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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 out-

sourcing 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

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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 sup-

ported 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 out-

sourcing 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 busi-

ness? 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 deliv-

ered and managed?


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“ 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

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 environ-

ments 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.

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 partner-

ship, 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.


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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 expec-

tations, flexibility, collaboration and mutual accountability.

Instilling value throughout the relationship

The most successful and satisfying outsourcing relation-

ships 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 trans-

form 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.


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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 profession-

als 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.

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 prom-

ise 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 propri-

etary intellectual capital, primarily developed by the IBM

Institute for Business Value, is delivered to our strategic

outsourcing clients through a process supporting ongo-

ing, proactive collaboration, and a forum for sharing ideas

and insights.

The IBM Institute for Business Value regularly develops

and maintains industry “landscapes”— identify key per-

formance indicators for our clients’ industries. To initiate

the value infusion process, IBM account team leaders,

along with a client’s business and IT executives, partici-

pate 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.


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The IBM value infusion program is supported by the

latest IBM research and development in areas ranging

from service-level management to middleware to cus-

tomer 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 genera-

tion 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.


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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 mem-

bers of the IT organization. The sessions enabled par-

ticipants 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.


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• 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.

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 gaug-

ing success. This process typically takes from six-to-

eight weeks to complete.

The IBM relationship alignment process

At IBM, we recognize that the best outsourcing relation-

ships are dynamic — managed in a way that accom-

modates 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 orga-

nizational 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 high-

value associations.

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 imple-

mentation 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.


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Relationship matters

• Finacial• Risk sharing• Innovation

• Shared goals• Incentives• Contracts

• Trust• Attitudes• Assumptions

• Task• Culture• Appreciation

• Assets• Skills• Knowledge

• Information• Process• Social

Day-to-dayOperational relationship in action

Over timeLong-term relationship in context

Relationshipdeterminants

Mutualbenefits

Commitment

PredispositionLinkage

Sharedknowledge

Uniqueresources


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Conclusion

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

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 electri-

cal 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 tran-

sition, 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 organi-

zational 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.


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© Copyright IBM Corporation 2003

IBM Global ServicesRoute 100Somers, NY 10589U.S.A.

Produced in the United States of America12-03All 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

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