Traversing through the many benefits that both single integrators and best-in-class providers offer, hard lines as to which methodology a company should choose to use are difficult to find and may be nonexistent. The bouquet of benefits and disadvantages of the two tactics weigh pretty evenly when placed upon the outsourcing scale.
Generally speaking, Attorney Richard Raysman of Brown Raysman Millstein Felder and Steiner, LLP in New York City, says choosing between the two approaches depends on the sophistication of the company that is planning to outsource. Less sophisticated customers may want to go with the single integrator because they are usually easier to manage. The more sophisticated customers, that feel they can manage multiple vendors, may go with the best-in-class approach. But that is where any discernable line ends. So how does a company decide? The presiding factors revolve around management and money.
Time Well Spent
If a company’s hope is to integrate the best-in-class providers into a smooth running operation where the vendors work hand in hand, it may run into problems. It isn’t in the nature of vendors to work closely with other providers that may be their competitors, Raysman says. Best-in-class providers may not want to share information with each other. For example, a company may be using one vendor strictly for its infrastructure services and another for application services. The infrastructure provider may also have expertise in applications though, and provides this service to other clients.
“The two vendors may be competing head to head for accounts with other customers,” he says. “The vendors are going to be very hesitant about providing confidential information to each other.”
In the information technology (IT) arena, another problem is identifying which of the best-in-class vendors is responsible if the system goes down, he says. The vendors and their client have to work together to figure out whether it was a hardware problem, communications problem, software problem, operations problem, etc. Then a company has to figure out what is going to happen when it is determined who caused the problem. The best-in-class provider(s) that didn’t cause the problem may want to charge additional amounts for the time it took to determine what the problem was.
From the vendor’s point of view, situations like this could lead to “scope creep”, Raysman continues. For example, if the vendor has to cooperate every time there is a problem, and it is usually a third party problem, the vendor could be devoting substantial resources to try and remedy situations. This can add to the scope of what is written in the contract and another level of expense to the vendor.
“There has to be fairly detailed negotiations as to how cooperative the vendor has to be before the provider can start charging time and materials over and above the normal monthly outsourcing fees,” Raysman says. This leads to the another factor in deciding between single integrators and best-in-class providers – money.
The Cost of Using Both
Single integrators provide the administration of the services provided, but a company that uses best-in-class providers has to use it own administration, he says. These costs come into play in the situations described above. First, time and resources have to be expended on integrating the vendors and getting them to cooperate. Second, when there is a diagnostic problem and the client has to figure out where the problem came from, it can become costly. But even with these administrative costs it is usually less expensive to hire best-in-class providers over a single integrator.
If a company goes with best-in-class providers, across the board it is likely a vendor’s bids will be more competitive, he says. So it is possible to get more service at a reduced cost. The reason is because a company that chooses to use a single integrator pays for the convenience of not having to deal with the administrative end of the arrangement, Raysman says. Customers that use a single integrator often end up paying for administrative costs over and above normal expenses.
So Which is Better?
Overall, from a customer’s point of view, Raysman believes that the single integrator approach is more advantageous. And of course people would differ on that, he adds. “The single integrator has a single point of contact if there is a problem. And the problem is remedied by the integrator as opposed to the client in a best-in-class arrangement,” he says. “Also, if the customer takes a strong negotiating position with the single integrator, the customer may be able to keep the overall administrative costs to a minimum.”
But there is a way to have both methodologies at a company’s disposal at the same time, he says. On occasion customers engaged in very large transactions have used the single integrator approach and compelled the vendor to subcontract to best-in-class vendors. That way, a company uses a single integrator to perform the administrative tasks and gets a best-in-class result.
Usually the vendors will not agree to this unless it is a rather significant outsourcing arrangement because it adds another level of administration to the prime’s workload, he says. And the subcontracted vendors must work out a lot of things in the contract including limitation of liability, indemnification, warranties and payments. For all the vendors involved, the prime and the subcontractors, the situation adds a dual administrative and negotiating obligation because not only are they contracting with the customer, but also among themselves. And again, it forces vendors that might be competing with each other into a joint venture.
Lessons From The Outsourcing Primer:
- It is difficult to integrate best-in-class providers because they are reluctant to share confidential information with each other.
- When there is a problem with the system, the client usually has to find out what type of problem it is and which vendor is to blame in a best-in-class situation.
- A company will usually get more competitive bids when using best-in-class providers.
- It is usually more costly to use a single integrator because the client pays administration costs.
- If the deal is big enough a company can use a single integrator and have them subcontract to best-in-class providers.