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Mitigating sourcing risks in the post-Satyam environment

Jenifer Hartnett-Bullen, Michael Latchford, and Edmond Cunningham
PA Consulting Group FSO Knowledge Xchange
20 March 2009

Protect your firm by employing supplier portfolio management with a clear sourcing strategy

After its financial scandal, the future of Satyam, a leading IT supplier, is in question, and its ability to meet its current client commitments is in doubt. Given that Satyam supports a number of significant mission-critical applications and infrastructures for some of the world's leading financial services firms, the news of its imminent collapse sent shockwaves through an already tense industry and left many wondering what they would do. While only one client — State Farm Insurance — has publicly cancelled its contracts with Satyam, the rest of the industry is waiting to see what happens with the company's restructuring before deciding how to act.

At the end of this "wait and see" period, it looks likely that Satyam will be taken over. What are the chances of this scenario playing out with other suppliers? Having invested significant amounts of money and trust with BPO suppliers, how exposed would you be should a similar situation happen to one of your suppliers?

While the obvious reaction to this situation is to look at your supplier contracts and ensure that your organization is protected, that's only part of the equation. A more diligent course of action is to look within your own organization at your supplier management and sourcing strategy. You need to ask yourself:

  • Could your organization react quickly and effectively should your primary supplier fail?
    Do you have the internal capacity — and capability — to handle a transition to another vendor or to in-source those services?
  • Our experience has shown that those organizations that are best positioned to survive the type of challenge that the "Satyam situation" presents are those that have adopted supplier portfolio management as the foundation of their sourcing strategy.

While companies may see this threat as something to be addressed solely through some form of business continuity planning, others may see this as resolvable through a portfolio review of their entire supplier environment. We recommend that the only means of truly mitigating the risk - operational and strategic — would be through a comprehensive continuity assessment and portfolio review.

Supplier portfolio management is the practice of strategically establishing and maintaining a group of suppliers that provide a set of services to your organization. Portfolio management ensures that your organization works with the right number of suppliers for the right services and that the prices you pay for services is optimal. The goal is to have a view across your entire portfolio of suppliers, an understanding of whether each supplier is strategic or tactical, and a view as to what services they are able to provide beyond what they provide currently. To get started with supplier portfolio management, answer the following nine questions:

1. Do you understand the full demand across the organization?
What does the business need? Do you require infrastructure support, IT service desk, application development and training? Assemble an inventory of active projects, anticipated future projects, and the resources required to support them.
2. Have you thoroughly reviewed these demands with the internal IT organization to conduct a gap analysis that will ultimately determine the need for suppliers?
What is the IT organization already doing, and what will they continue to do with existing capability and capacity? Can they handle tactical as well as strategic projects? Is there a known gap in ability to meet demand? What about the services that are being provided outside of IT, such as business functions provided by BPO suppliers?

3. Do you know whom you are working with and what services they provide?
Get an understanding of which suppliers are already engaged, obtain each suppliers' master service agreements and the current contracts or work orders, and review its details it thoroughly. In your analysis and review, ask yourself:

  • What are your termination rights?
  • What are the provisions around intellectual property and service continuity?
  • What are your rights for transitioning from one supplier to the next?
  • What are the provisions requiring the supplier to respond and the costs associated?

4. How critical is the service provided by each supplier?
Is the supplier providing the service to support a primary business offering? Is there a direct revenue impact if that supplier were to somehow fail? What is the business continuity plan in place for the provision of this service?

5. What are the alternatives in the market for each service?
Get pricing benchmarks for each service and determine how competitive your current contract is - open the service to bidding from multiple suppliers to see how you can improve the price you pay for the service and whether you would have the opportunity for cost savings by switching suppliers or by multi-sourcing from two or more suppliers.

6. What are the complications surrounding your ability to transfer the service to an alternative supplier, use dual suppliers and/or bring the service back in-house?
Perhaps there are regulatory requirements for the data supported by this service or specialized knowledge or training that is needed, like spoken language or business process. These would make it difficult to transition work quickly from one supplier to another or for the service to be provided by more than one supplier at once.

7. What is the geographic spread of your outsourced services suppliers and what risks are associated with those regions?
It is imperative that geo-political risks associated with the supplier portfolio are continually reviewed.

8. What process should be followed to minimize risks and maximize opportunities when contracts are up for renewal or a break point is reached?
Keeping close tabs on your suppliers' performance is an integral part of understanding their strengths and weaknesses when it comes time to consider contract renewal — you'll want to continue to reward the good behavior and build some stronger language into the contract to address lower performing areas. Likewise keep tabs on business requirements and the business satisfaction levels, as these are both likely to change over time.

9. What is your organizational model for managing suppliers across the organization, and how well are different business units interfacing during performance reviews and strategic planning?
Having a central Supplier Management Office (SMO) in place makes supplier management and performance assessment an easier task, as the SMO can take the lead in establishing and implementing processes.

The answers to the above questions will formulate the supplier profile, and an aggregate of these profiles will create the supplier management portfolio that your organization should support.

As prominent as disaster recovery and business continuity has become across organizations in response to specific events, the same diligence needs to be applied to the suppliers. Once this portfolio has been defined, then discussions with existing and possible future suppliers can begin. To support the portfolio, best practice states that you must ensure that the right people, processes and tools are in place to effectively manage and mitigate the risk on an ongoing basis.



Jenifer Hartnett-Bullen is principal consultant in PA Consulting Group's IT Consulting practice. She specializes in project and program management; custom software development; systems integration; methodology design and implementation; requirements definition and management; knowledge management; packaged software evaluation and selection.


Michael Latchford is a principal consultant in PA Consulting Group's IT Consulting practice and is a specialist in delivering complex outsourcing solutions, having designed, negotiated and implemented sourcing strategies for onshore, near-shore and offshore agreements.


Edmond Cunningham is a member of PA Consulting Group's management team, in the firm's IT consulting practice. He specializes in project management with particular emphasis in services such as outsourcing, systems integration, transforming IT performance, service management and planning.

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