Frank Scavo has a nice post on the downsides of vendor consolidation in the enterprise software space. His arguments are centered around vendor lock in and he writes:

• "Consolidate to a single vendor for worldwide financials, but standardize operational systems on another vendor's platform. Always leave the option open to replace one with the other.
• Consolidate to a single vendor for centralized CRM and order management, while allowing one or two different vendors to provide operational systems at the plant level, perhaps one for large plants and one for small plants.
• Revive a best of breed approach. Leave HR, asset management, and other non-core systems outside the scope of the primary vendor's implementation.
• Test vendors' touted SOA capabilities to build composite applications. If these capabilities really are what vendors say they are, they ought to allow "seamless integration" with third party applications."

Very true.

What of software services ? Vendor consolidation is low hanging fruit for both vendor and client.
The classic approach is to get a offshoring biggie to come in and clean house. Lock in is not such a big issue. Offshoring and process efficiencies that come with consolidation are big wins. But there are things to watch out for. Here are a few:

    - Keep the larger sourcing picture in mind : There are things that the offshore model is simply not suited for. Niche skill areas, choppy demand that fluctuates very frequently and onshore staff augmentation are a few things that come to mind. It's better to consolidate such requirements and give it to one local vendor - rather than to an offshore player.
    - Understand where your star contractors figure :  Great performance, good cultural fit, strong skill sets, loyal to your organization BUT offshorable. Vendor consolidation might be a good time to really examine the type of work these loyal stars are doing. Do they understand your business? Do they really have strategic value? Have they ended up managing the business relationship? If the answer is yes, consider hiring them rather than firing and replacing with an offshore provider. But think twice if you want these stars to continue to be domestic contractors and expect them to work with new resources from the offshore provider. The inherent conflict of interest could jeopardize your budding offshore relationship.
     - Closely examine productivity claims: It's easy to show improvement when your nose is in the dirt. Consider today's economy. People seem to be thrilled just because we are improving. If you are at an 80 year bottom the only way is up! Productivity norms of the current team of contractors should be base lined and the offshore provider should go up against this baseline. Also consider the fact that offshore work hours are usually longer than those of your local contractors. Apart from improvement, benchmark the norms against best in class.
      -Sign short term contracts with rewards and penalites: Vendors might give you an overall better deal if sign up a long term, 5 year contract at the outset. Guess what? You'll get an even better deal if you sign up for a year and then renew. Throw in six monthly reward and penalties and the deal becomes even sweeter.