Before the third floor of the eight-story bell tower we know today as the Leaning Tower of† Pisa was completed, the work had to be suspended. It was obvious to all that disaster loomed, and the immense building (14,500 tons) began to sink. Nevertheless, the investment was so big, and the hopes so strong, that workers resumed work on the project and completed what is now one of the world’s architectural wonders. Still, it continued to sink. It has cost a fortune to maintain it and a greater fortune now to try to straighten it. Although work was undertaken in 1992 to secure the tower’s foundation, as of June 1999, the slant has been straightened by only four-fifths of an inch. It is a tiny alteration in an eventual goal of pushing the tilt back by about 15 inches. The tower remains closed and in danger of collapsing. What endangers the tower is the foundation upon which it is built–marshy, shifting, waterlogged soil.
In outsourcing, the market is clearly changing. There is an emergence and an emerging dominance of specialist suppliers. Buyers now are faced with an important, strategic choice in selecting the “right” vendor. Best in class . . . single integrator . . . which carries the best chance of success? Success is neither magical nor mysterious, says Jim Rohn. Considered by audiences and peers to be America’s foremost business philosopher today, Rohn says that consistently applying the basic fundamentals will have the natural consequence of success.
As you will see in this issue of Outsourcing Journal, there are advantages and disadvantages, as well as tradeoffs, to both types of suppliers. The challenge for buyers in deciding if best-in-class suppliers or a single integrator is best for their companies really is to build an alliance structured on fundamental principles that guarantee success. Once a buyer determines its objectives based on outsourcing’s fundamental principles, the choice between best in class or single integrator will be easier to determine. One will stand out as the best means of helping the buyer meet its objectives.
Tight definitions of scope of service, service levels or metrics, as well as provisions for flexibility, are essential keys to success. More than contractual clauses, these are the primary means of communication between the parties. These are the means by which results (success or failure) are determined.
Defining the scope of service will clearly establish the boundaries of what the buyer is paying for. Metrics allow the buyer to have a level of trust with the supplier’s freedom over the outsourced process. Metrics also give the supplier a way to make sure it is producing the agreed-upon results and a way to make adjustments, if necessary. Flexibility is a necessity in any long-term relationship, as technology, personnel, and business objectives change over time. Flexibility also enables the supplier to add new services to the relationship.
Coming Into Focus
Outsourcing is really starting to penetrate all organizations at a very deep level. More and more organizations have some sort of outsourcing going on.† It has become the norm in business today, and it has given rise to more knowledgeable buyers who demand more from suppliers. As outsourcing becomes entrenched, it still follows the traditional structure–that is, it tends to segment into specialty areas.
This has given rise to companies with relative expertise in particular areas, which drives to the possibility of best in class. Some companies are truly expert in their field. AT&T Solutions dominates networks; Compaq specializes in desktop; Hewitt is best in benefits administration, and Fidelity dominates 401k outsourcing. They are best in class.
Best-in-class suppliers are perceived to be able to give optimal service. Today’s sophisticated buyer companies demand greater flexibility and higher levels of service. We see a great deal of consolidating of supplier companies in order to meet customer demands and be able to compete with the best in class MCI WorldCom, for instance, announced earlier this month that it is consolidating its global operations into a global solutions unit which will compete with AT&T Solutions.
Most organizations today are niche outsourcing. In Human Resources, a company might outsource payroll to ADP and retirement benefits to Fidelity. It makes sense to do that. In the IT arena, a company might outsource desktop and data center but retain applications.
But some companies do total process outsourcing–IT is a good example of such a process. In total process outsourcing, a company must choose between a single integrator† and a plethora of best-in-class suppliers.
Presenting the Upside
The first advantage that a single integrator brings to a buyer is a single point of contact. In the case of IT, a single integrator can make the different pieces work together better for a total better product. In the IT arena, the position of single integrators has been occupied by companies like IBM, CSC and EDS. Their advantage is that they have the opportunity to provide synergy from the component parts. They also have the ability for ease of management. In HR, we see the single integrators emerging. As with PricewaterhouseCoopers, some of the specialty firms are trying to move up into the total integration position.
One of our supplier voice articles this month features Hewitt, which holds the position as best in class and is also a single integrator. As you will see in our legal voice article in this issue, best-in-class suppliers can often save buyer money with their ability to be more competitive through economies of scale. You will also learn more about the advantages of a best-in-class supplier from Argosy Casinos (customer voice article), which outsourcers its accounting function to Arthur Andersen. The advantages of a single integrator supplier are the focus of the supplier voice article from Systems and Computer Technology Corp.
Revealing the Downside
There are those who are of the opinion that using several suppliers who are each best in class for their particular services is not the best approach. Our customer voice article featuring Geon, points out that consolidation is easier to manage.
A disadvantage of the single integrator approach is that they tend to bundle services; and they are not always as proficient in some areas as others. Bundling essentially leads to inflexibility on the supplier’s part and misunderstandings on the buyer’s part. In bundling, the buyer trades off some potential advantages — the advantage of best in class for simplicity of management; or† the advantage of a potentially lower cost structure for a higher cost structure.
Bundling also presents complexities in management. If the supplier bundles services, then it is difficult for the buyer to understand exactly what it is paying for. Clearly, supplier management is a different paradigm when there are multiple suppliers; however, it is unclear that it takes less work. It still takes a lot of work if a buyer is to get value for money with a single integrator. It simply is not a clear-cut choice.
Contending with Combinations
A frequent factor in the debate on which structure to choose is that buyers have found best-in-class suppliers often do not want to work together, fearing loss of trade secrets. Whether the structure is best-in-class or single integrator, the buyer must first have established very clear process definitions at each level, as well as very clear metrics. But a buyer working with a best-in-class supplier must not bring in a supplier that refuses to work with other suppliers.
It must be made clear that part of the suppliers’ compensation (and incentives or penalties) is for cooperation. This can be done through shared metrics and clear process boundaries. Many single integrators subcontract various components anyway. Tight definitions and service levels still are necessary under either vehicle for protection and for a good working relationship. In our experience, suppliers (when approached properly) can work together very well. This is particularly true if incentives are built into the relationship.
Unable to make a clear-cut decision, buyers sometimes consider using a single integrator to manage several best-in-class suppliers for each outsourced function. In our work at the Outsourcing Center, we have yet to find this concept to work effectively. A buyer cannot shirk the responsibility of managing the relationship; by removing it one step, the buyer merely deludes itself into thinking that it has shed that responsibility. There are other problems–additional profit margin where no value is added. This concept could work–in theory–we just haven’t found it working well yet.
Perhaps the best example of this concept of a “marriage” between a number of best-of-breed partners that appears to be working at some level of success is the relationship of † J. P. Morgan & Co. Incorporated and the Pinnacle Alliance. In this alliance, CSC holds the master contract and provides the data center and desktop service; Andersen Consulting provides application support and development services; AT&T Solutions provides the wide area network; and Bell Atlantic provides the local network and wiring. Even so, this paradigm has significant problems; among others, this approach usually removes the sources of competition.
At the Leaning Tower of Pisa, the first attempt to correct the problem was to pump cement into one side of the base. Unfortunately, it merely increased the tilt. Best in class or single integrator . . . either choice may work; either may fail. The alliance must, nevertheless, be built on the successful basic principles of outsourcing, rather than the rhetoric of suppliers. Otherwise, buyers may find themselves pumping cement to store up a relationship, or letting their structure fall.