Risk of losing control over multi-sourcing arrangements related to strength of governance not number of suppliers contracted, says expert

IT law specialist Iain Monaghan of Pinsent Masons, the law firm behind Out-Law.com, said that the quality of governance systems, and not the number of suppliers IT buyers contract with, would determine the extent of the risk businesses have in losing control of IT services when entering into outsourcing arrangements.

Monaghan was commenting after IT service research and analysts Ovum said that it believes there will be an increasing trend towards "bundled sourcing" of IT services by buyers during 2013.

In a new report, seen by Out-Law.com, Ovum said there is "an increasing fear and risk bias in the procurement of IT services" and attributed what it said was an "increased demand for bundled IT services contracts" to factors including the "increasing maturity of the IT service market" and "budget cutbacks" at IT purchasers.

"Some of the key arguments Ovum hears for bundling include the rationalization of suppliers (simplification, rationalization, and consolidation are consistently among the top five strategic requirements among enterprise buyers) and a growing need for control and transparency," Ovum's '2013 Trends to Watch: Bundled Outsourcing' report said. "Buyers also cite a desire for increased accountability (single throat to choke) and simply having a partner in place to respond to market changes quickly and seamlessly."

Ovum's report also pointed to the increasing importance of proper governance over IT service contracts. Monaghan said businesses that do lose control over their outsourcing arrangements can usually attribute the cause to failures in governance.

"We agree with Ovum that the growing maturity of the market has led to more companies realising the importance of doing the groundwork before they outsource," Monaghan said. "As Ovum point out in their report, investment in robust governance procedures and transparent service and pricing structures are essential to a successful bundled outsourcing. We would agree, but we would argue that they are equally essential to multi-sourcing and to the more complex mixture of internal and external sourcing which we increasingly come across."

"In other words, while failure to implement multi-sourcing successfully can lead to ‘loss of control’, our experience is that the risk is independent of the contract structure. Loss of control, in any form of contract, is usually traceable to a failure of governance, and that failure is itself often traceable to a failure to do the necessary groundwork," he said.

"While multi-sourcing usually requires more intensive groundwork than a bundled outsourcing, there is a balance to be reached: as Ovum itself mentions, one of the main reasons for the rise of multi-sourcing was a desire to regain control from suppliers of bundled services. Our experience is that in high value deals clients still favour a degree of multi-sourcing," the expert added.

"In our view, the underlying message to the customer should always be: do the groundwork; be clear as to your ambitions; recognise that while there is a minimum requirement for active governance if the contract is to succeed, the more complex the structure the greater the requirement – multiple suppliers create more interfaces to manage; be realistic as to your in-house skill-set and the resources you're prepared to commit to governance; , , and then choose the sourcing structure which best fits your ambitions, skill-set and resources," Monaghan said.