Is Selective Sourcing Truly More Satisfying?

By Doran Boroski

and Steve Powers

Although the outsourcing market continues to grow at a significant pace, many client organizations are becoming increasingly disillusioned with the concept of “mega deals.” Indeed, many large-scale, single-vendor arrangements have been characterized by excessive fees, unrealized cost savings, ill-defined contractual terms, ineffective service levels, and vendor inflexibility in response to changing business requirements.

In response to these problems, the “selective sourcing” model has emerged as a viable and attractive alternative to the single-vendor approach. Essentially, a selective sourcing approach involves choosing a stable of “best of breed” vendors to administer various business services or business functions, leading to either a total or limited point solution.

The perceived success of the selective sourcing approach in defining meaningful service levels, achieving cost targets, and enabling effective governance has gained it increasing favor in the executive suite as the preferred approach to sourcing. However, while selective sourcing may indeed address some longstanding outsourcing challenges, it also presents some new management issues. Moreover, many of the benefits of selective sourcing can at times be equally well realized by applying leading management practices to a single-vendor model.

Selective Success Factors

Evidence suggests that selective sourcing is more effective than ‘total outsourcing,’ in terms of critical success factors such as achieving targeted cost savings, maintaining or improving service levels, and renewal of contracts.

A 1998 study of 61 sourcing decisions directed by Leslie Willcocks, an academic outsourcing expert at the Warwick Business School in the United Kingdom, found that 85 percent of selective outsourcing decisions met customers’ expected cost savings, whereas only 29 percent of total outsourcing decisions met expected cost savings.

Willcocks and other cite a number of factors that contribute to the success of selective sourcing. These include the ability to choose vendors with specific areas of specialization to match requirements. Selective sourcing is also seen to facilitate a competitive environment, and to enable greater flexibility to adapt to change.

The major drawback of selective sourcing, according to Willcocks, is “the transaction costs associated with multiple evaluations, multiple contract negotiations, and multiple suppliers to manage and coordinate.”

Cause or Effect?

This qualification raises some important questions: Is selective sourcing inherently more likely to achieve cost savings? Or are selective sourcing agreements more likely to be characterized by the factors critical to the success of any sourcing arrangement – namely, careful preparation and planning, specific definitions of goals and responsibilities, and establishment of an effective governance framework?

Another consideration is the possibility that selective sourcing agreements are perceived to be more successful. Specifically, because a selective contract is smaller and narrower in scope, and applies to discrete functions or processes, clients may feel they have more control over the relationship, and that the vendor is more responsive to client input. By contrast, large, single-source relationships can be perceived as being more amorphous and vague; as such, “results” can be harder to define and specify.

Finally, if individual selective sourcing relationships are indeed more successful in addressing specifically defined objectives, what about the bigger picture? Can a large organization safely assume that its myriad selective sourcing agreements are effectively aligned and addressing enterprise-wide objectives? Is it possible that selective sourcing leads to duplicated efforts, or that problems go unresolved because they don’t clearly fall within the scope of responsibility of any individual vendor?

Selective vs. Sole: Benefits and Drawbacks

A better understanding of the true drivers of outsourcing success is of more than academic interest. A business that concludes that selective sourcing is by definition better than sole sourcing could face some unpleasant surprises. Through working with clients who have – under different circumstances – chosen either sole sourcing or selective sourcing, Compass has identified various situations where a sole vendor sourcing approach can be a more effective alternative than selective sourcing. These situations include:

• Speed to implement is critical. Here, the challenge of scoping, negotiating, and implementing a host of selective sourcing agreements in aggregate can be more daunting and time-consuming than focusing on one agreement with one supplier to provide a wide range of services.
• The potential multi-vendor arrangement is too complex. In some cases, the size of the deal, interdependencies with other processes, or strategic importance of the functions being considered for sourcing make a selective approach problematic. In other words, the benefits of selective sourcing – tighter oversight and the ability to manage closely – are offset by the higher level of client management effort needed to monitor complex supplier-to-supplier interactions and service level frameworks.
• A high degree of trust exists between the buyer and service provider in the form of preexisting relationships, either institutional or personal. One of the key benefits of a selective sourcing approach is that the discrete nature of the relationship’s scope allows the client to more closely manage the vendor. However, if the vendor is trusted to manage operations effectively, or if the client’s corporate culture favors a collaborative, partnership approach, this benefit becomes superfluous.

Sourcing Success Factors

From Compass’ perspective, neither a sole sourcing nor a selective approach sourcing is by definition more likely to be effective. Much depends on the client’s business requirements and the type of relationship being sought. In addition, Compass has identified a number of fundamental factors which are key to the success of any outsourcing relationship, and which apply equally well to either sole source or selective sourcing arrangements. These include:

• Pre-contract research in selecting the sourcing opportunities/strategies to be pursued
• Clear understanding of the true value proposition of the deal
• An effective service management team (on both sides of the fence)
• Clearly defined relationships and descriptions of roles and responsibilities among and between the parties involved
• Customer retention of ultimate service delivery ownership
• An environment where the client and vendor teams consider themselves to be one support entity with no political boundaries

Doran Boroski is an executive consultant based in Compass’ Oak Brook, Ill., offices; Steve Powers is a Compass senior consultant based in New York City.