Equity Creates ‘Sticky’ Outsourcing Deals | Article

online shopping cartInformation technology is moving from legacy information into a commodity. This inexorable shift is altering the nature of the relationship between buyer and supplier. “That has been a pretty big change in the market last year,” says Bob Chaffin, contract manager of IS for General Motors Corp. in Detroit, Michigan. Today, vendors must differentiate themselves in the marketplace and create an important distinction between their value added abilities and the commodity they are selling.

As IT services morph into commodities, Chaffin points out “it’s easier and easier to change suppliers.” Comparison shopping is now possible. Suppliers, to counteract this trend, are looking for ways to make their outsourcing relationships “sticky.” They are searching for golden handcuffs to keep buyers on their client roster.

Vendors have been successful in making an outsourcing relationship sticky when they throw equity participation into the outsourcing deal. Chaffin says vendors are offering warrants in return for the ability to be the sole supplier in that space. This creates a win-win situation for both parties. The supplier, especially if it is an ebusiness, can make a big announcement that it has inked an outsourcing deal with GM. “On my side, if my business is going to drive its market capitalization up, I get to share in that,” explains Chaffin.

Warrants also cause buyers like GM to think twice before switching suppliers. Warrants create stickiness because they affect the bottom lines of both companies.

Outsourcing contracts have changed during the last year, Chaffin reports. “Contracts are becoming more ASP-like,” says the GM executive.

Searching for a Stable of Suppliers

In addition, Chaffin says big companies are shunning a monolithic approach. They no longer want one company to handle all their IT outsourcing needs. Instead, they want to find the best of class in each area. The vendor who handles GM’s mainframe processing is not the vendor who handles the car maker’s Web hosting. “I want a stable of suppliers that’s the best fit for me,” says Chaffin.

This new attitude is a “continuing change from the old mentality.” Chaffin believes today the IT world is so complicated no one vendor can do it all and do it well. He likes shopping for the company that is the best at what it does who can fit GM’s exact needs.

One result is executives like Chaffin no longer only manage one relationship. Instead, they may be managing as many as 12. His job is making sure everyone works together “so there are no white spaces in the interfaces.” This, too, marks a significant change from the old way of doing things.

Today, managing a host of outsourcing contracts is emerging as a professional skill set. Requisite skills include legal, financial and purchasing as well as good interpersonal interactions. “Today most outsourcing managers are learning from their mistakes,” says Chaffin.

Since GM is working with multiple vendors, the auto maker no longer does one big deal every five to seven years. Instead, the search for new vendors is ongoing. GM is “constantly” looking for the best niche players.

Once a deal is signed, the length of the contract has changed, too. Chaffin says 10 year deals now belong to the history books. Long contracts “are not the way of the future,” he says.

Increased BPO Outsourcing

This year Chaffin predicts corporations will look at business process outsourcing (BPO) as an extension of IT outsourcing. In the past, companies outsourced their systems but kept their business processes in house. Now they are realizing the business process is not giving them a competitive advantage and are ready to shed it, too. And the same reasons that compelled them to outsource the IT are also insisting they outsource the business process with it.

In addition, IT changes are accelerating so quickly companies don’t have the time, knowledge or money to continually update or alter their IT systems. As Chaffin points out, if a company is outsourcing its payroll function, it doesn’t care what system the BPO provider is using. “At the end of the day, all you want is a paycheck,” he says.

Lessons from the Outsourcing Primer:

  • Suppliers are looking for ways to differentiate their services as IT outsourcing becomes more of a commodity.
  • Stock warrants tie a buyer to a vendor in a “sticky” relationship.
  • Big corporations no longer want one IT supplier. Instead, they are constantly searching for the best firm to fit their needs. Now they may have 12 outsourcing IT vendors.
  • Managing multiple outsourcing relationships is a new skill.
  • More companies will add BPO outsourcing to their IT outsourcing this year.


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