The Tactics of Transformation | Article

Men's hands with notebook and electronic notepadHistory teaches that, unless we constantly seek and find ways to accept the challenges of changing times, we will not survive. The outsourcing industry, having matured significantly during the past ten years, faces changes in 1999 that will not only alter the focus of the outsourcing industry itself, but will also transform the companies entering into such transactions. Doug Elix, General Manager, IBM Global Services-America, sums up his forecast for these positive developments in one word — strategy.

Companies today, Elix says, no longer focus on cost as the primary reason for outsourcing. Increasing competition through global E-business, the need to reach new performance levels, and the need for increased flexibility are causing companies to re-align their priorities. The outsourcer, he explains, will become the integration point, or glue, between the strategy to change the company and the reality of how to accomplish it. Elix notes, “We call it strategic outsourcing because it is not just ‘run this data center at less cost’ — it is that now I am looking for a partner in changing my company.”

The First Manuever

“Pick your partners carefully,” is Elix’s advice to someone considering outsourcing. To transact a win-win situation, the partners must share goals, risks and rewards. “There is a move,” he says, “to putting some meat behind the word ‘partnership.’ When you get involved in these business transformations, then the relationship is very, very intimate and intertwined. It is hard to tell the differences of who is working for whom.”

He cites, as examples, recent agreements between IBM and several of its customers. The deal with Monsanto, if evaluated strictly as a change from doing things internally to externally, might never have happened, had it not been for a developing co-dependence on each other’s capabilities. Monsanto’s scientists were working on genomics; IBM was working on patent recognition technology. IBM’s “solution looking for a problem” blended with Monsanto’s “problem looking for a solution,” and, Elix says, “we have a match. . . . That is a view of how your business interests become intertwined.”

Washington Mutual, when acquiring other banks, relies upon IBM to integrate those new banks into a common structure. Through their outsourcing agreement, IBM became more than an information technology provider; it became a significant part of the bank’s growth and business strategy.

The AT&T acquisition of IBM’s global communications network in December 1998 involves significant outsourcing agreements and co-dependence. The deal allows both companies to get back to their mainstay services, where they excel; yet they have hired each other to perform various tasks. AT&T will run the network that enables IBM’s customers to talk and transmit data within their own companies and with others; IBM will provide data management and applications software to AT&T. The outsourcing industry will see many similar customer/provider relationships changing in 1999. What will emerge is value propositions that help businesses transform.

The Battle Plan

Management of the outsourcing partnership is one of the biggest areas of concern. The key to maintaining smooth, successful relationships is the preparation before the partnership begins. It is essential that each party state what will constitute “success” and that the contract identifies what measurement will be used to check performance.

Elix advises outsourcing partners to devise a flexible, “living” contract that will enable each party to adapt to change without major confrontations. He notes, as an example, that IBM’s contract with Washington Mutual is amended each time it acquires a new bank. “You have to build into the contract mechanisms that look at changed business circumstances, resetting base lines to reflect reality, adding new work in, taking work out. . . . it is of no benefit to the outsourcer to be holding onto a lucrative contract with an unhappy customer,” Elix explains. He adds that there must be a sound business footing and integrity on each task — breaking up each service, rather than cross-subsidizing an area of high profit with another. In an outsourcing deal, cross-subsidization can lead to problems if one part of it goes away; then outsourcing won’t be responsive to needs.

Building the right partnership management system, which allows for negotiation and communication to solve problems, will be the other key element to success. Along with employee services, sourcing and procurement, Elix predicts customer relationship management as “the next big wave” and the major new activities that companies will be looking to outsource in 1999. In a changed marketplace, management services is among IBM’s top ten growth offerings today but did not even exist two years ago. He states that customer relationship management is “something that we want to put a lot of emphasis in. There is a tremendous amount that can be done in technology to support that . . .That whole area, I think, will explode. We have an organization that we started up to do nothing but develop software to do that.”

The Arena

Elix mentions the Internet as being the other initiative that will bring about changes in the outsourcing industry in 1999. E-business is exploding, as companies take advantage of technology to change the way they do things, to reach new customers as well as suppliers.

Elix explains that developing web applications and then linking back into a company’s core accounting and customer information systems is something companies are not used to and that there is an increasing trend toward outsourcing the running of those intranet and extranet functions. Elix also agrees with others in the industry that finding skilled workers is becoming increasingly difficult.

IBM Global Services has a major presence in Europe, Asia-Pacific, Latin America, and the U.S. Elix says the company’s 1999 international activities will concentrate on making sure “that we do business consistently in all of those places so that we not only look the same to our global customers wherever we do business, but we also leverage our intellectual capital and our investment around the world.”

He believes the economic difficulties in Asia are forcing companies there to look at outsourcing as an alternative for financial restructuring. But in the U.S., where “everybody’s company is running okay and they are making earnings,” he believes the economy is leading people to strategize and ask, “is there a better way?” IBM Global Services plans to be the leader in E-business, with more than 120,000 employees to solve business problems and create new strategic value propositions.


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