IBM Global Services Aligning relationships: Optimizing the value of strategic outsourcing Introduction Outsourcing changes everything. Not only does it impact a company s relationships, its processes and its technology environment; it also affects a business s very culture ( the way we do things around here ). In an effort to crystallize what companies expect to gain from their outsourcing relationships, IBM engaged Mercer Management Consulting to interview more than 300 senior IT and business executives in seven countries and seven industries. According to the Mercer study: While growing revenue is a top priority, an uncertain economic climate is forcing executives to cut costs in the very area IT they have come to depend on to optimize business processes, increase flexibility and productivity, accelerate time-to-market and fuel profitability. Given the critical role of today s IT environments, many CIOs are now considered key members of the senior management team. The relationship between clients and their outsourcing provider is much more strategic in nature reflecting a preference for collaboration and partnering.
Optimizing the value of strategic outsourcing The study also revealed that some of the early adopters of strategic outsourcing, including businesses in the U.S., Canada and parts of Europe, have become very adept at leveraging their relationships with IT service providers. They tell a consistent story: The key to successful outsourcing is having the right type of relationship with your service provider. This view is supported by Jeff Weiss, an expert in the field and a founder of the Boston-based consulting firm Vantage Partners. Weiss states: Negotiating a strong outsourcing contract is only a fraction of the equation. Effectively managing the ongoing relationship is what really defines the value of the contract, and certainly is what defines how much value will be realized. 1 This paper will explore how to establish the framework for a successful outsourcing relationship. What to look for in an outsourcing relationship An IBM study confirmed that when choosing an IT outsourcing provider, most companies look for the following: Flexibility Can the provider adapt the scope of work to meet the changing demands of the business and its IT environment? Modularity As needs evolve, will the provider make it easy to add, remove or modify services? Business and process knowledge Does the provider know enough about the client s industry to successfully deliver needed services? Does the provider exhibit a real interest in the specific needs of the client s business? Is the provider equipped to align IT strategies and applications with business, industry and market concerns? Is their knowledge of the client s business reflected in how IT products and services will be delivered and managed? 2
Forging a win/win relationship Ideally, IT outsourcing enables enterprises to keep up with market and technology advances with less strain on human and financial resources, and more assurance that the IT infrastructure will keep pace with evolving business priorities. Considering the integral role that information technology now plays in supporting both tactical and strategic business initiatives, it s easy to see why outsourcing decisions now involve the CEO, the CFO and the CIO. Planning, deploying and managing today s IT environments is both a tactical and strategic challenge that must take into account a company s organizational, industrial and technological concerns. Not surprisingly, outsourcing providers are being asked to inject more value into their relationships by helping clients utilize and share knowledge, and employ IT assets in ways that can contribute directly to the betterment of the business. One reason we chose our current vendor is because they really listened to exactly what we wanted to get out of outsourcing. Instead of telling us how to run our business, they took the time to learn about our business and then made recommendations. That doesn t always happen. Head of IT, Retail From the outset, outsourcing partners should be clear concerning roles, responsibilities and processes. This helps reduce frictional costs the often invisible expenses resulting from individual conflicts and concerns that can consume budgets, diminish value and chip away at top-line growth. A win/win outsourcing partnership, at both the tactical and strategic levels, is flexible and open to change, and reflects a willingness to share both risks and rewards. Collaboration and trust are key. 3
Optimizing the value of strategic outsourcing Intellectual capital is another consideration. Having ready access to business, technology and industry consultants can help assure best-of-breed knowledge transfer and support from professionals with a proven track record. Aligning and managing outsourcing agreements There was a time when outsourcing arrangements depended strictly on compliance with service-level agreements. Long planning periods and predictable requirements were the norm. But now, thanks to rapid technological advancements, erratic market fluctuations, revolving leadership and heavy customer demands, everything has changed. Today, fulfilling outsourcing contracts is just the price of admission to the relationship not a guarantor of value or satisfaction. Experienced outsourcing clients know that the best partnerships are dependent upon shared expectations, flexibility, collaboration and mutual accountability. Instilling value throughout the relationship The most successful and satisfying outsourcing relationships are built around the concept of value exchange sharing knowledge, keeping the lines of communication open, creatively aligning competing interests, building trust and reconciling differences between organizational cultures and operating procedures. At the same time, there must be an understanding that one size does not fit all. For example, in an outsourcing arrangement where the service provider is responsible for using IT to transform the client s business processes, the provider must understand the current and desired state of the client s business, be willing to share information and best practices, and remain committed to helping the client strengthen core competencies. In this case, the value exchange will focus on aligning the IT environment with the client s short- and long-term business strategies, adding value to processes and skills, and sharing intellectual capital throughout the life of the relationship. 4
IBM value infusion and innovation: Enhancing strategic outsourcing The IBM value infusion program delivers viable, valuable intellectual capital in the context of ongoing dialogues between IBM and its outsourcing clients. Value infusion is a process designed to deliver on the IBM brand promise of value: that we will share with our customers our company s unique insights into the use of information technology to improve business performance. Our proprietary intellectual capital, primarily developed by the IBM Institute for Business Value, is delivered to our strategic outsourcing clients through a process supporting ongoing, proactive collaboration, and a forum for sharing ideas and insights. The IBM Institute for Business Value regularly develops and maintains industry landscapes identify key performance indicators for our clients industries. To initiate the value infusion process, IBM account team leaders, along with a client s business and IT executives, participate in industry-insight workshops run by analysts and consultants from the IBM Institute for Business Value and Business Consulting Services. The workshops provide the client participants with valuable, topical industry insights. These sessions are intense and interactive leading to client-specific action plans for execution. At the same time, an ongoing dialogue with key client executives is established. During this program, IBM provides access to our intellectual capital and subject-matter experts to address clients interests, issues and responsibilities. Recent dialogue topics have focused on market and aggregate patterns of consumer behavior, knowledge management and human capital, supply chain and operations, and financial management. Direct access to advanced technologies IBM innovation teams connect outsourcing clients with IBM industry consultants, process experts, IT professionals and advanced technologies on an ongoing basis. We implement a governance process that includes a steering committee comprising of senior executives from the client s business and technology areas, and senior IBM executives representing the company s industry, technology and services organizations. Key to success in execution is strong, committed sponsorship by the client s executive team. 5
Optimizing the value of strategic outsourcing The IBM value infusion program is supported by the latest IBM research and development in areas ranging from service-level management to middleware to customer modeling, and draws on the vast reserve of IBM intellectual capital to help outsourcing clients strengthen their market position. Working with IBM innovation teams, our outsourcing clients can benefit from direct access to the thought leadership that influences the next generation of IBM products and services. IBM innovation teams support strategic business decision making, provide insights into technology and marketplace directions, prepare business cases for marketplace innovation and launch proof-of-concept solution development. Through this program, we integrate IT innovation from IBM R&D groups and e-technology Center, with the business-process innovation from IBM Business Consulting Services. What makes this so powerful is the alignment of business and technology strategies, something outsourcing clients now view as essential. 6
Pearson plc: Making the most of the outsourcing relationship With nearly US$7 billion in sales, media giant Pearson plc is a leading provider of financial and business news, including the Financial Times. The company shares ownership of The Economist, as well as a stake in the U.S.-based Interactive Data Corporation and the Spanish media group Recoletos. Pearson s education unit is the world s top educational publisher with imprints such as Scott Foresman, Addison Wesley, Longman, Allyn & Bacon and Prentice Hall. Pearson also publishes trade books through the Penguin Group, including imprints such as Penguin, Putnam, Dorling Kindersley and Viking. In 2002, IBM signed an outsourcing arrangement with Pearson to provide the company with managed operations services for its mainframe and server environment. Before the contract was even signed, Pearson engaged the IBM relationship alignment team to create a relationship launch. According to Frank McDonnell, Vice President of Information Management for Pearson Technology, The relationship alignment team was and continues to be an exceptional help in assisting us to initiate and sustain the actions necessary to build and maintain the relationship between Pearson and IBM. The team presented four separate launch events planned so that expectations could be aligned across several layers of management, including members of the IT organization. The sessions enabled participants to understand the amount and nature of work needed to make the relationship a success. According to McDonnell, Over the past year, I have learned that building the relationship between Pearson and IBM is a continuous process...it is a testament to the past and to the continued involvement of the relationship alignment team that we continue to get past the rough spots and work closely and successfully with our IBM outsourcing team. Clearly, the IBM approach enables both the client and the IBM account teams to contribute directly to the health of the relationship. 7
Optimizing the value of strategic outsourcing The IBM relationship alignment process At IBM, we recognize that the best outsourcing relationships are dynamic managed in a way that accommodates change and adds value at every opportunity. This philosophy is carried out through the Relationship Alignment Solutions practice provided by IBM Global Services Strategic Outsourcing. The goal is to assist our clients and their IBM account teams in developing and implementing successful, mutually beneficial organizational relationships. Our methodology stems from research conducted at the IBM Advanced Business Institute (ABI). The ABI initiative was influenced by the work of John Henderson, of Boston University s Center for Information Systems Research, in collaboration with Vantage Partners, a consulting firm recognized for its expertise in helping clients build and sustain highvalue associations. Both parties must have the will and the way to make decisions that strengthen the relationship, and exhibit behavior that engenders trust, confidence, knowledge transfer and information-sharing. Managing the relationship should be a collaborative, proactive effort. The framework for IBM relationship alignment includes: A governance structure and process that focuses on joint decision making, problem-solving, conflict management, planning and change management. Shared measurements and incentives. A communications process that facilitates exchange of information and knowledge. Criteria jointly developed and agreed upon to help ensure the continuing health of the relationship. Our approach is based on several assumptions: Throughout the life of an outsourcing engagement, attention should be paid to developing a value-based relationship framework that addresses the various stages of work from proposal, to contract, to implementation and renewal. An effective outsourcing relationship should align with the level of value exchange agreed to by both parties, and structured according to the type of alliance. During the process, the IBM Relationship Alignment Solutions team consults with the client and IBM Strategic Outsourcing professionals to gather data and thoroughly analyze the client s business and IT environments. Subsequently, the team works with both parties to craft an action-oriented work session the goal being to close whatever gaps exist between the current and desired states of the outsourcing arrangement. Emphasis is on developing a detailed action plan that includes roles and responsibilities, plus measurements for gauging success. This process typically takes from six-toeight weeks to complete. 8
Relationship matters Day-to-day Operational relationship in action Over time Long-term relationship in context Task Culture Appreciation Shared knowledge Mutual benefits Finacial Risk sharing Innovation Assets Skills Knowledge Unique resources Relationship determinants Commitment Shared goals Incentives Contracts Information Process Social Linkage Predisposition Trust Attitudes Assumptions 9
Optimizing the value of strategic outsourcing Conclusion IBM and SENA/SquareD Leveraging a long-standing relationship Schneider Electric, headquartered in France, employs close to 75,000 people. The company is one of the world s largest manufacturers of equipment for electrical distribution, industrial control and automation. In November 2000, SENA/Square D Schneider Electric s North American arm signed a Strategic Outsourcing agreement with IBM. The client had a long relationship with IBM and was looking to leverage the IT skills and competencies of IBM to improve problem-resolution time. Both companies recognized that leadership transition, change management, assignment of roles and responsibilities, and learning new processes would be essential to achieving the goal. In January 2003, the IBM relationship alignment solutions team presented a workshop for the SENA/Square D and IBM Strategic Outsourcing teams. The results included action plans for improving joint planning, reaching consensus about goals and objectives, and creating a robust organizational change process that would help ensure that activities were planned, managed and communicated effectively. As part of the change process, the teams developed a full communications strategy and plan. As of June 2003, all actions had been integrated into the SENA/Square D/IBM relationship management process. Both sides concur that the workshop s open and honest dialogue was the catalyst they needed to support a strong, healthy organizational relationship built on joint ownership of issues and resolution. Outsourcing relationships are too important to be left to chance. The IBM study demonstrates that outsourcing is much more likely to succeed when the parties work together to build a solid framework on which to manage the relationship. A value-based relationship framework can serve as the cornerstone for a partnership that is: Built on trust Sustained by the open exchange of knowledge and information Open-ended and flexible Equipped to overcome complexity and ambiguity Dynamic vs. static Able to identify and optimize opportunities for both partners Forged by a mutual commitment to sharing risks and rewards Find out more To learn more about how IBM can help you realize more value from your outsourcing partnerships, contact your IBM sales representative, or visit: ibm.com/services/stratout 10
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Copyright IBM Corporation 2003 IBM Global Services Route 100 Somers, NY 10589 U.S.A. Produced in the United States of America 12-03 All Rights Reserved IBM, the IBM logo and the e-business logo are trademarks or registered trademarks of International Business Machines Corporation in the United States, other countries, or both. Other company, product and service names may be trademarks or service marks of others. References in this publication to IBM products or services do not imply that IBM intends to make them available in all countries in which IBM operates. 1 Jeff Weiss, Vantage Partners LLC. G510-3464-00