Business Transformation Outsourcing promises technical innovation - if you set expectations properly and can stomach the risk.

OUTSOURCING | Ask most CIOs about the biggest benefits of outsourcing relationships, and "innovation" is unlikely to top their lists. Conventional wisdom holds that outsourcers can do only what they're told - they can help reduce costs and manage technology efficiently, but they can't innovate or help a company use IT to transform the way it does business. But a new marketing push by some of the largest IT outsourcers is aiming to change that belief. Dubbed Business Transformation Outsourcing, or BTO, the providers claim that new types of outsourcing relationships can help initiate technology-based business transformations - rather than simply lowering costs.

It's too early to tell if BTO will deliver on its promise or just turn out to be a ploy to sell strategy consulting on top of traditional IT services, but the term's very existence is another clear indicator that enterprises are seeking creative ways to get consultants to assume more risk and responsibility for delivering business innovation.

An Innovative Edge?

"The idea that you continue to have joint accountability and vested interest in what happens seems to make a lot of sense," says Lou Delery, vice president of operations for AT&T Consumer Services, describing a BTO-like structure he calls "cosourcing" that his company chose for a $US2.6 billion deal with Accenture.

While stopping shy of an actual joint venture, the deal's structure aims to reward consultants for delivering ongoing innovation by creating a new organisation staffed by both AT&T and Accenture employees, with its own pro-forma P&L and gain-sharing provisions, according to Delery. Technology investment decisions are guided by a quarter-to-quarter master plan and financial metrics.

The genesis of the deal, he says, was AT&T's realisation that it had fallen behind on key technologies in its consumer sales and customer care operations - such as CRM, personalisation and self-service - and that it needed a partner to help it deploy innovative technologies quickly and strategically to achieve business goals such as customer retention.

"Technology had changed dramatically, and [our] ability to serve customers was lagging a little bit," says Delery. At the same time, however, he adds that AT&T knew that "one of the things you have to be very careful about with outsourcing was taking a part of your business and giving it to another company". So in negotiating the deal, the company made sure it would retain all control over business direction, marketing strategies, product offering definitions and the "customer experience blueprint".

"Cosourcing allows you to retain quite a bit of control," says Delery, while also creating the right incentives for ongoing innovation on the part of outsourcers. "They have an incentive to make the technology work even [better]. There's a certain committed investment that they're making and we're making." The deal structure also helped AT&T reduce its up-front capital outlays and retain IT talent within AT&T, Delery claims. AT&T has subsequently added a similar $US500 million deal with Accenture for credit and accounts receivable management.

Benefits of Offshore

Other enterprises have attempted to reap the benefits of outsourced innovation using more traditional deal structures. In 1999, when Ron Glickman became senior vice president and CIO of San Francisco-based DFS (Duty Free Shoppers) Group, a unit of Moet Hennessy Louis Vuitton, he found that the IT operation was badly in need of a transformation. "The organisation was perceived as a cost to be minimised and not very strategic," he says, and it was split into 10 different regions supporting the company's luxury products stores.

Glickman quickly started exploring opportunities to remove cost and improve service. "It was clear to us from the beginning that we had to do both," he says. So he created a map that involved outsourcing key IT processes such as systems development to Cognizant Technology Solutions, a vendor with extensive offshore development capabilities.

Glickman then negotiated a three-year deal that commits a guaranteed revenue stream to Cognizant with the capability to add projects on a pay-as-you-go basis. "We don't do gain-sharing [as does AT&T]," says Glickman, "but as they come up with ideas to reduce our costs, we redeploy some of those dollars into other projects."

Thirty per cent of the Cognizant team is dispersed throughout DFS's operating environments, and 70 per cent is offshore, mainly in India. The result? "It's working great," says Glickman, who points to specific technology successes driven by Cognizant recommendations. DFS had legacy merchandising systems running in 10 different locations, for example, which Cognizant was able to consolidate onto a single IBM AS/400. Glickman says the vendor also found a way to rearchitect DFS's data warehouse environment for faster reporting and a single view of enterprisewide data.

BTO, Ill-Defined?

According to Agilent vice president and CIO Marty Chuck, who led his IT team through a major transformation when the company spun out from Hewlett-Packard in 1999, transformation outsourcing is a concept that exists in the eyes of the beholder.