The outsourcing marketplace has matured rapidly over the past few years as most Global 2000 companies have outsourced or have considered outsourcing some aspect of their businesses.

It’s fair to say that most companies have realised a measure of direct cost-savings from outsourcing. But companies should take this a step further and demand a measurable increase in business performance. One way of doing this would be to start by assessing their Application Development and Maintenance (or ADM) spending in a disciplined way.

During the downturn, in particular, ADM outsourcing has surged in popularity as companies have sought to rein in their costs. However, in their attempts to leverage the benefits of ADM outsourcing, companies have amassed a complex network of multiple suppliers to meet their needs. All too often, managing this type of network can create an enduring nightmare; and it can impact business performance.

High costs of accumulating suppliers

The simple reality is that many outsourcers of ADM tend to accumulate whole families of suppliers, either by design, or, more often, by default. And as time progresses, there’s a cost to it. A cost is borne for setting up each relationship, as well as managing it, resulting in missed opportunities for economies of scale.

There are also operational hiccups caused by inter-linkages in project management and testing across many moving pieces in multiple areas (such as performance monitoring and reporting) that can result in costly project overruns and significant operational downtime.

According to a recent study by the Everest Research Institute commissioned by Accenture, Total Cost of Ownership (TCO) savings of 22 to 28 percent can be achieved by working with fewer suppliers. This includes both one-time and recurring cost reductions. For example, one-time costs can be reduced 35 to 40 percent by working with existing suppliers instead of new suppliers, through savings in specifying, tendering, evaluating, selecting, negotiating, contracting, transitioning, managing and governing the additional work. These are largely hidden costs, since buyers often aren’t aware of them or don’t quantify them.

Recurring costs can be reduced 20 to 25 percent as fewer contracts, fewer invoices, and fewer compliance relations are managed, but mostly from economies of scale that enable fewer providers to offshore more senior operational roles into their global delivery networks.

Managing complexity from multiple suppliers

The initial approach involves the buyer adopting a “no regrets” approach for building its supplier portfolio:

  • Limit the number of suppliers;
  • Segment suppliers into strategic or specialists; and
  • Ensure appropriate scale to build mutually beneficial relationships with suppliers

Three necessary steps

To appropriately manage complexity and cost in organisation-specific situations, buyers should consider:

  1. Which organisational entity will be included (e.g. enterprise level versus specific business units, geographies);
  2. Determine the engagement model; and
  3. Manage and optimise day-to-day operations by carefully managing three key areas: division of work, scope and scale, and governance model

Organising and operating the portfolio

First, focus on the organisational entities that will form the critical foundation to shape future decisions. Will they select a truly enterprise-driven approach towards optimisation versus starting off in a few major groups and then expanding scope? These choices are closely linked to the buyer’s organisational structure, decision-making processes and culture.

Second, companies should evaluate and choose between two broad engagement models:

  • Harmonised: acquire talent at the best price and the buyer defines the primary tools and processes for service delivery.
  • Orchestrated: attain results from suppliers through defined objectives while requiring the supplier to determine how to attain results.

Third, with the proper engagement model, buyers must manage and optimise day-to-day operations:

  • Division of work: highly interdependent delivery increases the requirement of coordination, thereby impacting productivity.
  • Scope and scale: the scope of work outsourced has implications on the complexity associated with managing the work. Also, the extent to which the buyer provides the supplier scale benefits determines the potential cost savings.
  • Governance model: creates a more predictive environment through re-use of IP/frameworks. This lowers both one-time costs and recurring costs associated with managing performance of multiple suppliers.

Whatever reasons there may have been for using multiple ADM suppliers in the beginning, the more successful companies are now consolidating their vendor base.

When a company succeeds at reducing or limiting the number of suppliers in its ADM portfolio, it can achieve significant benefits such as greater business impact, improved quality and productivity, and cost savings.

Jeremy Oates is Managing Director of Accenture UK/I Technology