Large-scale outsourcing deals promise big savings, but they fail half the time. Here's how to make them work for you.

A CISR-CIO STUDY

Part 3 of a three-part series about outsourcing strategies and success models, defined in original research by MIT's Centre for Information Systems Research and CIO (US).

Part 1, "Simple and Successful Outsourcing", appeared in the November 2005 issue of CIO and examined the transaction relationship, in which an outsourcer executes a well-defined, repeatable process for a client.

Part 2, "Offshore Allies" appeared in the December/January issue and reported on the co-sourcing alliance, in which client and vendor share management responsibility for a project's success.

This final instalment looks at the strategic partnership, in which an outsourcer takes on responsibilities for a bundle of its client's operational services.

READER ROI

• Why "strategic partnership" outsourcing is riskier than other types of outsourcing
• How CIOs should closely manage their large-scale outsourcing deals
• Why day-to-day interactions are more important for success than contract stipulations

When Campbell Soup CIO Doreen Wright WAS trying to cut costs to fund a multimillion-dollar global investment in SAP, she found help from what many might view as an unlikely ally - her outsourcing vendor. Without being asked, IBM re-examined the outsourcing contract and identified several million in services it was providing that could be cut with minimal pain to Campbell. Recognizing the financial hurt that move might cause her partner, Wright took the sting out of it by working with IBM to identify new outsourcing services (which, by the way, would also further reduce her IT operating budget) and awarded the vendor several other projects in the following months. "They were very forward-thinking, and there was a tremendous amount of teamwork involved," says Wright. Bottom line: Campbell cut its IT costs and was able to go ahead with the SAP project, while IBM actually saw its revenue increase.

The Campbell-IBM relationship is an example of what Jeanne Ross, principal research scientist at MIT's Centre for Information Systems Research (CISR), calls "strategic partnership" outsourcing, in which a single outsourcer takes on responsibilities for a big bundle of IT services. These contracts include everything from mainframe operations and network management to application support and help desk services. The success of strategic partnerships depends on mutual benefit. CIOs set up these large, long-term deals to cut costs, access variable capacity and focus on their own core competencies. Vendors sign on not only to make money by taking advantage of their internal best practices and economies of scale but also in the hopes of becoming a first-choice provider for the client and moving up the value chain of IT services.

When strategic relationships are good, they're very good. Client and vendor work together, and the benefits accrue to both parties' bottom lines. But when they are bad, they're awful. Client and vendor can develop an adversarial relationship and become embroiled in bitter contract battles. In fact, half of all strategic partnerships fail, according to a study by CISR and CIO (US).

The two other outsourcing models identified in the research have higher success rates because they're simpler for both parties. Transaction relationships, in which an outsourcer performs a well-defined process that has clear business rules, work out for CIOs 90 percent of the time, while co-sourcing alliances, in which client and vendor jointly manage projects, are successful for the client in 63 percent of cases, according to the CISR-CIO research.

Evidence of the difficulties inherent in strategic partnerships has been seemingly everywhere lately. JPMorgan Chase pulled the plug early on its $US5 billion outsourcing contract with IBM in September 2004 and brought the work back in-house (see "Backsourcing Pain", CIO October 2005). Dow Chemical prematurely cancelled its $US1.4 billion deal with EDS in July 2004 and brought in IBM to start over. Even GM, which had the most long-lasting of any outsourcing relationship - its involvement with EDS dates back to 1986 - is backing off its strategic partnership and introducing more vendors into the mix, in a multisourced model.

The difficulty with strategic partnerships lies in their complexity. "Making these deals work is very difficult because the magnitude of the challenge is far greater," says Jeff Kaplan, senior consultant with the Cutter Consortium's Sourcing and Vendor Relationships Advisory Service and the managing director of ThinkStrategies. "The outsourcer is assuming a broader scope of responsibilities across the enterprise and IT operation. There are far more people and process issues to be addressed and migrated. And there are more enterprise and outsourcer business needs to be met." Overcoming these issues takes time - usually two to three years with the biggest deals, says Geoff Smith, president of IT consultancy LP Enterprises and former deputy CIO at Procter & Gamble. "Beyond that point, only the truly committed strategic partners survive," he says.

For a strategic partnership to be mutually rewarding, vendors need to be flexible and willing to adapt to their clients' changing business conditions. And CIOs must bend their expectations and behaviours to allow the vendor to perform optimally. Success in strategic partnerships has less to do with contract negotiations than with the day-to-day interactions down the line. Ross says that CIOs who sign the same kind of big outsourcing deal with the same vendor can end up having completely different outcomes. "When you talk to [CIOs] about it, what you find is that they didn't have terribly different experiences in the beginning. But in one case, the situation is deteriorating and in the other case it's getting better," she says. "The ones who are happy are the clients who say: 'Change is to be expected and we'll work this out'. And those that aren't are the clients who dig in and resist change."

But getting to that state of healthy interdependency takes time, trust and more management overhead than any other kind of outsourcing effort.