A Movement to Best-in-Class Providers and the Emergence of Multi-Supplier Integrators
- The primary goals of strategic outsourcing transactions continue to revolve around focusing on core competencies and leveraging cost savings.
- Continuing technological innovation, changes in global labor markets and global security concerns are driving significant trends in the size, frequency and structure of outsourcing transactions.
- This Holland & Knight alert focuses on different models and strategies regarding outsourcing transactions.
While the primary goals of strategic outsourcing transactions continue to revolve around focusing on core competencies and leveraging cost savings, continuing technological innovation, changes in global labor markets and global security concerns are driving significant trends in the size, frequency and structure of outsourcing transactions.
Over the past few years, there have been a number of changes in customer sourcing strategy. Previously, it was common to see large integrated information technology outsourcing (ITO) and business process outsourcing (BPO) engagements that included multiple service towers. Customers favored these large integrated outsourcing solutions because they allowed the customer to manage a single provider, which reduced the overhead of retained governance, provided a single source of accountability for service delivery and afforded the customer with significant leverage over the service provider due to the volume of business performed. These integrated outsourcing transactions with preferred providers have slowly given way to a more segregated sourcing strategy in which customers select best-in-class providers for each service category. This trend toward a decentralized sourcing strategy is due in part to the fact there isn't 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 (SaaS) solutions that have replaced certain traditional outsourced functions.
Because the outsourcing market has shifted from an integrated to segregated model, the number of outsourcing transactions has significantly increased, and the size of the deals has decreased. The reduction in deal size has been driven mainly by breaking apart integrated deals but also from cost reductions from automation, declining hardware prices, migration from multiple data centers to a cloud environment and transformational 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 trying to ensure that disparate outsourced solutions work together effectively for the benefit of the company. Second, the multi-supplier model results in redundant management costs that are embedded in the pricing of each service provider and requires customers to incur retained management costs to oversee the services provided by multiple service providers. Third, the multi-supplier model presents increased data security and compliance concerns for customers due to the increased number of systems, personnel and locations with access to customer data, the increased number of end-points that must be secured against intrusion and the increased complexity of legal compliance with multiple providers and global service delivery locations.
The Multi-Supplier Integrator Model
These challenges have resulted in the emergence of a multi-supplier integrator (MSI) model in which an MSI is engaged 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 feed performance data to the MSI. This platform allows the MSI to effectively manage multiple suppliers on behalf of the customer and ensure consistent and integrated service delivery among providers, which often includes the introduction of operating level agreements between service providers to address dependences and ensure coordinated delivery among service providers.
In essence, the MSI assumes the governance function traditionally retained by the customer and delivers many of management functions that would otherwise be priced into each service provider's solution, which should result in better service delivery and reduced costs for the customer. Even with the cost of engaging an MIS, the cost savings that result from the elimination of duplicate functions among service providers results in a net savings to the customer, with the savings increasing over time as additional process efficiencies and automation further reduce costs.
How We Can Help
If you are managing a complex multi-supplier environment, please contact the authors. Holland & Knight regularly works with MSIs to evaluate multi-supplier environments and establish solutions that provide customers with enhanced control over service providers, improved end-to-end service delivery and reduced costs.
Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.