Multi-sourcing carries hidden cost risks, warns study

The growing trend for enterprises to distribute outsourcing work to multiple service providers can lead to hidden costs and integration headaches, research by PA Consulting has found.

Almost three-quarters of companies are planning to renegotiate existing outsourcing contracts in a bid to drive down costs, the PA International Outsourcing Survey of 2009 - which polled more than 100 respondents from large scale enterprises across the UK, Europe and the US – revealed. This includes the use of multiple service providers.

But Graham Beck, senior sourcing advisor at PA Consulting warns there are hidden costs risks, as many of businesses lack the in-house resources to manage multiple outsourcing relationships.

"The logic gets unstuck, when you disaggregate into a number of constituent parts, the client needs to integrate them all together," said Beck.

"This creates a minefield of undeclared responsibilities. The outsourcers will say to the client, 'it's your job to integrate'."

The report also found 30% of companies don't know the costs associated with managing multiple suppliers.
"There has been more than 20 years of outsourcing. It should be a mature market," said Beck.

Yet only 16 percent of the respondents said they have a mature governance model for outsourced agreements

Recessionary measures have also negatively impacted innovation.

“Service providers are increasingly pushing innovation as a differentiator in this market, but these organisations are not explicit in how that innovation will translate into the customer’s business situation,” said the PA report.

But it's not just the fault of the supplier, said the report. "Many organisations are very unclear about what is meant by innovation. The innovation demands are left open-ended, leaving the services provider unsure of or unable to respond adequately," it said.

Only 3.6 of respondents stated that the service provider meets the contractual commitments to innovate.

Copyright © 2009 IDG Communications, Inc.

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