IT outsourcing relationships have certain similarities to human liaisons of the romantic – and physical – kind. There are long-term relationships, which, like marriages, survive but endure many bumps and arguments along the way. There are those who tire of their partners and change them regularly, or those who view it all as just another transaction, and opt for the cheapest price over quality as they search for instant gratification. And like notions of human relationship dynamics, our view of IT outsourcing is constantly changing.
Selective sourcing is suddenly in vogue as if we had just sanctioned a widespread social switch to multiple partners, each of whom satisfies a different but very particular need.
Breaking down the big contracts into smaller chunks is the opposite of outsourcing monogamy, and a trend that has gained greater momentum with the growth of process outsourcing, applications management and the temptation to buy functions from offshore.
Analyst firms are keeping track of the morphing outsourcing environment, and providing pointers for enterprises. A recent Meta Group report, for instance, says 80 per cent of organisations will outsource at least one function by 2005. And, while 70 per cent of that group will renew their outsourcing contracts, many will reduce both the scope and the duration of the original agreement.
"Vendor performance may factor into the decision to cut back on existing outsourcing arrangements, yet the trend is really driven by the need for organisations to regain control of their IT strategy and architecture," says Dane Anderson, Meta senior research analyst.
"The growing popularity of asset-leasing arrangements and the increased focus on business and IT alignment are also playing important roles in the decision to curtail outsourcing engagements."
Despite the reductions in scope and duration of outsourcing, the analyst firm believes outsourcing will continue to grow as a viable option for organisations seeking to remain competitive during the next decade.
Forrester, on the other hand, says even when the bulk of IT is outsourced, several key functions should be retained because they supply continuity for clients of IT, provide for the oversight of the outsourcer, are highly specific to the way the business operates, and are strategic to the organisation. To some extent, the mix will vary with the reason for outsourcing, says Forrester. The bottom line: All organisations will need to retain some expertise in strategic functions, such as project oversight, architecture, planning, vendor management and security.
In 2004, there is no doubt the outsourcing landscape has changed, and continues to change significantly, as users grow in experience and know more about what they want. Some of them share their experiences with MIS.
Sparks didn’t exactly fly when Auckland City Environments (ACE) received a tender from Datamail, a subsidary of New Zealand Post, to handle its mammoth project to transfer its property files into digital format.
ACE is the regulatory business unit of Auckland City Council. It produces building and resource consents, and administers the Building Act, district plan and by-laws. It is the biggest local body in the South Pacific (apart from Brisbane City Council), and its customers range from property developers behind big value projects like SkyCity, to residential owners.
A re-engineering project five years ago included a survey of customer satisfaction and the results were not something to be excited about. They were “very low” at around four, out of a possible 10. “Our customers were driven by costs, reliability of information and timeliness,” says Rachel Hill, ACE information manager. “We needed to speed up the consent process, we needed to contain costs and we needed to make it more reliable."
"We didn't understand how fundamental information was to our business. We thought consenting and enforcement was all we were about. We found that if we made information available concurrently and improved the integrity, then that would effectively speed up our processes.
"Paper files meant long wait periods for our staff and customers; it also meant that there were gaps and inaccuracies in the content. So, one of the decisions made was to convert a large repository of information to electronic images."
The files, however, were in different media, including paper, microfiche and aperture cards, making them difficult to read, file and analyse. ACE decided to take care of scanning and converting new information but to outsource the scanning of the historical files.
"Scanning was not our core competency," says Hill on the decision to outsource the job. ACE was faced with the choice of trying to do the job and not doing it well, or getting an expert to do it. "We decided to get the experts."
ACE worked with KPMG Consulting (now BearingPoint) as its systems integrator in determining what should be in the RFP, and how to evaluate the responses.'
Sleuthing on the job
Since Hill had no experience with scanning, she did some sleuthing to identify potential suppliers.
"It is not likely you would look in the phone book and say, 'let me find some scanning partner'." She was also concerned not to make the choices too narrow, or too wide.
Hill went down the supply chain and approached providers of scanning equipment and asked them which "good companies" used their equipment and how they worked with them. The possible suppliers were then invited to join the tender.
Some of the smaller players formed consortia. Hill thought there would be
pros and cons with having a consortium.
Potentially, each company would compete with each other internally to deliver the best service, but they could
also operate quite independently and she decided that having to manage the
potential variability in delivery could be problematic.
She likewise had concerns about giving the contract to one large company.
"I have worked in production management and once you get into these large companies, often there is a bit of a honeymoon period."
Once they have got your contract, they could just relax, move their attention to new and more interesting clients.
"I promoted a smaller company as I believed a company with a bigger investment in this contract would try harder in a long run."
She expressed these concerns to KPMG Consulting, over Datamail, a large imaging company, which won the contract after meeting all the tangible, measurable criteria.
The success or failure of the contract depended not only in meeting these tangible outcomes but also on the relationship – and the durability of that relationship – between both parties, she states.
Today, the conversion of millions of records to digital format is already halfway through. “Our target was to get 80 per cent of application processing using electronic property files within four years. We achieved that in two-and-a-half years.”
What set the contract apart was the absence of penalties. “I don’t think they work at all, the thing is actual performance.” The contract instead had “very strict” performance indicators.
“If they didn’t meet those, they would lose the contract at any renewal period,” says Hill.
“It was a question of dealing with performance problems as we went along and congratulating them obviously if they met them. We ironed out issues as we went along rather than let these build up.”
“If they didn’t stack up, then we would go back out to market. And that was tough.”
“We pulled together a document that has got every clause in the contract in it, and what their performance criteria are. It is a collaborative document, and then we signed it off.”
Hill meets with Datamail channel manager Nigel Grange every quarter and discusses the review document. This is based on the daily interactions and monthly operational meetings between staff at both organisations.
“What I had seen happen in other contracts is they all start up, ‘Sure we are going to do it all and do it well – trust us.’ Once it is running smoothly, the supplier thinks, ‘Okay it is running smoothly, let’s not worry about it.’ It all starts to turn bad and then you start being reactive, and so on until it’s a disaster. It is all about being proactive. It’s about building a relationship where both parties understand and value each other’s business; where there is regular, open communication with consequences for non-performance and recognition of good performance.”
Datamail, on the other hand, had to revise its processes for the ACE job. Prior to the ACE contract, Datamail had always worked on one type of media at high volume. The ACE documents, however, were of different media and sizes. In effect, it built a new production process around this particular contract. Datamail parlayed this new process into getting similar outsourcing contracts from other agencies, using ACE as a reference.
It was not a one-sided effort because Hill says the council staff also had to comply with their obligations. “In any contract there has to be profit on both sides,” she says,“and this need not be in dollar terms. That is something we have to teach our staff as well, so getting all that working cohesively was quite a challenge. At the end of the day, however, the results and outcomes show how effective this approach has been.”
She sums up the key success factors for projects of this scope and genre: “You have to start out how you mean to go on. Setting high standards, non-negotiable performance criteria and building a lasting relationship are of prime importance.”
A new experience
Outsourcing was untrodden territory for the Tauranga City Council. The in-house IT department usually handled the technology projects, but the scope of its recent network infrastructure revamp prompted the council to look for an external partner.
The major upgrade to the business systems included a new customer relationship management, purchase ordering and document management system. The council was also extending its main office, which required the physical re-cabling of the building.
“This project came up at an already busy time for us, so being able to hand this over to Gen-i was great,” says Robyn Dines, manager information systems. It was, however, a challenge to get the technical staff to hand the project over to someone else, she relates. “My staff grilled the Gen-i people very hard and really made them jump through hoops to prove that they came up to our expectations.”
The new network has been running since, and there was minimal disruption to the council’s daily business during the rollout.
For other agencies contemplating a similar foray, she says: “It’s really important that you have the right people mix in the project, that there is excellent, open communication and that you have a high level of trust in your outsourcer.”
Tower New Zealand, on the other hand, is no stranger to outsourcing, having inked contracts with local and offshore partners (see the special report on offshoring in MIS New Zealand July 2004). Tower has just signed a $25 million five-year deal for HdS to host and support core customer systems and provide full redundancy and disaster recovery services for three Tower businesses in New Zealand.
Ed Saul, Tower Group’s chief information officer, says the deal fits into Tower’s technology strategy of working with specialist third party companies to deliver components of its infrastructure to reduce costs and simplify its technology architecture.
“IT infrastructure is a commodity we would rather rent, than own and manage ourselves,” says Saul. “The ongoing strategic thrust is to deliver more benefit from technology, which will help drive cost out of the business and establish the platform for growth.”
He believes in incentives for both parties to extract maximum value from the relationship.
“Both companies share in the risks and rewards,” he says. “We have service levels that they need to achieve and they get this small additional payment if they achieve those service levels. If they fall below those service levels, we pay them less than what the standard payment would be. We review that every few months. It’s either they get a bit of extra or they get a bit less depending on whether they achieve their service levels.”
Riding out the turbulence
In corporate Australia, one of the longest outsourcing relationships has been the more than 20-year liaison between financial services group AMP and CSC, which has just been renewed until 2007.
Despite the turbulence at AMP, the company has stuck with CSC, and also with another long-standing contract with the Kaz Group, which dates back to 1988.
According to Lou Pagano, AMP’s alliances director, the CSC relationship has also had its ups and downs.
While happy enough with the relationship now, Pagano says there was a time after the contract was renewed in 2000 when he believes CSC “dropped the ball”.
While AMP was satisfied with the agreement, Pagano says the situation soon started to go rapidly downhill, partly because of changes at CSC. The new AMP deal, built off the back of the company’s acquisition of GIO, had given CSC real scale in Australia for the first time. As a result, it had gone out and found a number of significant new clients.
Servicing them all adequately with its existing resources was creating strains on CSC’s service levels, and Pagano says relations with AMP soon became frosty. “I think they were thin on the ground across everything, and we found we had also underestimated the size of the GIO acquisition, so there was a lesson for us in due diligence,” says Pagano.
The immediate AMP response, he says, made the problems worse.
“Instead of managing through an appropriate governance forum, what we did was try and bring in people who knew more about technology than CSC did,” says Pagano. “We had a desktop problem, so we hired a desktop expert to come in and tell us if they knew what CSC was doing.”
Realising it was “nowhere near” benchmark performance levels, AMP decided to get serious about its governance levels and realised that, while it had outsourced responsibility, “we hadn’t outsourced accountability”.
The result was a new, co-operative approach that got the partners talking to each other again, and which has saved the relationship, leading to the most recent contract extension. “One of the things we had to do to change the course of our relationship with CSC was actually to own up to the problems on both sides.”
Pagano says AMP and CSC “got back to basics” and created regular governance forums and reporting processes to track and monitor performance. “We changed that blame culture and finally understood that if our suppliers fail, then IT at AMP fails,” he says. “It was a cultural shift and it allowed the governance forums to gain a new focus and the focus was not just how do we get CSC to better improve its service delivery dynamics but how do we enable CSC to do that?”
A recent entrant into the outsourcing market is flagship airline Qantas, which has just announced an A$1.4 billion (NZ$1.52 billion), 10-year data and communications deal with IBM and Telstra.
Qantas chief information officer Fiona Balfour says that, up until now, Qantas believed its internal capabilities were at least as good as it could buy from an outsourcer. It had outsourced its reservations to Amadeus in 1999 in a US$1 billion deal also negotiated with equity partner BA, and outsourced its desktops to Telstra two years ago, but had kept its core infrastructure in-house.
But with the data centre now 35 years old – five years beyond its design life – Balfour says it was time to look at alternatives, and the main outsourcing providers now had the “critical mass” to service a company the size of Qantas.
“The other driver for us was a desire to change from having fixed IT costs to a more flexible arrangement where we could access on-demand computing, so that when we have a growth phase, we can add capacity at pre-ordained prices, and when we have something bad happen to us – like SARS – we can let go of costs very quickly,” says Balfour.
The Qantas deal, despite being the biggest in Australia so far this year, has been criticised by some financial analysts for not going far enough. The airline will be left with about 700 IT staff, and the analysts are keen for Qantas to strip out as much as it can in the way of labour costs.
“It’s nice financial analysis but it shows they know more about understanding balance sheets than running an IT shop,” says Balfour. “We are keeping control of where we add the greatest value – architecture, policy and application development.
“That doesn’t mean you cut the code on every application yourself, but you absolutely manage the process of integrating that technology back into your organisation.”
Balfour remains sceptical she can find better skills at a better price from an outsourcing provider for these services.
“By keeping things like architecture and development in-house, we’ve got absolute control over the priorities of where resources are allocated, and the quality of resources allocated to various tasks,” says Balfour.
"There are a whole lot of good reasons why you want to keep control of that, and that’s the bit the outsourcers put the margin on, and why would you want to pay that margin if you can do it yourself?"
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