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Optimizing Multi-domain Sourcing

Consider all that a service provider can bring to the table in ensuring you meet all of your compliance mandates.

by William B. Bierce

In multi-domain outsourcing, the enterprise customer relies on a single master service provider to deliver several business processes. In HRO, the same service provider might offer two or more services ranging from recruitment processing and expatriate transition advisory services to processing services and related accounts payable transactions and tax filings.

The key drivers for multi-domain include integration, pricing, efficiency, transparency, accountability, continuity, and consistency. Key risks include failure to jointly reach these goals and the resulting consequences.

MULTI-DOMAIN PROBLEMS
The most frequent problems in multi-domain sourcing arise from the governance structure. Issues range from:

• Integration of the Process Warehouse. Lack of process integration or “disintegration” occurs when process flows are not under the same control or where compliance with two different technologies is necessary. In single-provider multi-sourcing, the provider offers a warehouse of business processes. As the CIO knows, a warehouse full of different processes is useless without binding rules for interactivity, transparency, and common terms.

A service provider with its own technology and delivery platform for all service silos faces the classic problems of integration. Effective integration requires a common database for the flow of relevant basic data (such as employee records) across different processes (recruitment, onboarding, payroll, benefits, 401(k), employee training, recognition, and testing). In turn, these processes need to be integrated into the enterprise customer’s financial and accounting systems.

The customer should be concerned about the provider’s integration management. Changes in one outsourced process will affect others. For effective continuity, accountability, process management, compliance, and audit, the customer should understand and delineate the interdependencies of internal operations with those of the provider.

• Flexibility in Scope and Term. Multi-domain outsourcing presents the same risk profile as typical “monolithic” IT outsourcing in the 1990s. These deals typically resulted in the customer’s dependence on one service provider, a long commitment, a painful transition, significant termination costs, a relatively inflexible statement of work, and no competition for projects within scope.

Today, modern outsourcing contracts allow customers to structure and re-structure scope, duration, and termination.

• Service Level Management. For multiple service domains, service level management can become exponentially more complex. The enterprise customer can use the master services agreement to ensure an effective balancing of service levels. For the provider, multiple minor defaults across different service silos create the risk of a cross default.

MULTI-TIER PROBLEMS
Multi-sourcing involves special problems. The customer has no direct contractual relationship with the subcontractors, so it depends on the general contractor to provide supervision, integration, business continuity, and financial responsibility. Consequently, the risks are mitigated in a myriad of small provisions.

These include:
• Phased Rollout. In this approach, the customer selects the provider on the basis of a narrow scope of service and tests the waters. This approach extends the evaluation period of the provider’s operations.

• The “House of Cards” Clause. Under classic “cross-default” principles, a vendor’s control over a given domain could be at risk if it fails to meet metrics in other domains.

• The “Portability” Clause. The vendor’s service delivery platform must be homogeneous and easily replaced. Individual domains are separately transitioned in sequence or in tandem. Effective portability requires more complex exit planning, including special attention to proprietary intellectual property, people, process, and training.

• The “Compound Fracture” Clause. The liability of a vendor in one domain may be defined either by an aggregate of all payments under that domain or by all payments under the entire contract. A customer needs to have direct links—or the right to establish them—to the subcontractors. For the provider, such a right could have a counterproductive impact if the customer uses it to eliminate the general contractor.

•The Divorce Clause. The multi-domain sourcing agreement defines a complex matrix of operations and management teams that must successfully integrate across customer, general contractor, and subcontractor.

Multi-sourcing—with or without subcontracting—involves some special opportunities for integration. Corresponding risk mitigation strategies should be adopted.

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