Good Relations

Good Relations

It may not have been audible, but there was a corporate sigh of relief in the air when EDS gathered together the bid team and their partners for a celebration dinner at a Chinese restaurant in North Sydney. It was several months since the team had won the five-year, $100 million deal to provide outsourcing services to Integral Energy, but this was the first "heads-up" time that could be found to regroup the bid team, this time around a dining, rather than a conference, table.

The first contact with Integral Energy was in the October, when the electricity supplier initiated discussions with EDS, Digital Equipment, ISSC (now IBM GSA) and CSC about its outsourcing agenda. Integral Energy had hired consultant Bain International to benchmark its existing IT arrangements and add insight to the process and plans.

By early in the new year, Integral had whittled the list back to two candidates - Digital and EDS. From January to March, the EDS team defined the scope and intent of the outsourcing contract, leading to a proposal being made formally in March. May saw EDS selected as preferred tenderer and contract negotiations began. In July it entered what is referred to as the "confirm" phase and work began in July.

By September - almost a year after the process began - Integral was ready to announce that it had selected EDS to manage its information technology and telecommunications systems for a period of five years in a deal worth around $100 million. EDS was finally going to vindicate the "several hundred thousand dollars" that it spent bidding for the work.

"When you win the deal there is a sense of relief," confirms Tony Henshaw, deputy managing director of EDS. "Take tax," he says. (The company also secured the ATO outsourcing contract after spending nearly $2 million on the bidding process.) "There is a core team who lived and breathed tax for two years. If the answer is no - then you've got all that emotion, and you can't execute [your plans]."Burnout is a recognised problem by companies which bid for outsourcing projects. Henshaw says that bid team composition is regularly changed, and where possible people given a breather and a chance to intellectually regroup.

There are rules though - "one person at a time gets to spit the dummy. We actively watch team members for signs of stress.

"You need a combination of men and women on the deal, with an aptitude for dealing with complexity and the ability to work under pressure, to have a passion for delivering something that meets the customer's requirement. You have to be a bit of a masochist to do this.

"The thrill," Henshaw says, "is looking at a really complex business and finding how do I deliver something that will make a difference." Something which would make a difference is precisely what Integral needed. It's incidental, but the managing directors of both EDS and Integral at the time the outsourcing deal was signed have moved on. But according to Integral's current chief executive officer Jeff Allen, the outsourcing program is as relevant as ever it was, three years into a five-year contract.

Integral itself was formed almost four years ago as the result of a merger between Prospect Electricity and Illawarra Electricity, to become one of the largest utilities in the country. Based at Huntingwood in Sydney's west, the company operates from a glass and marble bunker whose architecture bears an uncanny similarity to IBM offices the world over.

But like that computing edifice, Integral has spent much of the 1990s reforming itself for a newly competitive environment. Established as a statutory organisation by the NSW Government in 1995 the company needed to place a much higher emphasis on its commercial operations. There were no longer any sinecures in government businesses.

As part of this reformation, Integral closely examined its information technology and telecommunications set-up. "Many companies have an internal IT department," Allen says, "and they become self-serving. We questioned the value we were getting from our own internal IT department. We looked at the options and decided to pursue IT outsourcing and call for expressions of interest."Allen was at the time general manager of networks, and had come to the new company from Prospect Electricity where he started work as a cadet engineer in 1963. By the time he'd made general manager of networks, Allen was charged with ensuring that the electricity network was operating well, which demanded a significant IT&T component.

"I was interested in the final outcome," Allen says with a commendable level of understatement. He was one of the executives who whittled down the list of four candidates to two and then to EDS.

For EDS one significant hurdle had already been cleared, in that Integral had already made the intellectual and emotional commitment to outsource. It wasn't exploring the concept, but truly looking for a partner to execute an outsourcing plan. "This was a strategic decision from our perspective. To outsource a significant activity was seen as core to our success," Allen says.

Before taking the plunge the company had hired consultants to benchmark its existing IT&T set-up. That revealed high costs, low service and much discontent among end users. Simultaneously, Integral "recognised that with the changing business environment and the emergence of a competitive electricity environment, we needed to have more understanding of what was available in best practice around the world," Allen says. "We felt that an international company could call on its resources and establish what was that best practice," he adds.

EDS, which now draws 70 per cent of its revenues from outsourcing contracts, boasts an impressive international client list, which was expected to help determine international best practice. That depth of client experience has been helped by the maturing of outsourcing as a technique. "Four years ago outsourcing was a concept, not a reality," Henshaw says. "Now it's a seriously considered strategy." As far as sectoral best practice was concerned, EDS already had a handle on that when Integral first came calling. "Most of our business is 'pull'. We do a lot of prospecting - well, marketing is a more honest description," Henshaw admits. "This is not sales, it is talking about how what we do could generate a business advantage for them. We put them in contact with people, and then assess whether the concept of outsourcing is on their agenda.

"We do pretty regular whole-of-economy analyses, what sectors are performing, what not, what issues are being faced. We do segment analyses, such as airlines and look at what is driving their search for shareholder value, what tactics they may use, and compare them to relative organisations," Henshaw says. The same holds true for utilities; so based on its existing global analysis, EDS was able to immediately pinpoint for Integral what strategies were paying off for similar businesses overseas.

In Integral's case, the customer came calling; but Henshaw says that much of the new business generation comes from the cold call, based on this sort of economic and sectoral analysis. Armed with the data, the company approaches the chief executive, information or financial officer. Henshaw, however, says it's not an evangelical exercise on behalf of outsourcing, more a demonstration of what might be possible.

"Sometimes they just tell you they're still forming their plans. Sometimes you have a dialogue and that may result in an information gathering plan drawing on us, our customers, our competitors and their customers," he says. Visiting EDS customers overseas was a part of the Integral bid process, but the costs of that trip were borne by Integral - not by EDS. Integral has also now hosted a few similar visits from EDS' new prospects.

Unlike the old mainframe sales heydays, though, there are few freebies left in the IT game. "I think this is very clean because the relationships are all embracing," Henshaw says. "We have to satisfy them from the technical to the cultural level. A trip to Houston or a round of golf isn't going to win the business," he says. "The relationships are so complex. The businesses are dependent on one another. A bunch of flowers or a bottle of red wine won't make any difference when their survival is dependent on getting the decision right."The hard sell was in any case not needed with Integral - at least as far as selling the outsourcing story was concerned. "The Integral chief executive [Alex Walker, now at Sydney Water] had decided that to meet the NSW Government objectives they needed to take this path," Henshaw says.

Jeff Allen says that after the initial meeting with four companies, the company decided to pursue its plans with just two - Digital and EDS. "We went through a relatively exhaustive due diligence for us to get comfortable with them as a partner," he says. "We wanted compatibility in culture, service and ethics. We also wanted to understand the costs and parameters of the project. We only got down to the nitty gritty after EDS was selected."The due diligence phase is crucial for both outsourcer and outsourcee. "We have to quantify aggressively whether this is the right business to deal with," Henshaw says.

EDS has a formal methodology for selecting business. It's not in the business to win everything in sight - just to win what makes sense.

"We call it strategic value selling and use a value review process," says Henshaw, who sits on the Value Review Board which comprises 10 senior EDS executives.

That board meets weekly, and consists of executives from all areas, including sales, finance and human resources. It reviews all deals being discussed, and determines which will be pursued, which dropped, and who will be allocated. At present there are about 30 deals on the table at EDS, most of which are in the early "discovery" phase, with about half a dozen entering or in the confirmation phase. There are many more in the pre-discovery phase.

Out of the 3500 people within EDS Australia - most of whom (55 per cent) joined the company when their former employer outsourced their IT&T to EDS - there is a group of 30 people which can be called upon to drive through the outsourcing bids once they reach the confirmation phase and beyond. The core team on the ATO bid, for example, numbered 12, although many more people then contributed.

The 12 at the top essentially steered the project.

But the teams don't, of course, always steer EDS to success. Henshaw admits that it tends to win only one in three contracts it bids for. "We want it to be one in two, and we have got to be more rigorous in deciding whether to go from the discovery to the define phase." With bids typically costing between "hundreds of thousands" and "millions" of dollars, losing a pitch can have a significant effect on EDSÕ bottom line.

Similarly, there is a cost associated with picking the wrong outsourcing partner at the customer end. Allen admits that there's a bit of a black art to picking the right partner from his side of the fence. "When you interview somebody you get the feel for them; you look behind the smoke and mirrors for the substance. The cultural fit is especially important," he says.

"[Integral] wanted a culture that was innovative, flexible, nimble, aggressive from a business perspective and customer-focused. We had an emphasis on innovation and we saw a lot of that at EDS. [When negotiations started] they were new to Australia and they wanted to make a mark. We were the first in the energy field in Australia to outsource with them, as their worldwide resources were very attractive."Allen is proud of the cultural fit that has been achieved, and willing to conduct tours of the Integral headquarters to see if visitors can pick the EDS from the Integral staff. Of course you can't; EDS staff don't have to wear armbands, and indeed the IT&T crew is called Oneteam, and made up of staff from Integral, from EDS, and from outside consultants and overseas assignees. EDS staff in Oneteam may be on the EDS payroll, but they work for Integral. So meshed are the workforces, that when you look at the most recent Integral annual report, overseas travel expenses for EDS employees are bound together with those of Integral employees.

Culture Aside. What about the Dough?

According to Allen, one of the keys to a successful relationship is the service level agreements which are determined. "You set your costs and service levels and then you move to a contract."So with the benefit of experience, was the contract which Integral nutted out as good as it should have been? "I give this advice to everyone," Allen says.

"Really understand your information technology needs and develop service level agreements and contracts that reflect exactly what your needs are.

"A lot of people outsource to get rid of a problem. Outsourcing will not necessarily solve your problem. You do, though, need to understand your problem, and outsourcing can be a better way to do that - but the simple act of outsourcing will not necessarily make the problem go away."Given the opportunity over again, Allen would have spent more time understanding Integral's information technology needs. "We would still outsource to EDS, but the way we set up service arrangements - with 20:20 hindsight it would have been different."Integral and EDS are currently reviewing the service level arrangements and expect within the next few months to have agreed a new set. Allen characterises the renegotiation as a win for both sides, and says EDS has been very flexible throughout the process. As part of the renegotiation Allen expects that "we will be moving it away from a traditional service provider and customer [arrangement] to more of a partnership where we will share the savings and offer incentive payments. That wasn't the initial approach. Some EDS clients do change their relationship to better reflect their better understanding of their IT needs."As far as the benefits are concerned, Allen is sold. Now his company has access to a raft of international expertise much broader and deeper than Integral alone would have been able to afford, despite being a $1 billion company. "A lot of people talk about the cost of IT; a lot of people talk about the value of IT. It is difficult to measure. IT&T is an enabler of improvement in your business processes. It's like the old joke about half your advertising dollars being well spent, but which is the right half. It's not quite the same in IT.

"But you ask if we spending enough on IT, because it is difficult to see the value. It is a little nebulous as an issue," he says.

Although IT can be used to drive out costs, Allen believes its greater value is meeting customer demands. "I find we are spending more on IT&T and less on other areas. You need to take a more holistic approach."Step by StepEDS engages a formal four-step business process when it embarks on an outsourcing bid. The process ensures that EDS assesses what it can do, whether that is relevant and the money someone might be willing to pay for that service. It's what deputy managing director Tony Henshaw calls the value proposition. The four steps in the process are discover, define, confirm and deliver. "It's Systems Analysis 101 writ a little larger," Henshaw quips.

Discover essentially involves EDS identifying where and how it might be able to add value to a customer's business. In define the customer needs also to put together a team which can work with EDS to explore information technology that might be needed to service the business. This phase can last quite some time and eat into resources. For example, define for the Commonwealth Bank $1 billion, 10-year deal involved a team 150 people-strong. And for the ATO define phase a team of 50 people worked full-time for three months.

The confirm phase is the segment which leads to a contract and involves a further refinement of the proposal. This might require a statement of work, the legal and financial framework and the establishment of service level agreements. These are not insignificant documents, and although EDS has a standard contract blueprint, each one is different. Integral Energy's current contract fills a four-inch ringbinder, while the ATO's stretches to a couple of thousand pages.

Then there's deliver. That's crunch time.

B Head

Five Questions to Ask Yourself Before You Outsource: 1. What are your core competencies?2. How does your IT organisation help enable corporate strategy?3. What IT skill sets will you need in the future?4. Can a vendor provide your current service levels at a lower or variable cost?5. Does upper management support your outsourcing decision? Vendor References Five Questions to Ask: 1. How did you choose the vendor?2. How has the outsourcing relationship helped achieve your business strategy?3. In what ways has the vendor met and not met its commitments?4. What value proposition did the vendor sell you versus what it ultimately delivered?5. How has the vendor handled change and conflict?

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