Simpson Industries, Inc. knows the importance of a flexible contract. Richard Lefebvre, CIO and vice president of information technology at Simpson, says that business objectives change everyday and companies need a contract and a supplier that will change with them.
“If you’re talking about a firm, fixed price contract for five years, you have to be careful not to lock yourself in because many things can happen during that time,” Lefebvre says. “You could acquire new businesses, you could divest yourself of a division, or you could restructure and close down plants. And if you don’t have an outsourcing agreement that is flexible you’re locking yourself in a box.”
Simpson Industries, Inc. is a global, tier one designer, manufacturer and distributor of specialty parts for automotive and diesel engines, air conditioning compressors, and transmission and driveline components. It operates in eight countries in the Americas, Europe and Asia.
IBM Global Services runs Simpson’s computer operations, which is the upkeep of its midrange computing on Simpson’s nine manufacturing sites in North America, with the central midrange computer for the entire operation in Rochester, N.Y. The outsourcing effort went live in December 1996 and Simpson completely turned over the operation to IBM on February 1997. The initial contract is for five years.
“IBM makes sure that the computers stay up and the applications stay running seven days a week, 24 hours a day,” Lefebvre says. “And we are so thrilled with the service we receive that we are looking at adding an additional five years to the current contract.”
The Dynamics of Big Business
Lefebvre says that the contract is pretty straightforward because of the nature of the service that IBM provides Simpson, which are managed operations — a pretty finite process. “IBM runs the jobs and if there is a specific error code there is a check list of who call,” he says. “It is a well-defined set of procedures and there aren’t a whole bunch of different things that can happen.”
But there are exceptions. Since IBM took over the computer operations, Simpson has had a major acquisition in Europe and Brazil. And they have also closed two plants in the United States because of manufacturing rationalization, Lefebvre says. “If we had a locked contract where IBM held us to the letter of the law, the relationship just wouldn’t work.”
Also, Simpson implemented an ERP (enterprise requirements planning) system, which was a somewhat unique situation and wasn’t precisely in the contract, but the two companies have designed a way of dealing with additions.
“The old way of thinking is that, ‘I’m the customer and you’re the supplier and I’m going to call you in here once a month and kick the heck out of you.’ My preference is to have these guys as part of my staff and to have them as a business partner,” he says. “So what we do is every two weeks we have a change management meeting, and I don’t even have to get involved. It’s my guys with their guys and it really works well.”
It is during these meetings that Simpson tells IBM its future considerations and then the two sides figure out how they will handle the change. “And when we get up from that table we have a handshake on how we are going to do things,” he says. “And they are a good partner because they don’t say, ‘wait a second this isn’t in the contract,’ they just make it happen.”
There are plenty of clauses in the contract, as well, that allows for flexibility if specific circumstance arise. One is a termination for convenience clause. “Clearly if economic conditions change, you want to be able to terminate the contract and you want to be able to do that without it costing a lot of money,” Lefebvre says.
Another thing is established thresholds with specific pricing points. For instance a company might have a contract that provides for 400 users. If the staff increases to 405 or 410 users a company doesn’t want the price to go up as well for these subtle changes, Lefebvre says. Changes like these can occur daily. So the vendor and supplier might add additional costs for increments of 100 users.
There are many clauses that can be used depending on the company’s circumstances, Lefebvre says, and adds that outsourcing agreements are nothing that companies should be afraid of. “There are companies that can do it much faster, better and cheaper than a company can do it themselves,” he says. “And if that is the case, why not take advantage of it? And if you get into long-term agreements, the flexibility will be there, so treat your service agent as a partner, not as someone that you want to beat on.
“I can’t figure out why a company would want to operate their own computers. It is a very important task, but is simply not value added,” he continues. “Instead of having three or four people sit in a room and keep a machine going, I would rather have those people on my staff trying to help us do things more inexpensively and helping us get better by working on process improvement. Why operate a computer when you have guys like IBM that do it professionally and do it well.”
Lessons From the Outsourcing Primer:
- If you are in a long-term fixed price contract, flexibility is a key to a successful arrangement.
- Even if the function being performed is pretty straightforward, a contract should still be flexible for precautionary measures.
- Pricing points can be established so that prices increase as level of activity or users increase.