An Approach for Portfolio Selection in Multi-Vendor IT Outsourcing

Companies increasingly extend their outsourcing strategies from single-sourcing to multisourcing combining best-of-breed vendors. This paper includes an analytical model to evaluate a company’s multisourcing strategy. The model can be applied for decision support to answer the questions, how many and which outsourcing vendors to integrate in the implementation of an IT project. We identify an optimal vendor portfolio considering monetary benefits and risk diversification as well as transaction costs arising from the integration and coordination of outsourcing vendors. Based upon a simulation, we find that it makes good economic sense to include a risk evaluation into the multisourcing decision process even if it is subject to misestimation. Therewith, companies are able to avoid unnecessary high risk and consequently a possible high damage. Furthermore, we find that it is better to be too cautious in risk assessment than to be too negligent.