   

 

Is Bundling The Answer?

 

 

Our recent research provides some key insights on this question:

 

• The maturity of the organization to manage innovation and suppliers has a big influence on their ability to contemplate bundled services. This was the case with a major oil company and a telecom multinational, both mature and with their in-house capability sorted, and both willing to bundle services as they felt necessary going forward. Secure in their own ability to manage and implement sourcing strategy, they had high propensity to buy bundled services if they could find the right provider and right risk/reward deal.
• We are finding that clients do not know how to evaluate getting value from bundled services. As result they tend to evaluate based on function or silo. This is quite an important, if worrying finding. We would suggest that this inhibits their ability to identify the value of the bundled service proposition and pushes them into uncoupling services and leaves them open to multiple provider solutions. Clients need some way to identify in detail the synergies from bundled services, and how to value those synergies. In interviewing one European and one Indian-based major provider we found that they also struggled to demonstrate the financial advantages accruing from  both technical synergies (production costs) and from common management arrangements (transaction costs) though could point to how such financial advantages could arise. Clients would then request: “show me actual examples”.
• As a result, on bundled services, an organization will tend to take an even more ‘political’ than ‘economic’ approach to decision-making. In other words, lack of reliable economically based reasons push decisions towards individual judgement and political influences.
• Mature organizations will look at bundling if they can get innovation - i.e. they have high ambition in these sorts of deals - AND if they can shift risk to, or share risk with, the vendor.
• More mature organizations all emphasize the relationship – if you know them well and the track records is OK to good – you are more likely to go for bundled services. 
• Some organizations did bundle as start-ups or to achieve fast change but were immature in their ability to manage outsourcing and had poor experiences subsequently. One consequence was a move to multi-supplier sourcing in their second and third generation outsourcing arrangements. Some of these organizations are now rethinking the extent of their multiple suppliers sourcing.
• Good relationships and track record lead to incremental buying of further services. 
• Bundling occurs often where there is a strong and large-scale change agenda, through peer pressure, or in a belief that, in a recession, with limited resources it will be cheaper.
• A bundled service proposition really does need a client Board member driving it. The ancillary strong finding was that relationship factors received strong independent endorsement but that relationships needed to be many-to-many between client and supplier with lots of touch points and ‘glue’.
• There is often a ‘tipping point’ where a client increasingly finds advantages to bundling,  pursuing what I would call an ‘add-on’ strategy, gradually bundling more and more services over time.

 

 

An Answer to the Riddle: Key Factors

 

There are 20 factors that allow an organization to make the optimal bundling/multi-sourcing choice.  These group into five factors which I will briefly explain (see Table 1).

 

Client Factors. There are eight client factors. Their combined weighting of 40 indicates client factors to be the most influential of the five groupings shown in the Table. A more centralized process favours a bundled service decision. It is interesting to note that organizations that multi-source wrestle continually with the issue of needing to simplify and coordinate governance and decision-making, but while decision-making processes remain more fragmented, bundled service decisions, especially across ITO and BPO, are unlikely. Key influencer preferences are important in shaping a ‘dominant coalition’ in favour or against a degree of bundling services. Mature clients are in a better position to undertake a bundled services option.  But a strong preference for competitiveness amongst providers, and question marks on provider capabilities can also lead mature clients to adopt a best-of-breed strategy.

 

Organizations needing technological integration and seamless information and technical service will prefer to go for bundled services, where available. Business profile, and the existence of a ‘burning platform’ may well work in favour of a bundled decision.  For example, a business doing badly, or needing to do something different, may well see bundled services as a cost-driven, low management solution.  Heavy users and high spenders on outsourcing will tend to consider bundled services. A further factor we identified related to risk attitude. Organizations with a high risk perception concerning IT or back-office back up,  security, complexity tend to favour bundled services.

 

 

Table 1 To Bundle or Not To Bundle Outsourcing Services: The  Decision Matrix
Client Factors (weighting 40)	Tend to Bundle	Tend NOT to Bundle
1. Decision-making process	Centralized	Decentralized
2. Dominant coalition preferences i.e. – procurement, COO, CIO, CEO, advisors	Possible	Possible
3.Maturity of company with outsourcing i.e. – history of success/learning, internal capabilities built	Yes	Best-of-Breed if desire for vendor competition
4.Organizational and technological factors             Size             Complexity             Interdependent activities             Reliability needs             Technological integration              Seamless information/technical service	Large High High High High High	Small Low Low Low Low Low
5. Burning platform             Cost crisis             New CEO or CIO             Acquisition/merger             New consolidation strategy	Yes Possibly Likely Yes	No Possibly Possibly Unlikely
6.Business profile Business doing badly/ Need to do something different             Large, well performing firm	Yes   Likely	Unlikely   Possible
7. Heavy users and high spenders on outsourcing	Yes	No
8.Risk attitude to back-up, security, complexity	Perception of high systemic risk	Perception of low risk
Relational Factors (weighting 12)	Tend to Bundle	Tend NOT to Bundle
9.Culture             Transaction-orientated e.g. UK, USA             Relationship-orientated e.g. South Korea	Less likely Very likely	Probably Less likely
10. Prior Relational Aspects: client and provider             Strong relations between senior managements	Very likely	Less likely
11. Relationships/performance as incumbent provider	Strong relationships Track record of service delivery	Weak Poor record
Client Market Forces and Characteristics (weighting 10)	Tend to Bundle	Tend NOT to Bundle
12. Strong Regulatory Compliance Needs	Reduce complexity If provider assistance	If no complexity reduction If no provider help
13. Geography – advanced market             e.g. USA and UK             e.g. North and South Europe	More likely	More likely
14. Level of innovation required (2)	More provider investment More integrated services	Low innovation required   Low integration
15. Sector Influence             e.g. telecoms and utilities             e.g. retail             e.g. high preference for industry verticals             e.g. high competition intensity	Likely Possible Likely Likely	Possible Likely Possible Possible
Provider/Outsourcing Market Characteristics (weighting 18)	Tend to Bundle	Tend NOT to Bundle
16. Initial choices and incumbent vendors shape future bundling	Incumbent vendor with additional services and integration capabilities	Poor record No strong additional capabilities
17.Provider capabilities              Widely capable across different services             Able to use IT in each scope of service geographically             Can deal with large contract size	Yes Yes Yes	Concern over too few providers
18. ‘Lock-in’ through provider services             Provider offerings as interdependent services	More likely	Less likely
19.External Media and Bandwagon effect             High media attention on bundled services	Likely	Likely if performances do not improve and if providers fail to develop dependencies between bundled services
Cost Effectiveness Characteristics (weighting 20)	Tend to Bundle	Tend NOT to Bundle
20.Management and Integrated Services Efficiencies             Management and transaction costs             Integrated service efficiencies	If demonstrably lower Yes	Possible Unlikely

 

 

 

Relational Factors. Culture – whether clients are transaction-orientated or relationship orientated has a role to play here. For example, the USA and UK tend to be more transaction-orientated than South Korea and Scandinavian countries. Other things being equal, relationship-oriented cultures will favour service bundling. Prior relations between client and provider, especially where the provider has had good communications with a client’s dominant coalition, can influence client’s propensity to contract for bundled services.    Strong relationships as an incumbent where combined with a track record of service delivery, inclines a client to outsource more services to the incumbent provider.

 

Client Market Forces and Characteristics. In a highly regulated environment the strong requirement for regulatory compliance will favour bundled decisions, on the whole.  Bundled services will lower complexity, especially if the provider offers assistance with regulatory mandates. Geography can have an effect. Bundled service options are more likely to be taken up in the lead markets of the USA and UK, perhaps cancelling out their transaction-orientated cultures, but more relationship-orientated cultures not in USA and UK could now start to grow faster into bundling.  Additionally bundling is favoured by organizations requiring a higher level of innovation from a provider. Here, bundling is the quid pro quo to the provider for its innovation investment and its provision of more integrated services.  There is also sector influence. For example telecoms, manufacturing and utilities sectors take the lead on bundling.

 

Provider and Outsourcing Market Characteristics. Initial choices and incumbent providers shape future bundling – incumbency and capability to do other services lead to client propensity to give them bundled services. This goes beyond the relationship effect mentioned above. Part of this incumbent advantage relates to demonstrable additional capabilities. Indeed provider capabilities are a bigger influence than mere incumbency. The few providers that can service large scope, bundled deals will be prioritized, but there is a caveat - a limited number of provider options may also inhibit bundled service decisions. Where a provider offering is of interdependent services then a ‘lock-in’ effect can occur, where the client is more likely to buy the combined service, already integrated, as bundled services. Finally, external media attention given to bundled services can create a bandwagon effect, increasing a firms’ propensity to look for bundled services.

 

Cost Effectiveness Characteristics. The area of cost is weighted 20 out of 100. Cost emerged as a constant key concern in our research. Two types of costs emerge, namely management and integrated services efficiencies. From a client’s perspective, we suspect the transaction cost savings from bundled service purchase are large but hidden. They include typically:

• Risk reduction
• Less governance
• Simpler contracting (cheaper legal costs)
• Ability to move to standardized practices.
• Synergies across services and processes
• Less management time getting to contract
• Lower relationship management costs

 

It is possible that the transaction cost savings between a single and multiple provider route may be substantial enough to offset where a single provider might offer a less attractive deal on production costs. Most large providers are now busy reducing their internal transaction costs (the costs of doing business with themselves), and their production costs through focusing on standardizing as a shared service across all processes, the customer contact part of a process they run for a client, and likewise for its administrative back-end, e.g., reporting.   This leaves the middle sections of a process which tend to be more domain-specific, e.g., procurement or sub-components, HR (recruitment, training remuneration) and here the idea is to standardize for the client globally on the relevant process and charge the client for idiosyncrasies away from that standardized process.  This then enables the provider to provide a standard contract for all standardized shared services (but not necessarily the domain specific ones). Obviously the reduction in both transaction and production costs is large if this can be achieved across a client’s several IT/BP activities. The size of this gain as passed on to the client will be one attractive aspect of bundled service purchase.

 

Action Point: Making the Optimal Decision                          

 

How can the Decision Matrix be used? Step 1 is to identify the unit of analysis in a group of services that an organization is wishing to outsource. For example, this could be HR payroll, related IT applications, and HR training and development. Should these be bundled and outsourced to one provider, or left unbundled and outsourced to several providers? Step 2 is to arrive at a weight for and score each factor (within the ranges provided), to make a single score out of 100. A score between 66 and 100 means that the organization is past the tipping point for bundling, and should certainly make a bundled decision for the services under consideration. A score between 0 and 33 is past the tipping point for unbundling and means that an unbundled decision is the right one. Scores between 34 and 65 need much further analysis. A score between 34 and  50 suggests unbundling is the right way to go but, you need to  assess which factors need to be leveraged to make this a good decision, and perform a risk assessment of  the consequences of leveraging these factors. Alternatively, a score between 51 and 65 suggests bundling is a better decision but only after further assessment, leveraging salient factors, and ensuring that the risk profile of the consequent decision is sensible. 

 

Decision-making on bundling is an unglamorous but perennial, major challenge in sourcing strategy. As ever in strategy, it is important first to understand where you are. The 20-factor model offers a precision in answering this question previously not available.  Our research also enabled us to provide a reliable set of weightings to these factors which help decision-makers to discover the sort of decisions they need to lean towards, whether these be for the whole organizations, a business unit, a set of IT processes and activities or a mix of business/IT processes or functions. The potential for more effective decisions using the 20-factor matrix and the related decision-making tool is immense. A client can provide much more structure; gain more information and a much surer grasp on direction when using the tool. A provider can, either separately, or with a potential client, sit down and work through a pre-qualifying process using the tool. This might persuade the provider not to make large financial outlays on attempting to win bids that will either fail, or could succeed but might turn into very hard work indeed. Alternatively, working through the tool with a potential client, the two may discover the shape of a more suitable level of bundling for both to contract for, again saving effort, and also improving the likelihood of a successful outsourcing experience.

 

Leslie Willcocks is Professor of Management and Director of the Outsourcing Unit at the London School of Economics and Political Science. Two forthcoming publications are Advanced Outsourcing: From ITO to BPO and Cloud Services, and The Emerging IT Outsourcing Landscape, both published by Palgrave Macmillan.  See www.outsourcingunit.org. Contact: l.p.willcocks@lse.ac.uk