Global IT Multivendor Sourcing Strategy:
What Service Can and Cannot Learn From Manufacturing
ABSTRACT
Reliance on multiple vendors is an emerging trend in today’s global information technology (IT) services
outsourcing arena. This approach to sourcing is an intricate part of “multisourcing”, according to which
firms optimize their use of one or multiple internal and external service providers to achieve business
goals. Due to the nascent nature of the phenomenon, the information systems (IS) literature provides only
limited understanding of the trade-offs involved in the multivendor strategy. A similar concept, however,
has been extensively examined in operations management (OM), especially in the context of
manufacturing, where there is an opposite trend of reducing the number of suppliers. In this study, we
integrate related work in IS and OM to investigate how to successfully use multivendor sourcing in IT
services. Specifically, we first conceptualize a firm’s multivendor supply base along the dimensions of
breadth and depth, and synthesize the impact of these two dimensions on outsourcing outcome; second,
based on this theoretical framework, we identify and analyze four configurations of IT multivendor supply
base; finally, we use case studies of two global financial services firms to illustrate how these
configurations were implemented and evolved over time.
Keywords: Multivendor Sourcing, Outsourcing Strategy, Supply Base, Services Supply Chain,
Multisourcing
1
INTRODUCTION
“Multisourcing” is emerging as an important strategy in today’s global information technology (IT)
services outsourcing arena. Multisourcing is generally understood as the combination of IT and business
services from a select set of internal and external service providers to achieve optimal outcome (e.g.,
Cohen & Young, 2006; Thibodeau; Ribeiro & Stedman, 2006). A critical part of this strategy is the idea
that firms can gain strategic benefits from combining services of multiple vendors.1
1
The term “multisourcing” is often mixed up with multivendor sourcing; however, when Gartner’s consultants
Cohen and Young introduced the term multisourcing, it was meant to include both single and multivendor use. The
authors of the term subsequently proposed to use the term “multivendor strategy” to refer specifically to that aspect
of multisourcing (Young & Cohen, 2007).
1
The rise of multivendor strategies is driven by firms’ increasing needs to achieve cost efficiency,
flexibility, and quality in a rapidly-changing global supply market (Huber, 2008; Levina & Su, 2008), and
is precipitated by the expiration and renegotiation of many firms’ old outsourcing contracts (Thibodeau et
al., 2006). On one hand, the use of multiple vendors may bring some firms a competitive advantage
(FinancialWire, 2008); on the other, it may challenge many firms’ existing managerial capabilities and
operational models (Cohen & Young, 2006; Anonymous, 2007).
While it is often the case that large firms end up with multiple vendors due to historic reasons,
such as merges and acquisitions and decentralized decision making about vendor selection, it is only
recently that IT services managers started thinking of multiple vendor selection as a strategic move. As a
result, the existing information systems (IS) literature offers only a limited understanding of this
phenomenon. The operations management (OM) literature, on the other hand, has extensively examined a
similar concept, “supply base management”, especially in the context of manufacturing. Interestingly, in
manufacturing, there is an opposite trend of consolidating supply bases (e.g., Ogden, 2006). It is generally
believed that reducing the number of suppliers and building deep supplier relationships are among the key
best practices that differentiate the market-leading Japanese automakers Toyota and Honda from their less
successful American counterparts Ford, GM and Chrysler (McMillan, 1990; Liker & Choi, 2004).
In this study, we integrate related work in IS and OM to build a theoretical model of the tradeoffs
involved in the use of multiple vendors for IT services. Specifically, we first characterize a firm’s
multivendor supply base along two dimensions, breadth and depth, and theorize about the impact of these
two dimensions on outsourcing outcome such as cost, flexibility, quality, and risk; second, we build on
this theoretical framework and develop a conceptual map of four configurations of multivendor supply
base; finally, we use case studies of two global financial services firms to illustrate how these
configurations were implemented and had evolved in real business settings.
The rest of the paper is organized as follows. In Section 2, we review the concepts of multivendor
strategies in both IS and OM literatures, as well as the work on outsourcing outcome. In Section 3, we
develop a theoretical framework regarding the impact of multivendor strategies on outsourcing outcome.
In Section 4, we identify four configurations of multivendor supply base. In Section 5, we elaborate on
the case studies of the two global financial services’ outsourcing practices and decision rationales. In
Section 6, we conclude and discuss future research directions.
2
RELATED LITERATURE
In this section, we review the concepts related to using multiple vendors in IT services and manufacturing,
and identify different aspects of outsourcing outcome.
2
2.1
Multivendor Sourcing
One of the first detailed descriptions of the use of multivendor sourcing strategies in IS literature is the
work of Currie, Lacity, and Willcocks, who have referred to multiple supplier sourcing as a specific
sourcing arrangement where there is one outsourcing contract but multiple suppliers of services (Currie &
Willcocks, 1998a, 1998b; Lacity & Willcocks, 1998) . They have argued that such strategy is best utilized
when there is a high scale of IT work to be outsourced and when the firm wants to reduce the risks
associated with supplier dependence (Currie & Willcocks, 1998b). However, these authors acknowledge
the managerial overhead created by such multivendor relationships as the key limitation. This major
limitation seems to be diminishing in recent years as firms recognize the need for investing in internal
sourcing competence, that is, creating organizational structures and tools to enable effective vendor
management and sourcing strategy execution. The idea that firms have to build sourcing capabilities that
then can later be used to manage multiple vendors was made popular, in particular, by a recent
practitioner book written by Gartner’s consultants Cohen and Young (2006). The book advocates the use
of multiple vendors for some types of services as part of the development of outsourcing strategy that
they termed “multisourcing”, that is, “the disciplined provisioning and blending of business and IT
services from the optimal set of internal and external providers” (p. 1). The actual deal announcements in
the offshore global sourcing space seem to corroborate the trend (Anonymous, 2008). The value of
multisourcing in offshoring arena has been recently explored by Levina and Su (2008), who have argued
that multivendor deals and frequent updating of vendor strategies are particularly beneficial to the focal
firm when offshore vendor markets change rapidly.
In the OM literature, the concept of “multiple sourcing” or “multivendor sourcing” refers to a
business model where a firm utilizes multiple suppliers as opposed to a sole supplier for a particular
component (e.g., McMillan 1990, p. 46; Agrawal, Smith & Tsay, 2002). Multivendor sourcing is in
contrast with single sourcing, where the sourcing client develops tightly-integrated relationship with a
single supplier for a particular component (Deming 1986). “Parallel sourcing” — a practice often found
among leading Japanese carmakers — refers to using multiple suppliers with comparable capabilities who
are simultaneously sole-source suppliers for similar components (e.g., McMillan 1990; Richardson, 1993).
Unfortunately, the manufacturing literature adds somewhat to the confusion among terms as parallel
sourcing is a type of multivendor strategy with a particular duration and nature of supplier relationships.
On the firm level, a manufacturing firm may end up with thousands of suppliers (e.g. Ogden, 2006).
These suppliers form a complex, interconnected “supply network” (Choi, Dooley & Rungtusanatham
2001). Within this network, the sourcing client is termed “focal firm”, while the set of suppliers that are
actively managed by the client firm through contracts and purchases is termed “supply base” (Choi &
Krause 2006).
3
2.2
Outsourcing Outcome
From the IS literature we identify four key measurements of the benefit of outsourcing: cost reduction,
flexibility increase, access to skills and expertise, and service improvement (e.g., Teng, Cheon & Grover,
1995; Carmel & Agarwal, 2001; Dibbern, Goles, Hirschheim & Jaiatilaka, 2004). Among them the latter
three, that is, flexibility, resource, and service quality, are termed “noncontractible” (Bakos &
Brynjolfsson, 1993). The literature also identifies two forms of risks: structural risk and operational risk
(Aron & Singh, 2005). These value propositions and risk factors are consistent with those in
manufacturing supply base management (e.g., Choi & Krause, 2006). In the following, we review each of
these benefits and risks in both IT services and manufacturing.
2.2.1
Cost
The most important driver of outsourcing for many organizations is cost reduction. A firm’s total cost in
sourcing is the sum of production cost and transactions cost (Clemons, Reddi & Row, 1993). Production
cost in the context of outsourcing mainly refers to price for acquiring needed services, which includes
vendors’ actual production cost and vendors’ profit. On occasion, these costs also involve client’s own
production costs that may be associated with outsourcing, e.g., rework costs described by Dibbern,
Winkler, and Heinzl (2008). Transaction costs is a term that has been used to broadly describe all sorts of
costs associated with transacting with an external service provider, including costs incurred in searching,
creating, negotiating, monitoring and enforcing contracts as well as the costs for coordinating activities
with and among suppliers (Ang & Straub, 1998). It should be noted that in the existing literature, there are
mixed views on which of these costs belong to the label of transaction costs: for example, some consider
coordination cost as part of transaction cost (e.g., Clemons, Reddi & Row, 1993), but Williamson’s (1985)
original definition treats coordination and transaction costs separately. To avoid confusion surrounding
the term “transaction cost”, here we view the total cost of outsourcing as consisting of three types of costs:
contracting cost, production cost, and coordination cost. Risk can be seen as another form of cost, but in
this paper we will treat it separately.
2.2.2
Noncontractible
While costs still tend to be the major driver of outsourcing decisions (OutsourcingInsitute Survey), other
major benefits of outsourcing include flexibility, access to suppliers’ valuable resources, and service
quality (e.g., Dibber et al., 2004) These outcomes are termed “noncontractibles” by Bakos and
Brynjolfsson (1993) because they involve suppliers’ investments that are more difficult or even
impossible to specify contractually.
4
2.2.2.1 Flexibility
Flexibility in IT outsourcing manifests itself in a firm’s ability to successfully evolve its IT systems as
markets, technologies, and supplier capabilities change (Lacity et al., 1995). It can be conceptualized
along four dimensions: robustness, modifiability, new capability, and ease of exit (Tan & Sia, 2006). In
supply chain management, flexibility is also reflected in a firm’s ability to respond to time-sensitive
requests in a timely fashion (Choi & Krause, 2006). A firm’s flexibility in sourcing is part of the firm’s
general “operating flexibility”, which refers to the firm’s ability to arbitrage in the real and financial
markets by shifting production factors and resources among different units of the firm (Allen & Pantzalis,
1996).
2.2.2.2 Access to Supplier’s Valuable Resources
Access to suppliers’ valuable resources is widely acknowledged to be a key strategic benefit of
outsourcing (e.g., McFarlan & Nolan, 1995; Dibbern et al., 2004). The scope of valuable resources is very
broad and may encompass professional talent of suppliers’ employees as well as organizational-level
technical, business, and industry expertise brought by the suppliers. In particular, acquiring advanced
technological skills has been reported as one of the top reason for information systems outsourcing
(Saunders, Gebelt & Hu, 1997). In some cases suppliers’ deep business and technical know-how can also
help client firms strategically transform their operations and organizations (e.g., Liker, 2004) or generate
innovation for the client firms (e.g., Quinn, 1999; Li, Liu, Li & Wu, 2008).
2.2.2.3 Service Quality
In IT outsourcing, suppliers’ service quality is an important factor for outsourcing success (Grover, Cheon
& Teng 1996; Lee & Kim, 1999). Broadly speaking, service quality refers to the difference between the
service customer’s expectations and perceptions (Parasuraman, Zeithaml & Berry, 1988). Service quality
can be conceptualized along five dimensions: reliability, responsiveness, assurance, tangibles and
empathy (ibid). Specifically, reliability refers to dependable and accurate delivery of promised service;
responsiveness refers to the willingness to help customers and provide prompt service; assurance refers to
the knowledge and courtesy of supplier employees and their ability to build trust and confidence; empathy
refers to caring, individualized attention provided to the customer; and tangibles refer to related physical
facilities and equipment and the appearance of service personnel (ibid).
2.2.3
Risk
Sourcing-related risk generally refers to the potential occurrence of an incident where suppliers do not
meet customer demand (Zsidisin, 2001; Choi & Krause, 2006). Risk in sourcing can be very broadly
5
categorized into two types: structural risk and operational risk (Aron & Singh, 2005). Structural risk is
caused by vendors’ deliberate, opportunistic profit-seeking behavior which reduces clients’ financial
benefits; operational risk is caused by unintentional breakdown in executing tasks (Aron & Singh, 2005).
It is worth noting that risk can also be seen as a type of cost. In particular, structural, or strategic risk is
very close to the definition of “opportunism cost” (Aron et al., 2005; Clemons et al., 1993). However, in
this paper we have only included actual costs incurred by the client in the contracting process in the
definition of costs and we view the costs associated with vendors’ opportunistic behavior as a risk as they
may or may not take place.
2.2.3.1 Structural Risk
According to the definition of Aron and Singh (2005), structural risk refers to the risk caused by the
misalignment between incentives of the clients and vendors. In IT outsourcing, structural risk may take
several forms. The first form arises when vendors under-invest in the relationship with the client by
reducing employee training, management attention, etc. The second form of structural risk is vendors’
potential dramatic escalation in pricing during contract renewal; this is often due to vendors’ rising
negotiation power as a result of clients’ transferring of process and knowledge to the vendors. Other
forms of structural risk include vendors’ acquisition of clients’ proprietary processes and technologies and
eventually becoming a competitor. (e.g., Aron & Singh, 2005; Choi & Krause, 2006)
2.2.3.2 Operational Risk
Operational risk is associated with the unplanned and unanticipated occurrence of events that negatively
affect the flow of goods or services in a supply chain (e.g., Stauffer, 2003; Chopra & Sodhi, 2004).
Operational risk generally encompasses, among others, disruption and delay of delivery, information
system breakdown, inaccurate forecast, expensive and inflexible supply capacity, low service quality and
high error rates (Chopra & Sodhi, 2004; Aron & Singh, 2005). In IT outsourcing, the limited codifiability
of outsourced work and therefore the requirements for tacit knowledge, and the lack of metrics to measure
service quality are two important causes of operational risk (Aron & Singh, 2005)
3
THEORETICAL FRAMEWORK
In this section, we review the concepts related to multivendor sourcing strategy in both IT services and
manufacturing, and identify the impact of two characteristics of multivendor supply base on different
aspects of outsourcing outcome.
3.1
Characterizing Multivendor Supply Base
6
We adopt the term “supply base” from the OM literature and apply it to IT and business services to refer
to the set of contractual supplier relationships that are directly managed by the sourcing firm at a given
time. This definition is somewhat similar to the term “outsourcing portfolio” introduced by Cullen,
Seddon & Willcocks (2005) in the IS literature, which describes the set of outsourcing contracts in force
at a given time of a firm.
3.1.1
Supply Base Breadth
According to the OM literature, two key characteristics of a firm’s supply base are considered most
critical to the competitiveness of the firm. The first and most straightforward characteristic is the number
of suppliers the focal firm uses for a given product or service (e.g., Trent & Monczka, 1999). Drawing on
the OM literature, we define the breadth of a firm’s multivendor supply base as the number of suppliers
the focal firm uses for a given business function. Note, that we do not consider in this definition the cases
when different suppliers are used for different functions as such suppliers may or may not pose
competition to each other.
3.1.2
Supply Base Depth
The second characteristic of a supply base is the level of partnership between the client and the suppliers
(e.g., Liker & Choi, 2004). A close buyer-supplier relationship is often seen as key to sourcing success in
manufacturing (e.g., McMillan, 1990; Watts & Hahn, 1993; Liker & Choi, 2004). This is a separate
dimension as often focal firms manage to build quite significant commitments with their suppliers
without agreeing to single-source relationships. In fact, McMillan (1990) points out that Japanese
manufactures often develop long-term supplier relationships with multiple similar suppliers. Sometimes,
one can obtain significant commitment from suppliers even in extreme multivendor scenarios where
many suppliers are willing to invest in the relationship for the sake of learning valuable skills or
knowledge from the client in a competitive situation (Nordberg, Campbell & Verbeke, 1996; Celly,
Spekman & Kamauff, 1999; Levina & Su, 2008). In this paper, we define the depth of a firm’s
multivendor supply base as the average expected commitment in the focal firm’s relationships with its
suppliers within a given function. The level of commitment can be reflected in the longevity of a clientsupplier relationship, as well as the client and the supplier’s investments that are specific to this
relationship.
3.2
Supply Base Characteristics’ Impact on Outsourcing Outcome
In the following we review and analyze the impact of the breadth and depth of multivendor supply base
on focal firms’ outsourcing outcome.
7
3.2.1
Impact of Supply Base Breadth
3.2.1.1 Cost
A major argument for the focal firm to increase the number of IT service vendors in its supply base for a
given function is the potential to select and utilize vendors with best-of-breed capabilities (e.g., Currie &
Willcocks, 1998; Levina & Su, 2008). Such capabilities are “generic” in the sense that they are
accumulated across the vendor’s past projects with multiple clients, rather than specific to a particular
client. Vendors’ generic service capability consists of a set of complementary capabilities, including,
among others, technical competency, managerial skills and client facing ability that they have often built
over time through their exposure to a variety and multitude of clients (e.g., Levina & Ross, 2003; Ethiraj,
Kale, Krishnan & Singh, 2005). Strong vendor capabilities can result in vendors’ cost advantage that may
eventually translate into the client’s cost savings through proper contracting (Levina & Ross, 2003).
Additionally, a vendor’s strong client-facing capability, such as methodologies for knowledge transfer,
experience with client-vendor relationship governance and contracting and interpersonal skills of
vendors’ managers, can directly lower client’s coordination cost. (e.g., Su, 2008).
Proposition 1.1a. The breadth of the focal firm’s supply base is positively related to its ability to
access suppliers’ generic capability.
Proposition 1.1b. Suppliers’ generic capability is negatively related to production and
coordination costs.
Increasing the breadth of the supply base, on the other hand, has its downside from a cost
perspective. First, as the supply base broadens, the average amount of tasks sourced to each vendor is
reduced. The consequence of the reduced size of each client-vendor relationship is limited economies of
scale within the relationship (e.g., Cousins, 1999). Specifically, the vendor’s upfront investment in the
client, especially in training of human resource and acquisition of client-specific knowledge, is now
spread across a smaller scale of ongoing work. Therefore, for a given unit of service delivered by the
vendor, the average production cost is increased. Second, increasing the number of vendors raises
administrative cost such as invoicing, order generation, etc. (Cousins, 1999). The cost of coordinating
activities of multiple vendors is also increased (Handfield & Nichols, 1999). Third, having a broad supply
base involves a higher total cost of searching for, negotiating and contracting with the suppliers.
Proposition 1.1c. The breadth of the focal firm’s supply base is negatively related to each
supplier’s economies of scale within the outsourced function for a given focal firm (henceforth, within the
engagement)
Proposition 1.1d. Each supplier’s economies of scale within the engagement is negatively related
to production cost and coordination cost.
8
Proposition 1.1e. The breadth of the focal firm’s supply base is positively related to contracting
cost.
3.2.1.2 Noncontractible
Increasing the breadth of multisourcing supply base may also bring non-contractible benefits to the client
in the form of flexibility, innovation, and service quality. From a flexibility point of view, on one hand, a
broad supply base gives the focal firm access to vendors with best of breed capabilities that potentially
enable the vendors to better accommodate clients’ requirement changes or bring new competency; on the
other hand, however, the misalignment of interest of different vendors and the increased coordination cost
potentially harm flexibility. A recent empirical study suggests that increasing the number of suppliers
alone can increase firms’ outsourcing flexibility, but not significantly (Sia, Koh & Tan, 2008).
From the perspective of resources, increasing the number of suppliers provides the focal firm
with a broad set of “probes” (Brown & Eisenhardt, 1997, p. 1) into potential pools of best of breed skills
and talent. Such broadened access to high-quality resources can improve firms’ innovation performance
(e.g., Ahuja, 2000). Empirical studies of multivendor sourcing practices suggest that increasing the
number of vendors can indeed give firms the opportunity to tap into emerging supply markets, access
highly skilled work force and gain first-mover advantage over competitors (Nordberg et al, 1996; Levina
& Su, 2008).
Proposition 1.2a. The breadth of the focal firm’s supply base is positively related to the ability to
produce innovation within supplier relationships.
Access to best of breed vendors as a result of increasing the breadth of supply base also improves
the quality of service received by the clients. For example, vendors with strong competency in managing
cultural differences with the client can lead to a higher quality of service (Winkler et. al., 2008).
Proposition 1.2b. The breadth of the focal firm’s supply base is positively related to service
quality.
3.2.1.3 Risk
Increasing the breadth of multivendor supply base can potentially reduce the client’s dependency on each
individual vendor and therefore lowers the possibility of being taken “economic hostage” (Williamson,
1983) by the vendor. For example, in case a vendor under-invests in the relationship or opportunistically
increases price, the client has the option to transfer the service to other vendors in the supply base. In
other words, a broad supply base lowers structural risk. This benefit, however, is premised on the
assumption that the client can switch from one vendor to another (Aron et al., 2005; Aron & Singh 2005).
Low switching cost includes two aspects. First, contractually, the client has the flexibility to terminate a
9
relationship. Second, operationally, the client is able to transfer outsourced service from one vendor to
another at a reasonable cost. In fact, if the vendors are quite diverse in their capabilities or the
relationships are structured so as to prevent switching, the breadth of supply base may not lower structural
risk. To summarize, switching cost between vendors mediates the negative relationship between a broad
supply base and structural risk in outsourcing.
Proposition 1.3a. The breadth of the focal firm’s supply base is negatively related to structural
risk.
Proposition 1.3b. The relationship between supply base breadth and structural risk is mediated
by the cost of switching between suppliers.
Similarly, operational risk can be mitigated by the presence of multiple vendors. In the event that
one vendor fails to deliver the outsourced service, the client has the option to transfer the business to other
vendors at a certain switching cost (Aron & Singh, 2005). The lower the switching cost, the less time and
effort it takes to transfer the business and recover the supply disruption. In other words, switching cost
plays a mediating role in the relationship between supply base breadth and operational risk.
Proposition 1.3c. The breadth of the focal firm’s supply base is negatively related to operational
risk.
Proposition 1.3d. The relationship between supply base breadth and operational risk is mediated
by the cost of switching between suppliers.
Additionally, the access to best-of-breed vendors, as a result of using a broad supply base, may
also reduce operational risk, due to individual suppliers’ superior service delivery capabilities. In fact,
superior supplier capabilities, e.g., large vendor’s ability to switch locations and engage other backup
systems, may be a stronger way of reducing operational risk than switching between vendors (e.g.,
Whitten & Leidner, 2006).
Proposition 1.3e. Suppliers’ generic capability is negatively related to operational risk.
3.2.2
Impact of Supply Base Depth
3.2.2.1 Cost
Increasing the depth of the supply base means that suppliers and the client have long term outlook on their
relationships and are less interested in getting short-term gains at the expense of the other party.
McMillan (1990) discusses this as a way of avoiding typical incentive misalignment associated with
prisoner’s dilemma. Thus, both parties may be willing to make long-term investments in the relationships.
Such investments may enable the suppliers to develop capabilities that are specific to the client, i.e.,
“client-specific capability” (Ethiraj et al., 2005). Such capabilities may be tangible in their nature, e.g., a
10
dedicated high-speed communication line, or intangible, such as knowledge of the client’s technological
systems. Client-specific capability often results from suppliers’ deep understanding of the client’s
business processes, organizational practices, routines and culture. The suppliers’ client-specific expertise
and continuous learning enable themselves to improve production efficiency and ultimately help clients to
reduce production cost (e.g., Liker & Choi 2004). Also, a deep understanding of the client facilitates
smooth communication and collaboration with the clients and lowers the coordination cost between the
client and the suppliers (e.g., Liker & Choi, 2004; Ethiraj et al., 2005).
Proposition 2.1a. The depth of the focal firm’s supply base is positively related to suppliers’
client-specific capability.
Proposition 2.1b. Suppliers’ client-specific capability is negatively related to production cost
and coordination cost.
3.2.2.2 Noncontractible
Increasing the depth of the supply base improves suppliers’ learning of the client’s business requirements,
communication style and culture, which potentially contributes to suppliers’ timely response to changes
in client needs. For example, McFarlan and Nolan (1995) suggest that having a deep, alliance-like
relationship is beneficial for flexibility in IT outsourcing. Sia et al.’s (2008) empirical study confirms the
positive impact of strong client-supplier partnership on outsourcing flexibility. In manufacturing,
suppliers’ investment in both human and physical assets specific to the client firm is critical to the
responsiveness of the supply chain (Handfield & Bechtel, 2002). Therefore, a collaborative long-term
supplier relationship is deemed critical in manufacturing supply base management (Liker & Choi, 2004).
Proposition 2.2a. The depth of the focal firm’s supply base is positively related to outsourcing
flexibility.
Increasing the depth of the supply base helps establish a close partnership between the client and
the suppliers. In IT outsourcing, such a close relationship can enable a firm to acquire resources that
complement its own weakness (McFarlan & Nolan, 1995). In manufacturing, deep supplier relationship
has become a competitive advantage for leading firms such as Toyota and Honda (Liker & Choi, 2006)
enabling these firms to innovate across organizational boundaries (McMillan, 1990). In such deep
relationships, on one hand, client firms help suppliers develop technical and managerial expertise; on the
other hand, the client firm benefits from innovation brought about by its suppliers (Harley & Choi, 1996;
Liker & Choi, 2004).
Proposition 2.2b. The depth of the focal firm’s supply base is positively related to the innovation
produced in collaboration with suppliers.
11
Increasing the depth of the supply base also helps create a trusting, committed, and mutually
understanding partnership between a firm and its suppliers. In IT outsourcing, such a high-quality
partnership contributes to the success of outsourcing from a service user’s perspective (Lee & Kim, 1999).
In manufacturing, building deep supplier relationships is also considered beneficial for the improvement
of supplier service quality (Galt & Dale, 1991; Trent & Monczka, 1999).
Proposition 2.2c. The depth of the focal firm’s supply base is positively related to service quality.
3.2.2.3 Risk
Increasing the depth of multivendor supply base implies that the vendors accumulate client-specific
capabilities or assets that cannot be easily replicated by other vendors. Such client-specific capabilities or
assets may include deep knowledge about the client, customized solutions (e.g., Sia et al., 2008), etc. In
the event that the client switches to a different vendor, such capabilities are lost and the replication of
these capabilities takes significant time and effort; additionally, the incumbent vendor is often reluctant to
share and transfer such capabilities. Therefore, the switching cost is increased due to high client-specific
capabilities. The high switching cost creates a dependent relationship that gives the suppliers the
opportunity to lock the client in. Therefore, structural risk increases. This is consistent with the empirical
results that high level of customization lowers client’s ability to switch vendors or take their operations
back inhouse (Whitten & Leidner, 2005; Sia et al., 2008).
Proposition 2.3a. The depth of the focal firm’s supply base is negatively related to structural risk.
Proposition 2.3b. The relationship between supply base depth and structural risk is mediated by
the cost of switching between suppliers.
Client-specific capability, as a result of increased depth of multivendor supply base, on the other
hand, reduces operational risk of outsourcing. This is mainly due to the vendors’ increased client-specific
capability, which improves the client’s ability to respond client’s changing business needs (e.g., Liker &
Choi, 2004; Ethiraj et al., 2005). Also, vendors’ commitment tends to lead to a reciprocal, strong
relationship between the client and the vendor. Such a high-quality relationship increases the robustness,
modifiability, and the ability to bring new capabilities to clients (Poppo & Zenger, 2002; Sia et al., 2008),
and therefore reduces operational risk.
Proposition 2.3c. The depth of the focal firm’s supply base is positively related to switching cost
between suppliers.
Proposition 2.3d. Switching cost between suppliers is positively related to operational risk.
Proposition 2.3e. Suppliers’ client-specific capability is negatively related to operational risk.
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Figure 1 summarizes the theoretical propositions we developed regarding the impact of the
breadth and depth of multivendor supply base on outsourcing outcome. In particular, the oval-shaped
components represent the mechanisms by which such impact takes place.
Costs
+
Contracting cost
–
Access to suppliers’
generic capability
+
–
–
+
Multivendor Supply Base
–
Economies of scale
within engagement
Breadth
–
–
–
Production cost
Coordination cost
Number of suppliers
–
Risks
Depth
Supplier commitment
+
Switching cost
+
+
+
Structural risk
–
–
Operational risk
Suppliers’ clientspecific capability
Noncontractibles
+
Flexibility
+
Innovation
+
Service quality
+
+
Figure 1. Theoretical framework
4
CONFIGURING MULTIVENDOR SUPPLY BASE
According to their breadth and depth, we can broadly classify multivendor supply bases into four
“configurations”: high breadth, high depth; high breadth, low depth; low breadth, high depth; low breadth,
low depth. We respectively term these four types diversified partnerships, diversified transactions,
concentrated partnerships and concentrated transactions. Using the above theoretical framework, we
discuss each type’s strength and weaknesses and the type of outsourced work that is suitable for each
configuration.
4.1
Diversified Partnerships
“Diversified partnerships” involves using a significant number of suppliers that make significant clientspecific investment to form a portfolio of partner-like relationships. The main strength of this
13
configuration is the acquisition of a broad set of generic and client-specific capabilities. The weakness is
limited economies of scale within the outsourced task and therefore potential lack of cost advantage. Risk
can be mitigated if switching cost is properly managed. Given its unique characteristics, this configuration
is especially suitable for outsourcing functions for which economies of scale within the outsourced work
is not critical, but access to both best-of-breed and client-specific capabilities is key. One example of such
task is customized, knowledge-intensive service such as specialized software research and development
(e.g., Levina & Su, 2008). In this task, both suppliers’ inherent expertise and deep knowledge of the
client’s specific business are important, while economies of scale is limited due to the idiosyncratic nature
of each project.
4.2
Diversified Transactions
“Diversified transactions” involves using a significant number of suppliers that do not make significant
client-specific investment to form a portfolio of market-transaction-like relationships. The main strength
of this configuration is low structural and operational risks, as well as acquisition of best-of-breed generic
capabilities. The weakness is also limited economies of scale within the outsourced task and the potential
lack of cost advantage. Given its unique characteristics, this configuration is especially suitable for
outsourcing functions for which economies of scale within the outsourced work is not critical, but access
to best-of-breed generic capabilities is key. One example of such task is generic, knowledge-intensive
service such as “Software-as-a-Service” model of package software outsourcing (e.g., Xin & Levina,
2008). In this task, the suppliers’ service capability is important, but no client-specific investment is
needed on the supplier side due to the generic, self-customized nature of the service.
4.3
Concentrated Partnerships
“Concentrated partnerships” involves using a small number of suppliers that make significant clientspecific investment to form a few partner-like relationships. The main strength of this configuration is
economies of scale within the outsourced task and therefore potential cost advantage as well as
noncontractibles associated with suppliers’ building of client-specific capabilities. The weakness is high
structural risk. Given its unique characteristics, this configuration is especially suitable for outsourcing
functions for which both economies of scale and suppliers’ client-specific capability are critical, while
structural risk can be properly managed. One example of such task is complex, large-scale IT work that
requires significant customized innovation from suppliers, often executed through strategic alliances as in
Campbell Soup’s strategic partnership with IBM (Ross & Beath, 2006). In this task, suppliers not only
need to achieve economies of scale to reduce cost, but also need to collaborate closely with the client to
continuously improve its production.
14
4.4
Concentrated Transactions
“Concentrated transactions” involves using a small number of suppliers that do not make significant
client-specific investment to form a few market-transaction-like relationships. The main strength of this
configuration is its low contracting and coordination costs and fairly small structural risks due to lack of
specific investment on either side of the relationship. Given its unique characteristics, this configuration is
especially suitable for outsourcing functions with low operational risk (non-critical) and for which the
vendor market is abundant with a large number of vendors with similar capabilities that match the focal
firm’s needs very well. One example of such task is manufacturing of commodity products (e.g.,
Kaufman, Wood & Theyel, 2000), or buying of standardized hardware such as PCs. In such low-end, low
value-adding tasks, reduced administrative burden and access to competitive market prices are key
success factors.
These four “configurations” of multivendor supply base may be most appropriate for different
types of outsourced task, depending on the nature of the task. For a given business function, the focal firm
may choose and change the configuration over time to achieve the optimal business outcome, as
illustrated by the following case studies.
5
CASE STUDIES
We use two cases to illustrate how companies strategically configure their supply bases over time the
rationale behind their decisions. The cases are based on our interviews with senior and middle level
managers at two leading global financial services companies between year 2005 and 2008. We refrain
from disclosing the names of the two firms and their specific financial numbers because of confidential
agreements. Specifically, in this paper we describe and analyze their outsourcing strategies for the
software application development and management function.
5.1
Background
We first briefly overview the business backgrounds of these two companies and summarize their
outsourcing histories.
5.1.1
Global Bank A
Global Bank A is a leader of the financial services industry and a Fortune 100 company, with 2008
revenue of above 50 billion USD and thousands of employees across the globe. Global Bank A has a long
history of IT service outsourcing and offshoring, which can be generalized into four phases. Phase I
15
started in the 1980s, when the bank already established outsourcing relationship with several onshore
vendors. Then in 1989, the bank contracted with a few Indian vendors to provide technical support to the
bank’s operations in Asian countries such as India and Singapore. Global Bank A’s outsourcing entered
Phase II in 2001, when the CEO mandated aggressive cost-cutting in the face of the slowdown of the
financial services industry after the dotcom crash. In response, the bank adopted an aggressive
outsourcing and offshoring strategy that led to the creation of a large supply base across the globe. Some
deep supplier relationships were formed in this stage. For some divisions of the firm, there were over 50
vendors on their preferred vendor list. In 2003 Global Bank A entered Phase III, when it decided to
consolidate its IT service supply base. As a result, the bank successfully reduced its preferred vendor base
and formed deep relationship with about a dozen vendors.
5.1.2
Global Bank B
Global Bank B is also a leader of the financial services industry and a Fortune 100 company, with 2008
revenue of over 50 billion USD and thousands of employees across the globe. Global Bank B’s approach
towards IT services is very different from Global Bank A. Global Bank B has been very cautious about
transferring IT services to external organizations. We also conceptualize its outsourcing journey as having
three phases. After some small-scale, ad-hoc outsourcing activities with some vendors, the bank officially
started the Phase I of its outsourcing around 2003, as the bank began to work with two major Indian IT
service vendors and another smaller Indian vendor in a so-called “co-management model”. The smaller
vendor was later replaced by a global vendor. Since 2007, Global Bank B entered Phase II, in which the
bank deepened its relationship with the three strategic vendors and gave more core processes to them. In
2007, the bank outsourced a major IT function to a leading Western European vendor. There was a high
level of mutual commitment between the bank and its vendors. Since 2008, Global Bank B decided to
broaden its supply base and implement multisourcing by increasing its preferred vendor base from 3 or 4
to about 25. This firm is now undergoing this supply base expansion, and is expecting to enter Phase III,
i.e., the multisourcing phase, in 2009.
5.2
Theoretical Analysis
We use the two dimensions, breadth and depth, to demonstrate and analyze the evolution of the two
banks’ supply bases over time (Figure 2). Interestingly, these two firms have recently been changing their
supply bases in opposite directions.
16
Breadth
Diversified
Transactions
Diversified
Partnerships
Partnering
High
Bank A
Bank A
Expanding
Consolidating
Bank A
Bank B
Bank B
Bank A
Co-managing
Low
Diversifying
Bank B
Bank B
Full
outsourcing
Concentrated
Transactions
Low
Concentrated
Partnerships
High
Depth
Figure 2. Evolution of Global Bank A and Global Bank B’s Supply Bases
5.2.1
Global Bank A
For Global Bank A, Phase I was characterized by creation of relationships with a number of vendors. At
the time, the trend of outsourcing in the financial services industry was just emerging, and many offshore
vendors were still in their infancy. Therefore, many of these relationships were experimental in nature and
the commitment between the bank and the suppliers was weak. The type of outsourced task at the moment
was project-based low-end IT services. The diversified transactions configuration was adopted by the
bank.
What pushed Global Bank A into Phase II, aggressive outsourcing, was the need to take
advantage of the growing capabilities of offshore suppliers and reduce costs. In this phase, the breadth of
its supply base kept expanding as the bank sought to tap into new best-of-breed capabilities in offshore
locations. Also, its relationship with many key vendors became strengthened. The depth of the supply
base kept increasing as some strategic vendors became even more committed to the bank and some
vendors undertook highly customized projects. In this phase the outsourced task shifted towards more
high-end software development. In accordance with the goal of outsourcing and the type of outsourced
task, the diversified partnerships configuration was adopted.
As the supply base kept expanding, the bank felt the elevated management overhead, lack of
coordination across projects, as well as vendor’s inability to tap into economies of scale existing within
17
the bank. Therefore, the bank entered Phase III and started to consolidate its supply base. As a result, the
relationships with a select set of vendors were furthered deepened, whereas many other relationships were
terminated. In 2008, the number of vendors on the preferred vendor list was about a dozen. In this phase,
the bank was moving toward a balance between economies of scale across projects and having a diverse
set of suppliers to mitigate risk and access capabilities. Therefore, a configuration between diversified
partnerships and consolidated partnerships was adopted.
5.2.2
Global Bank B
Before it started systematically outsourcing software development and management, Global Bank B
outsourced small-scale, ad-hoc, low-end tasks to several vendors. As the bank felt the increasing need to
take advantage of the already mature capability of offshore vendors to reduce cost, it entered Phase I and
created a relatively low-breadth supply base. Three vendors were picked to work with the bank in the
form of “co-management” model, on a set of non-core, more generic tasks. Cost reduction by using
readily available market capabilities offered by similar vendors was the primary goal of this phase.
Accordingly, the concentrated transactions configuration was adopted.
In Phase II, the bank deepened the relationship with the three key vendors and started moving
towards a “full outsourcing” model. In this phase as the goal of outsourcing shifted towards further
leveraging the capabilities of vendors, rather than only taking cost arbitrage, the bank started giving the
vendors more core processes and more customized tasks requiring the vendors to make client-specific
investments. The concentrated partnerships configuration was adopted.
In the meantime, the bank also started planning Phase III. In this phase, on one hand, the bank
will further deepen its relationship with vendors; on the other, it will broaden the supply base by
diversifying it to about 25 vendors. The objective of this phase is to capitalize on a growing global talent
pool and mitigate risk, while maintaining cost advantage. Eventually, a configuration between diversified
partnerships and consolidated partnerships will be adopted.
6
CONCLUSIONS AND DISCUSSION
In this study, we synthesized the research on IT outsourcing and manufacturing supply chain management
in both IS and OM literatures, and developed a theoretical framework to conceptualize multivendor
sourcing in IT service delivery and its impact on outsourcing outcomes. Based on this framework, we
identified four configurations of IT multivendor supply base and analyzed the pros and cons, as well as
examples of suitable outsourced tasks, for each configuration. Case studies of the outsourcing practices of
two global financial services companies were presented to illustrate these configurations.
18
This work potentially leads to several future research directions. First, the theoretical propositions
developed in the paper need to be empirically tested. Second, in this paper we focus on exploring
multivendor sourcing at the business function level; further theory building is needed to examine the
implications of multivendor sourcing at business unit level and firm level. Third, the propositions in this
paper are very general; the actual optimal breadth and depth of a supply base may depend on many other
idiosyncratic characteristics of the outsourced task; more factors need be considered in future studies to
further refine the theory of multivendor sourcing strategy.
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