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The Everest Group has prepared a white paper on the appropriate use of sole source outsourcing. This is an excerpt from that white paper. To read the full text, click here.

As companies attempt to streamline the outsourcing process, a range of reasons may make sole sourcing a viable, cost- and time-saving option - if applied wisely.

Sole sourcing is the practice of working with a single service provider to define, negotiate, and purchase services. Traditionally, buyers used sole sourcing to deliver a simplified, faster service acquisition process because it entails fewer of the difficulties of staging and reviewing a multi-service provider process. Today, the use of sole sourcing most often stems from the trust that already exists between a buyer and service provider.

Sole sourcing can deliver significant potential efficiencies over multi-vendor outsourcing efforts in terms of cost for completing the process and time required to make a decision. However, a sole source approach is susceptible to challenges that buyers must address early on to ensure a successful outcome. Doing so increases the chance that the initiative will suit the buyer's and service provider's objectives - today and in the future.

Why Sole Source?

Buyers of outsourcing services may select either a sole source or multi-service provider approach for a wide range of reasons. In many cases, the buyer has a preexisting relationship with the service provider, either through consulting efforts or existing outsourcing relationships. Indeed, it is rare that a buyer elects to pursue a sole source approach without having already entered into some form of dialogue or relationship with a potential service provider.

Buyers select the sole source option when:

• A speedy process is critical
• The reputation of the service provider is critical
• The service provider has unique capabilities; in some cases offering unique business cases (e.g., drive top-line in addition to efficiencies) or helping transform processes in a manner that delivers business value
• The potential arrangement is complex. This is typically driven by the size of the deal, interdependencies with other processes, or strategic importance
• Existing "entangling" alliances (e.g., service provider owns critical software or exclusivity rights)
• High degree of trust between buyer and service provider in the form of preexisting relationships, either institutional or personal; often based upon proven ability of service provider to deliver results
• Corporate culture favors collaborative sole source approach
• Opportunity for a broader buyer-service provider alliance (e.g., cross-selling of products, managing sales channels, or providing access to technology or research capabilities)

On the other hand, buyers select the multi-vendor process when:

• Services in scope are well-defined within the marketplace
• The focus is on achieving the lowest price over broader measures of value
• Multiple solutions based on differing service provider strengths need to be evaluated due to insufficient ability to perform rigorous internal analysis of options
• No dominant preexisting relationship guides the selection
• Corporate guidelines, governmental policies, or culture dictate multi-vendor approach
• Change management and implementation challenges are minor
• The organization is highly skeptical of any sole source approach, thereby slowing up decisions and undermining the credibility of the process.

An Outsourcing Center poll revealed that existing relationships and a desire for a speedy process are the two largest factors influencing a company to consider a sole source approach - together accounting for almost half of the decisions to consider a sole source approach (Exhibit 1).

Interestingly for outsourcing service providers, buyers disclosed that a service provider approaching them with an attractive proposal was the least likely reason to consider a sole source approach. Given the high switching costs of outsourcing arrangements, building upon existing relationships can increase the success of a sole source approach, but that alone does not ensure success.

The Key to Success: Using a Rigorous Approach

The key is for the buyer to take responsibility for making the sole source approach disciplined and rigorous. The necessary components of this include:

• Carefully defining the buyer's objectives and the services required
• Establishing a framework (financial and other factors) that helps both parties know when the proposed solution is acceptable
• Laying the foundation for the two organizations to productively govern the implementation and on-going execution of the solution.

By establishing such a process, the buyer provides a level of tension that drives the process to produce increased performance from both the service provider's and buyer's organizations, while also forging a productive working relationship with the service provider.

Next month we will discuss the history of sole source outsourcing and the lessons learned.

Lessons from the Outsourcing Journal:

• Sole sourcing can provide a viable, timely, and cost-effective way to streamline the service provider selection process, if done carefully.
• The key to success is for buyers to use a rigorous, disciplined approach.
• Buyers typically don't select a sole source service provider simply because of an attractive proposal. Instead, they prefer to deal with a trusted service provider who has delivered proven results.

Publish Date: October 2003

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The Correct Way to Sole Source, Part 2

Copyright © 2003 - Everest Partners, L.P.

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