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Tying the Knot

Tying the Knot

With Comalco's outsourcing contract with IBM up for renewal, IS general manager Iain Green was determined to push the relationship to a higher level in the about-to-be-expanded next-generation contract. IBM had been running Comalco's mainframe in a straight, "vanilla" outsourcing arrangement for some time, but would now add network management, help desk services, application support and desktop services. In return, Green had decided IBM needed to play a much more active role in helping Comalco leverage IBM's technical expertise and gain greater benefit from the new deal. In short, the new arrangement would be a partnership or it would be no arrangement at all.

"It wouldn't be too unfair to say that in the previous contract our relationship was somewhat combative. We saw ourselves going into the next generation of contract, which had some expanded services, and within it we decided that we wanted to make the contract work better than it had previously," Green says. The result - delivered with the help of someone who specialises in brokering partnering deals in the construction industry - was a statement of intent that clearly identified the new deal as a partnering arrangement while carefully reflecting the objectives of both parties involved. The document may not have legal teeth, but it is helping to turn the new arrangement into a win-win situation.

Analysts expect outsourcing and partnering to increase dramatically in Australia in the early parts of the 2000s. The trick for business is to find ways to develop more creative partnership arrangements without losing control or creating deals neither side can profit from. That's easier said than done when you're up against vendors with vastly more experience in deal-making, with a thorough understanding of the psychology of the parley, and often - or so it seems - with the determination to outfox their clients.

Those in the know say managing alliance relationships is a huge challenge that requires dedication, insight, an excellent understanding of psychology, a clear delineation of responsibilities, a full comprehension of potential pitfalls and continued hard work. "The world is changing so rapidly that trying to foresee the best shape of the relationship and to build that into a fixed contract is difficult," Mincom CEO David Merson says. "And the outsourcing deals done on that sort of fairly black-letter contracting basis tend to come unstuck fairly quickly.

"The challenge is to try and formulate strategic alliances which will provide the right sort of incentives to organisations to partner in a very genuine sense in terms of dealing with a rapidly changing reality. While those sorts of strategic alliances are harder to do, they do offer the best potential for good rewards for both parties involved in a relationship." And it's that word 'relationship' that is the key to the success or failure of the new partnering arrangements. Build a strong relationship with your supplier and you can hope to reap big rewards. Create an atmosphere of deep distrust and loathing and you can expect to pay the price.

"I've always felt that a lot of IT shops have run in confrontation mode with their suppliers. About the one useful thing that seems to have come out of Total Quality Management is the need to have good relationships with your suppliers," says Jonathon Potter, general manager IT Services CSIRO. "Now that doesn't mean that you don't argue price and terms and conditions, and I think if you asked any of our suppliers they would say we probably do. But it does mean that you have to operate on a reasonably up-front basis. You have more chances of establishing a relationship if you operate in a very business-like but not confronting way."

Veterans agree managing the relationship starts long before any ink hits a contract, with decisions about the nature of the relationship and the best ways to achieve desired goals established early on. EDS Australia chief operating officer Bob Kahan says one reason so many outsourcing arrangements have failed is because organisations entered into them without having any clear idea of their objectives.

"In many cases people just set up a partnership without really knowing why they are doing it," he says. "You need to talk to others about it, make sure it makes sense, make sure both organisations understand what the objectives are and what the other organisation's objectives are before they get into it. If you don't do that up-front, because you're in a rush and because you think that if you do it fast you'll get some advantage over somebody else, it ends up costing you a lot later."

Never make a decision to partner with somebody based on something you read in a technical publication or saw on the Internet. Investigate any potential partner thoroughly, before committing to making a deal with them. From there, successful partnering is all about finding a common understanding and developing mutual objectives, Kahan says. "At the end of the day the key things in a successful partnership are technical flexibility, understanding each other's businesses and what each other's objectives are out of the partnership. You can't get any of that unless you've actually taken the time to develop personal relationships."

That's certainly the approach Commonwealth Bank general manager group technology Howard Morris took before the bank sold its networking infrastructure to EDS in a $5 billion, 10-year partnership deal for the delivery of IT services. Morris says in the face of local, national and global competition the Commonwealth Bank wanted to forge the closest possible arrangement with its IT supplier.

The first step was to outline the bank's business goals and use that outline as the context to decide what supplier it would approach on the question of technology outsourcing and how it would make that approach. "The bank set its objectives for entering into a technology partnership and they flowed right through in terms of the selection process, ultimately ending up with a decision for the bank to join EDS," Morris says.

That decision made, the two parties strove to identify areas where they could work together to solve common issues, and to find opportunities where the respective strengths of the two organisations could create mutual gain. They built trust by showing a willingness to sit down together whenever a difference of opinion needed to be resolved, and by gaining a thorough understanding of the goals and objectives of the other side. And Morris integrated EDS staff wherever possible into the day-to-day operations of the bank.

"[It means] they get to understand the business: what our concerns and issues are, in the context of them being able to be more effective if they have access to the bank. This is opposed to what might be regarded as a commodity-type relationship where you have an arm's length view," Morris says.

Common Ground

Centrelink created an alliance with Andersen Consulting in June 1999 after inviting two of the 20 companies which responded to its expression of interest to prepare detailed proposals for a complex and primary systems integration project.

While Andersen and rival IBM GSA were developing their proposals over an eight-week period, Centrelink gave them facilitated access to selected Centrelink staff to ensure they fully understood its requirements. CIO Jane Treadwell says this proved an excellent way to assess the compatibility of the two organisations under consideration. "The process was really sound. You actually get to open up to the companies and have quite a number of discussions about expectations."

Andersen evaluated Centrelink's business and technological readiness and identified key issues for resolution. Centrelink evaluated whether it could work with Andersen and whether it would be able to draw on the supplier's competencies. "There was a really strong sussing out on both sides," Treadwell says. "We did quite a bit of research and all of the companies and all of the case studies say that it relies on personalities and a willingness to actually see each other's side. You can have as tight a contract as you like, but if there isn't trust and a willingness to cooperate and actually understand the environment from two perspectives, you're into stiff negotiations and contract management changes.

"The other thing is that many of the large IT companies are telling us that the transition or the initial days are pretty tough, and that it might take two years to actually get to an absolutely wonderful relationship," she says.

Treadwell points out that while it is important the contract specifies what is to be delivered, there's little point in spending hours negotiating on a penalty when you could be spending the time on fixing the problem. So instead of investing heavily in developing a black-letter contract, Centrelink has focused on building an improvement process into the relationship and identifying areas which can be improved.

Minimising Risk

Black-letter contracts may hinder more than help when it comes to setting up a strategic partnership, says Fred Balboni, PricewaterhouseCoopers Asia Pacific IT systems integration practice leader. However, organisations still need to spell out quite clearly just who is to be accountable for what, he says. While organisations are getting better at building partnerships, some have yet to come to terms with the need to spell out the accountabilities and responsibilities of each of the parties involved, Balboni says. That failure means it is still quite common to blow scope in a partnership model, he says.

In the classic outsourcing model, all the risk shifts to the external service provider, who is left to manage scope, budget, and delivery. The fact that the organisation is holding that external service provider wholly accountable makes it difficult to vary any of those elements. In a partnership model, by contrast, both the CIO and the external service provider take some responsibility and both accountability and scope control can be diminished.

"My message is that in a partnership model your scope has to be tightly, tightly managed, regardless of the kind of model you put together," Balboni says. "The CIO has to put clear accountability on who owns the scope of the project, and that has to be made clear to the partner or the project sponsor. The CIO must make the accountability of scope and schedule management crystal clear for the external service provider and for the project sponsor. It should be in the contract or the quality plan or the working plan - the working document that says this is what you're going to do, this is what we're going to do."

There also needs to be willingness on both sides to establish methods and conventions by which the two organisations will work together. If you're considering a partnership with a partner that's very heavily methodology- and methods-based, for instance, you must closely evaluate those methods for "fit" with your organisation.

"If I'm going to, as a CIO, make sure my business is able to translate its requirements into a system, I need to work with the service provider that is able to take their ideas and turn it into an absolute design," Balboni says. "We often see clients who say: 'We want to use our methodology'. And they end up using an excellent external service provider, an excellent development house that has a methodology that is far more comprehensive than their own, but they choose not to use that.

"I think people need to be flexible about their choices of methodologies, both service providers as well as clients as well as CIOs. But in either case, whichever methodology they select, they need to ensure that it is rigorous, comprehensive and they follow it to the letter of the law," he says.

TPI Asia Pacific is a consulting organisation that specialises in helping clients set up relationships with external service providers. This entails using a set of processes and methodologies that help clients quickly understand their environments and objectives and formulate them into a set of requirements for potential suppliers to address. Managing director David McGee says the main problem with many early outsourcing arrangements is that neither party had figured out ways to define their relationships in ways that gave the supplier any incentive to continually reinvent itself with the client.

"Because those early deals were geared towards a static, non-changing IT environment, there was no flexibility for suppliers to build relationships with other vendors that would help the organisation to reinvent itself by, say, using e-commerce as a way to beat the competition," he says. "We help a client build in those incentives and ensure they get the best out of the supplier. Just last year we helped Lend Lease renegotiate its relationship with IBM. A big part of it was to try and in effect give Lend Lease more choices and more flexibility and [provide incentives for] IBM to step up and to address Lend Lease's business requirements more effectively."

The Gentle Art of Facilitation

Facilitation is the key to improving outsourcing deals, says Axio CEO Chris Mracas. While today's corporate outsourcing deals are so complex companies have little choice but to use multifunctional teams to put them together, the bigger the team, the more likely it is that it will run into difficulties. "The advantage of a team approach is that it offers an assortment of resources, skills and ideas. However, the more people involved in a team the more potential there is for opinions and ideas to conflict," Mracas says.

Effective outsourcing teams typically face either domain-related or systemic problems. Ineffective outsourcing teams tend to experience mainly people-related problems and tend to fail to deliver due to their inability to deal with team dynamics. Mracas recommends teams work to an agreed outsourcing framework that can help them identify root causes and create and deploy the best solution. He says the outsourcing framework should incorporate a diversity of tools for problem solving and a mechanism to select the most appropriate tools.

"An outsourcing team's ability to come up with novel ideas and to reach good decisions depends on its ability to manage conflict within the team," Mracas says. "For teamwork to realise the required benefits, high-quality facilitation is required."

Professionally trained outsourcing facilitators add value to a team by providing three key competencies: outsourcing process knowledge, diagnostic and intervention skills. They draw on their understanding of the outsourcing process and their diagnostic skills to understand the team dynamics and to recognise problems or obstacles that could impede a team's effectiveness. They also use intervention skills to steer the team back on track so that it can accomplish its outsourcing objectives within the defined outsourcing framework.

Mracas says good outsourcing facilitators are persistent, proactive, adaptable, goal-oriented and at ease with problem-solving dynamics. They can work with different personalities and see the big picture, and they can help the team learn by asking the right questions, rather than giving them the answers. And he says Axio's experience at facilitating teams in outsourcing leads it to believe that facilitators are far more successful if they are neutral and have no vested interest other than the successful attainment of the team's outsourcing goals.

- S Bushell

Tips for a Successful Partnership

Any resemblance to marriage may not be wholly coincidental 1. Look for a partner with compatible values and business goals.

2. Be clear about what each partner expects of the other.

Avoid promiscuous partnering. Be sure your partners do the same.

3. Plan for the protection of intellectual property that each partner brings to the relationship.

4. Determine what will happen to products and processes jointly developed if the relationship goes sour.

5. Be flexible. Don't expect a contract to anticipate every possible circumstance.

6. Define fully the business benefit each party anticipates.

7. Be sure your partner's definition matches yours.

8. Develop a method to measure success, both quantitatively and qualitatively.

9. Pay careful attention to delineating boundaries, commitments and rights.

10. Meet conflict head-on. Don't wait until it explodes.

- Miriyam Williamson

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More about AndersenAndersenAndersen ConsultingAxioCentrelinkCommonwealth Bank of AustraliaCSIROCSIROEDS AustraliaGSA GroupIBM AustraliaIBM GSALend LeaseMincomPricewaterhouseCoopersPricewaterhouseCoopersRIO TINTO

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