IT costs were increasing by 20 per cent a year and user satisfaction was on a downward spiral. After an IT benchmarking exercise, CHH transformed six business groups into 35 separate units and implemented a new charging system to identify the real cost of using IT-related services.
It decided to re-brand the IT department as Oxygen Business Solutions and outsource to itself. Through a supply contract, the spin-off organisation would handle all IT service delivery and be tasked with lowering the cost of managing and maintaining the SAP system and infrastructure, improving user satisfaction and generally delivering better business value to CHH. Oxygen was also to become a profit centre, using its skills to win outsourcing and services business throughout the Asia-Pacific region.
Three years on, those goals have been fully realised. Whilst not disclosing figures, CHH chief of information technology, Pat O’Connell, says Oxygen got past break even in 2003 and has been delivering to the bottom line ever since.
Stripping out the excess
The arms-length effort drove close to 30 per cent out of IT costs including telecommunications. In 2001, the budget was $115 million; by 2003 it had been slashed to $90 million. Savings came from cutting unused licences, returning dormant equipment still on lease and renegotiating contracts with external providers. “We turned off servers and in some case redeployed support personnel, recognised inefficiencies and improved service delivery,” says O’Connell.
Ahead of the spin-off it was clear the highly skilled IT staff weren’t particularly challenged. “An internal IT department in a forestry company is pretty dead end. They were in danger of atrophying without more work so we turned the team to face externally,” he says.
Today, with 350 staff, Oxygen is almost twice the size it was as a shared services organisation inside Carter Holt, with a completely different mindset. “They’re now a professional organisation as opposed to a backwater.”
Although things did get off to a rather shaky start with a ‘scatter gun’ approach around infrastructure work, technical services and other ad hoc projects, O’Connell says the process of outsourcing the IT shop was not easy but “eminently worthwhile”.
“Initially they were not that successful. If Oxygen had kept going in that vein, it would have meandered along doing bits and pieces and struggling for revenue.”
However, when the company saw tier one organisations across Australia and New Zealand shedding SAP, they realised their key differentiator and began picking up SAP expertise and contracts. “They pounced at the appropriate time.”
Leveraging niche SAP skills was definitely the key to success. Oxygen’s skilled people, state-of-the art processes, technology and access to high capacity network infrastructure spanning secure data centres in Melbourne, Sydney and Auckland, make it a worthy IT partner on either side of the Tasman.
Currently, Oxygen has about 240 customer sites across the region, including 180 CHH locations and 60 external sites.
They support more than 6000 NT users and 3000 SAP users with application and process hosting, enterprise management services and full 24-hour help desk and support services. Oxygen has become SAP’s number one partner in New Zealand and the largest specialist SAP outsourcing, hosting and consulting company in the South Pacific region. Locally it is working with a range of organisations including Fonterra, Farmers, Tenon and TVNZ.
It is now ramping up its profile in Australia where CHH has 40 per cent of its staff and assets. Oxygen inherited the core IT function including staff at the Melbourne office, which have doubled to 70 this year. It has just opened offices at the North Ryde technology park in Sydney where employees have grown from two to 15 in the past 12 months.
There are about 400 SAP implementations across Australia and New Zealand – about half outsource some or all of their support. SAP says it is on track to grow its business by 50 to 100 per cent in the next couple of years, giving Oxygen every reason to be confident. Over 50 per cent of Oxygen’s work in Australia is outside CHH and most is SAP and there’s likely to be a push into China where CHH has recently invested.
Pat O’Connell and Oxygen’s chief executive Mike Smith are peers on the CHH team, despite reporting directly to CFO Jonathan Mason. O’Connell has six employees and a communications and IT function responsible for strategy, architecture, standards, security and policy.
Oxygen, ‘the back end part of the IT group’ under Mike Smith, doesn’t own any equipment but is responsible for supply, installation and management of best of breed systems.
Under the ‘arms length’ commercial outsourcing arrangement, there are regular meetings where performance is measured and service level agreements and modifications discussed.
There’s a standing joke that has Oxygen caught in the middle, with both parties insisting its commitment lies elsewhere. “When I visit the CEO, he says you guys are busy chasing new business – we know you don’t love us any more. Then when I go to prospective or existing customers off-site, they say because you’re owned by CHH you’ll pull resources off my project at the snap of a finger,” says Smith.
Living up to SLAs
The fact is, if you negotiate a service level agreement (SLA), Oxygen is committed, says Smith. “If you are clear about what you want in an SLA we have to deliver. That’s the only way we can run it. There have been conflicts when someone with specific skills and experience might not be available but we talk it through and find a resolution. Generally it’s worked pretty well.”
O’Connell says Oxygen knows where its bread is buttered. “We’re responsible for a good proportion of their revenues, at the start of this year we were around 70 per cent.” However, by the end of the year, the mix will be down to about 60 per cent, with a goal of reducing CHH to 50 per cent of Oxygen’s revenues as it continues to grow its external client base.
He’s confident resources will be added, creating a larger talent pool to draw from. “In the end it will contribute to added revenue we’re getting as an organisation.”
Oxygen’s talent will be in demand by CHH as it continues to standardise practices and processes, including upgrading to SAP version 4.7 or 5. Currently the organisation runs on SAP 4.5b installed in 1999.
The options are a straight technical upgrade to reduce the high maintenance costs or leveraging new components including Net Weaver, to remove legacy infrastructure around interfaces.
“There’s a high cost in having customised SAP. It’s another one of those millstones around our neck in terms of support and upgradeability. Having a more vanilla approach will allow us to be more disciplined in our approach.”
O’Connell says CHH wants to rely on SAP and associated components where possible. “We’ve got into bed with SAP so we’re going to pull the covers up.”
For CHH, he says further consolidation will come through better technologies and use of bandwidth. “Cost reduction coming from mobility, so people use their own space including their cars, may enable the company to start divesting itself of buildings.”
Part of enabling that is a five-year contract with Telecom to move up to its next generation network, linking 13 sites in Auckland and others in Tokoroa and the central North Island region at speeds of 10Mbit/sec and greater.
“Currently we have about 500 servers for different applications. This new fibre optic network gives us the ability to provide services from a central or a regional hub to disparate sites. There’s really no reason for technology to exist anywhere other than in the hub,” says O’Connell.
Oxygen’s Mike Smith says the demand-based pricing model has been a major part of keeping costs down at CHH. “It’s quite revolutionary and forces us both to constantly improve. It means CHH is not buying things from us they don’t need. The total spend is in the hands of the business as opposed to pure allocated cost which is the standard approach.”
Under the old model, he says, a whole bank of servers and software would be allocated cost, no questions asked. “By making it demand-based, the company can look at ways of reducing the number of users, taking an entire system out or literally asking for ‘a bit of this and a bit of that’,” says Smith. “The first year was about fixing the basics, getting the costs under control and looking at the pricing model. The last two years have been about growth.”
Oxygen has recently undertaken several major projects within CHH. For example Canopy, which integrates existing geographical information systems (GIS) into SAP, gives management a graphical overview of forest location, history of the land, type of trees and whether they’ve been pruned, access roads and other relevant data. “It’s quite a neat application that probably can be used across other areas including mining,” says Smith.
Oxygen also completed Expedite, a $5 million upgrade to standardise on Windows 2000 and XP. The swap-out meant 1000 applications were rolled out to 5000 desktops and 150 servers across 130 sites over four months. That meant better management of resources, more centralised control and ultimately cost savings.
While some of this was automated, the bulk was hands-on requiring the installation of new PCs and servers. “We’re very good at this. It worked well and we’re looking to do more across the industry,” says Smith.
Oxygen was also involved in splitting off the CHH tissue business after the March sale to Svenska Cellulosa Aktiebolaget (SCA) for $1 billion. This was part of a move by CHH to focus more on its core wood, paper, pulp and packaging businesses. “It was like a Siamese twin operation where we had to make the incision down the middle from their email systems, network and core SAP applications.”
Key projects this financial year include the SAP upgrade, along with a number of projects under the TPI (Total Productivity Initiative) which is largely about optimising the CHH supply chain.
With hindsight, O’Connell says CHH should have pushed harder for more centralised control around IT. “We still have a federated model inside CHH. While I run IT from the centre, there is specific business IT responsibility with a dotted line back to me using Oxygen as a service delivery agent.”
Tension remains between consolidation and autonomy. “We didn’t really migrate to a more tightly controlled model until the past 12 months and will probably never achieve a completely central model because we have such diversity.”
O’Connell views Oxygen as a child of its time and doubts whether the same opportunities exist in the market today for a profitable IT department spin-off. “I would still look at outsourcing but I think the market is too saturated for another Oxygen.”
However he believes other IT departments can learn a lot from the CHH model.
“If I were to move to another organisation I would still look to get better control over costs by apportioning them, making them variable and giving people the tools to turn them on and off.”
Is IT a millstone?
O’Connell says identifying costs, especially in a dispersed or distributed organisation like CHH, is a big job. “Fixed costs such as licensing and infrastructure are not normally more than 50 per cent but people costs such as support are variable according to demand.”
And while IT can be used to strip out costs, he warns there’s a time when you bottom out. “We’re heading in that direction unless we do some major step changes. We have a few ideas but after you’ve pulled all the fat out, you have to look at the IT department and see whether it’s now a millstone around the neck of the organisation.”
O’Connell warns an IT department is there to increase revenues. “If you are not doing that, then you are failing. Your investments in IT should be focused on a positive return whether in a supply chain area or enablement for consolidation.”
He reiterates the importance of ‘value creation’. “As we finish taking costs out, we have to start putting value back to keep the equation on the right side of the ledger.”
There are still two years to go before the contract with Oxygen is up for review and while there are no specific plans, there remains a possibility it could be sold to a third party or floated.
“We would never claim it’s not going to happen. Any commercial deal that makes sense is always on the table as far as we’re concerned,” says O’Connell.