TMI163 Weatherstone 13/3/08 12:43 Page 18
The Growing Trend
towards Multi-Sourcing
by Hilary Weatherstone, Director of Technology in Lloyds TSB Coporate Markets’
Corporate Asset Finance division
F
uelled by two key developments in the past decade, the
outsourcing industry has passed the point of critical mass.
Firstly, customers have become increasingly educated
about the best way to go about outsourcing their non-core
The trend
functions. And secondly, this has given them the ability to choose
more
the most appropriate outsourcing partner with much more
recently has
success, as publicly available and anecdotal experience on out-
been for
sourcing becomes more accessible.
corporates to Indeed, the market has witnessed successes in outsourcing and
move learnt from the disappointments of others. And as this market has
toward matured, companies have increasingly moved to a model using
multiple multiple outsourcing partners who provide specialist services,
specialist rather than larger corporates who act as prime contractors. This
service shift has brought advantages and challenges - one of which is to
providers. ensure that the future investment necessary to fund the on-
going technology requirements will be available and appropri-
ately structured from both the outsourcer and its customer’s per-
spective.
Fragmentation and differentiation
Look at any recent predictions in relation to technology out-
sourcing, and you will see a healthy continued projected growth
rate, with Gartner recently forecasting 2008 growth rates to be
8% or higher in the global market. However, looking across the
industry, in addition to declining margins and continued pressure
to lower the overall costs of any technology outsource, the
market seems to have agreed that the age of the mega-deal has
stalled, and may be in decline. The main reasons cited for the
growth of multi-sourcing are positive, highlighting specialist
expertise for certain services in areas such as the outsource of
your desktop, BPO of certain defined functions, or transforma-
tional outsourcing.
The table in Figure 1 summarises some of the operating models
which have historically been used.
Although mega deals still exist (recently announced examples
include; Computer Science Corporation’s $540mn deal with
NASA, EDS Corporation’s $715mn contract with Bristol Myers
Squibb, and Fujitsu Services’ global infrastructure contract with
Reuters), the trend more recently has been for corporates to
move toward multiple specialist service providers (including those
providers involved in mega deals), where the deal sizes awarded
18
may be less than $100mn, but with multiple smaller contracts
across the enterprise.
So why are corporates looking at doing this? Some of the
perceived benefits for corporates are summarised below:
● The reduction of risk across the portfolio of services (through
diversification of supply);
● Innovation through competition;
● Potential lower cost of supply (multiple service providers poten-
tially creates price reductions);
● Potentially more portable service provision - as individual
services can be transferred to another provider with limited dis-
ruption; and
● Allowing specialist providers to concentrate on their true core
competencies to deliver efficiencies
However, with these benefits come a number of challenges,
including the need for good customer governance regarding the
interplay between individual providers, and the time investment
in managing each relationship.
A less well publicised challenge is the ongoing investment
necessary to ensure that the appropriate level of underlying
investment is guaranteed over the term of the contract, which
could be for up to ten years. In the past many outsource
providers swallowed the cost of this investment, as the margins
earned overall on the contracts gave enough leeway to meet the
carry cost. As margins are squeezed and outsourcing becomes
increasingly commoditised, questions about funding for ongoing
investment in technology have become more common when dis-
cussing the dynamics of the deal.
summary
Outsourcing of non-core functions has become well-estab-
lished in recent years, but partly because mega deals are
becoming less common, the trend is now towards multi-
sourcing, using multiple outsourcing partners who provide
specialised services rather than larger firms acting as prime
contractors. This article discusses the benefits and chal-
lenges of this situation, with particular reference to the
need for ongoing investment over the life of the contract,
where an external financier can often provide solutions such
as structured loans or receivable based products.
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Figure 2 illustrates the revenue and
expense cash flows in relation to this type
of arrangement, highlighting the
challenge in recovering the expenditure
incurred early in the contract term from
the ongoing related service payments.
Traditionally the outsourcer has absorbed
the cost of the investment made.
However, depending on the outsourcer’s
own financial position, his internal cost of
capital can skew the deal economics to
the extent where the decision to
outsource is adversely affected.
One way of managing this situation is
to look to an external financier who can
fund the ongoing expenditure, looking
through to the risks in the underlying
contract, and based on the corporate’s
covenant. This should provide a lower
cost in relation to the ongoing invest-
ment, while guaranteeing that the funds
will be available to pay for the future
Figure 1 - Examples of outsourcing engagement models
Mega Deals
Customer
Outsource
expenditure.
Leading financiers should work closely
with service providers and corporates to
finance the expenditure through a
number of routes such as a structured
loan or receivables based product. Lloyds
TSB look at the underlying payment
streams generated over time (under the
outsourcing contract) and from this
create a pool of cash which can be used
to fund capital expenditure now and in
the future. Assets such as hardware and
software and even delivered services
(such as consultancy) can be purchased
today for use in the outsourcing contract
by raising finance against future
committed payment streams from the
end customer.
These structured financing solutions
are most suitable when the outsourcing
provider and the corporate need
flexibility both in choosing the assets
Prime Contractor
Customer
Primary
Specialist
being used (and replaced) over a period
of years, and in choosing countries
where those assets might be located.
The structured solution is matched to
Talking to ensure that the term, profile and
specialist frequency closely match the benefits
financiers accruing from the underlying outsourc-
ing contract. This allows the business to
allows the
have an efficient tailored solution.
corporate to
This solution has been used in many
focus on the
different scenarios; however its relevance
important
in the new world of multiple outsourcing
decisions. contracts should not be under-estimated.
Talking to specialist financiers allows the
corporate to focus on the important
decisions - such as which outsourcer is
best placed to provide the service and
how will this be managed over the life -
rather than being concerned about where
the cash will come to finance business
critical assets.
In addition the solutions provided can
be structured to ensure that the
following elements are taken into
account:
Multi-Source
● Accounting treatment - the construc-
Customer tion of the finance solution is fine-
tuned to best suit the outsourcing
company and its customer’s business
accounting practices and (with the

Specialist

Specialist
Provider

Provider

Provider

Provider Provider relevant auditor’s approval) potentially

treat the assets as being off-balance
sheet.
Disclosed Multiple Suppliers

Disclosed Multiple Suppliers

Disclosed Multiple Suppliers

Disclosed Multiple Suppliers

Supply Chain

Supply Chain

Supply Chain

Supply Chain

● Asset flexibility - most types of

business assets can be financed, with
the ability to substitute assets over the
life of the agreement.
Outsourcing Models. 2006. Lloyds TSB Corporate Markets

Features Features Features

§ One contract to
customer
§ Single-interface with
customer
§ Ongoing delivery of
service rests with single
source including
ongoing investment in
technology
● Operational benefits and geography -
§ One contract to customer § Multiple contracts with
§ Multiple contracts customer
we have the ability to locate assets
between prime contractor § Multiple interface
and related suppliers § Substantial due-diligence
globally without potential restrictions
§ Still a single interface on each specialist
§ Greater clarity and provider required
on geographical location.
diligence of the suppliers § Ongoing delivery of
to deliver activities service rests with
§ Ongoing delivery of individual provider
service rests with single including ongoing
● Tax neutrality - the parties can
source including ongoing investment in technology
investment in technology
structure the transaction to allow any
potential tax allowances to sit with

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 TMI163 Weatherstone 13/3/08 12:43 Page 21

strate gic
treasury

within the agreement was sufficient to

Figure 2: Outsourcing Contracts - cover the upfront cost of the assets.
how to manage your ongoing investment in technology Once the milestones were reached,
Technology Investment and Lloyds TSB paid the cash across to the
Customer Service Payments service provider for the underlying assets, Outsourcing
and the payment profile was sold to non-core
£ / €/ $

Acquisition Lloyds TSB. functions

or At the end of the financing period, the
replacement allows a

2008. Lloyds TSB Corporate Markets

of Refresh customer and its service provider have
existing or renew business to
systems systems
complete flexibility in the continued use
Ongoing investment focus on
(or disposal) of the underlying assets.
Time delivering its
Conclusion chosen
the party who can take most benefit. service provider who would have an on- Outsourcing non-core functions allows a products and
going managed services contract. business to focus on delivering its chosen services.
● Constraint free at the end of financing The assets were going to be bought products and services. This is now a well
- the corporate or the outsourcing over time as the project reached certain accepted method of trading where the
company remains in control of the milestones, and as each milestone was end-user company can create a strategic
assets throughout the financing reached then these assets would need to advantage over its competition by estab-
period, with no constraints placed at be funded. lishing efficiencies through outsourcing
the end of this period on using the secondary functions. While the model
assets. The solution: continues to be refined through the rise
Lloyds TSB Corporate Markets entered of multi-sourcing and opportunities are
Case Study - Meeting the into a receivables agreement with the materialising through greater efficiencies,
investment challenge service provider where it gave its commit- the challenges of managing a diversified
The business need: ment to fund the project over the roll-out base of suppliers with the corresponding
A well-known media company wanted to period. investment needs of the client in mind
finance new technology infrastructure. The underlying agreement between the requires careful consideration.
The management of these assets was customer and the service provider was Our experience of working with both
going to be undertaken by an outsourced structured so that the payment stream clients and the outsourcing providers has
ensured that the investment needs can be
Lloyds TSB Corporate Markets met so that the client and the outsourcer
can get on with the real reason for the
Lloyds TSB Corporate Markets provides comprehensive expert financial services to
businesses ranging from privately-owned firms to multinational corporations and agreement - seamless customer service
financial institutions. As well as offering the expertise and capabilities our clients delivery. ■
need to compete successfully in the marketplace, we are proud of the relationships
we build with our customers. We work closely with them to understand their
business and offer the best financial solutions to meet their distinctive needs.

The wide range of services and innovative solutions we can deliver includes:
Hilary Weatherstone
Director of Technology,
● dedicated relationship banking; Corporate Asset Finance,
● capital market funding; Lloyds TSB Corporate Markets
● debt and equity finance;
● treasury and risk management services; Hilary Weatherstone is responsible for Lloyds TSB Corporate
● structured finance solutions; Markets' financing activities in the technology and outsourcing
● asset finance; sectors, focusing on providing tax and non-tax based senior
● leasing; debt and residual value investments to clients and suppliers.
● company registration and employee share schemes; She works with colleagues within Lloyds TSB's Corporate Asset
● competitive e-trading facilities. Finance team to provide practical financing solutions within
● import and export trade finance; these sectors, having signed facilities during 2007 for over
● tailored cash management solutions; and $160mn of assets. She joined Lloyds TSB in 2007 having spent
● structured credit investments and securitisation facilities. over 15 years providing asset and structured finance.

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