Fashions in outsourcing, as with hemlines, tend to move in one direction for a period of time—and then start moving the other way. With outsourcing, at least, the shift reflects the fact that buyers are being pulled two ways. Go with one supplier, and you could secure better rates and service on the larger portion of business being offered. Decide instead to spread the work among multiple suppliers, and prices may not be as keen. However, that potential hit to the bottom line is softened by multisourcing's flipside: With more suppliers competing for the business, competition can force prices back down again.
Overlaying the whole calculation is the question of risk. With just one supplier, an awful lot of eggs can be in one basket, while spreading the work decreases the risk.
Yet price and risk aren't the only considerations. No two vendors—or their offerings—are exactly alike. A broad supplier base also offers the prospect of benefiting from a pool of suppliers, with the capabilities of each dovetailing neatly in the organization's requirements.
{ORGANIZATIONS RELYING ON A ONE-SIZE-FITS-ALL APPROACH RUN THE DANGER OF FAILING TO RESPOND TO THE PROS AND CONS OF INDIVIDUAL SOURCING DECISIONS. —Linda Cohen
This is especially true in the project sphere, says Raees Lakhani, London, U.K.-based director of client services at Resources Global Professionals, a project staffing specialist. “If it's intellectual capital you're buying or recruiting, no company has a monopoly on that,” he says. “You've got to look behind the resource provider and at the caliber of the individual people on offer.”
Of course, sourcing decisions are increasingly global in scope—which offers challenges of its own. While companies shouldn't ignore cultural differences when engaging with overseas suppliers, they shouldn't overemphasize them either, Mr. Lakhani says. Drawing from his own experience sourcing from countries and regions as diverse as China, India, North Africa and Thailand, he says generalization is difficult. “There are undoubted cultural differences between the West and the East,” he says. “But the language of business is well enough understood to overcome most cultural difficulties.”
Risky Business
Concerns over intellectual property rights play a major part in global sourcing decisions for Tim Moore, Ph.D., chief executive of SGAI Tech. The company is a joint venture between technology consultants Scientific Generics of Cambridge, U.K., and Chinese electronics manufacturer AML.
Intellectual property rights are the reason that SGAI Tech is located in Hong Kong, and not, say, Shanghai, Dr. Moore says. “In Hong Kong, which only became part of China in 1997, laws regarding intellectual property are well understood,” he says. “Elsewhere in China, that isn't the case.”
As a result, AML's four Chinese plants are used for manufacturing, but the joint venture carries out critical prototyping and development in Hong Kong. On the rare occasion that any development work is done in China, he says, “we'll do it with disparate teams that don't know the others exist. Each team works on only a part of the project.”
Dealing with multiple suppliers, though, increases the administrative burden—sometimes considerably. “Managing and coordinating multiple suppliers of essentially similar goods or services can be a massive task,” says Martyn Hart, chairman of the National Outsourcing Association, London, U.K. The group's membership roster includes U.K.-domiciled global businesses such as Rolls-Royce, HSBC and Cable & Wireless. “In terms of management effort, it can be far more extensive than when using a single supplier or even when undertaking an activity in-house.”
Companies also often underestimate the costs of obtaining and managing that wide base. If nothing else, constantly putting out requests for proposals and invitations to tender is expensive.
“One of the challenges of multisourcing is that it does place a lot of responsibility on the customer organization to have a team in place to manage and get the best out of a group of suppliers,” says Katy Ring, Ph.D., outsourcing practice leader with Ovum, an analyst and consultancy firm in London, U.K. “Many organizations don't fully understand the cost of this—and don't fully understand the dynamics of getting the best out of a group of peers working together on a project.”
The Right Balance
As businesses strive to strike a balance, several options are on offer. Partnering, for example, “can be a very effective tactic,” says Julian Brackley, director, strategic alliances, Europe, Middle East and Africa at CA Inc.'s Clarity unit, London, U.K. However, he adds, “bringing in a cheap off-shore resource to cut costs alone is not the answer. Finding the right partner for the job is critical, as it can make or break the success of a project. Having visibility of the strategic alignment of the project or program to business goals will directly support the decision process on where to source the resource. Finally, to effectively mitigate risk, it's extremely important to have complete visibility of costs before they are committed.”
Another strategy is secondary sourcing, says Tracy Stephens, Houston, Texas, USA-based chief executive of the global supply chain management practice at Resources Global Professionals. The technique essentially calls for keeping a supplier in reserve, just in case of difficulties. “It's natural to want to leverage the organization's spending with a single supplier as much as possible to get the best prices—but not to the extent that the business can't maintain a quality relationship with another supplier as a backup to mitigate risk,” she says.
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Choices, Choices, Choices
Organizations relying on a one-size-fits-all approach run the danger of failing to respond to the pros and cons of individual sourcing decisions, says Linda Cohen, managing vice president and leader of the strategic sourcing practice at Gartner Inc., Stamford, Conn., USA.
The real choice goes beyond one supplier or several suppliers and embraces in-house options and cooperative solutions with other buyers. An in-house capability even might be spun off to bid for business on a competitive basis. It might sound far-fetched, but consider the logic of the appeal: competitive pricing because of marketplace pressures—plus the lower risk of working with a provider that has an intimate knowledge of your business and its requirements. The ability to evaluate these kinds of options, Ms. Cohen says, is “a core competence that businesses must acquire.”
Relying too heavily on any given sourcing model, however attractive it first appears, has its downsides. “You have to consider sourcing in the context of the business as a whole,” says Thie Watse Brouwer, operations director at pharmaceutical distributor OPG, Utrecht, Netherlands. “Not every sourcing model will work in every business.” Just as retailers can't get away with stocking a single brand of peanut butter—no matter how reliable its supplier—sourcing decisions must be evaluated as part of a broader business picture, he says.
Even in sourcing itself, it seems, the old Latin tag caveat emptor—“let the buyer beware”—holds as true as it ever did. PM
Malcolm Wheatley is a U.K.-based freelance writer who writes for CIO, CSO and Manufacturing Business Technology.
