Cultivating a High Yield in Outsourcing | Article

Farmer plowingBest Partnership

2001 Editor’s Choice Award
IBM and National Steel

From the CEO:

The relationship between National Steel and its outsourcing supplier, IBM Global Services, impressed our panel of judges as an outstanding example of the attitude and approach for which both parties need to strive in order to achieve success together. In this relationship, both parties had prior strong histories of outsourcing and had learned what it takes to craft a win-win relationship. Learn how they accomplished their objectives and see the role that trust plays throughout a successful relationship.

Just as there is a difference among gardeners in the number and quality of vegetables their gardens yield, so is there a difference in outsourcing relationships as to the value they yield. Outsourcing is not meant to be a one-sided affair; at its best, it should yield something of great value to both the supplier and buyer. It starts with healthy seeds that can grow a win-win situation, and it helps if the gardener has some knowledge of how to tend a garden. That’s what is happening with the high-yield relationship between IBM Global Services and National Steel Corporation.

The fourth largest steel company in the U.S., National Steel manufactures steel for the automotive, construction and tin container industries and has annual shipments of almost six million tons of flat rolled products. The company outsourced the housing and operation of its mainframe and data center services to IBM in November 1998 with a seven-year contract worth nearly $60 million. John Davis, CIO of National Steel, explains that they wanted to reallocate its human resources to solve National Steel problems, rather than technology problems. “I wanted them working on solutions that would differentiate National Steel from other steel competitors,” he says.

The company has accomplished that and other goals, and their agreement has yielded far more than they asked for. But, after all, National Steel is no novice to outsourcing. In the 1980s, National Steel spun off its data center (which then became a part of ACS). In 1992, they entered into a mainframe outsourcing relationship with Mellon Bank, but it was not Mellon’s intent to stay in outsourcing. When that contract neared its end, the steel manufacturer went out to bid again. By this time, National Steel had learned a lot about outsourcing. History had taught them that they needed a supplier who would heed the buyer’s needs and go well beyond contract specifications. IBM won the contract because it had learned the very same things about how to grow a successful relationship.

Davis says IBM actually brought an account manager in long before it had secured the contract, and that individual listened to National Steel’s needs and requests and then helped to develop a proposal that responded to those. “It was much more than just giving us numbers that filled in blanks in a proposal,” says Davis.

Starting with Mulch

Just as straw and peat moss form a protective ground cover to protect seedlings, IBM and National Steel worked very hard to protect their business partnership with honest, open communication and trust. Davis says the two companies trust each other implicitly. He meets every morning with the IBM exec at National Steel, and he says both sides work hard to make sure they are looking after the needs and concerns of the other.

IBM proved its worth in early technology challenges. There had to be a total transition of National Steel’s data center from Pittsburgh (at Mellon Bank) to IBM’s facility in St. Louis, but the mainframe could be shut down no longer than eight hours to avoid a shutdown of all the company’s facilities. They struggled for a couple of months to figure out a way to overcome it. IBM ended up chartering five Lear jets and took National Steel’s entire tape library to St. Louis. “We actually ended up having our mainframe shut down for just a little over seven hours,” Davis remembers. “It was a tremendous challenge; but they came up with an intricate plan, put the right people on it, and they were able to execute it.”

The trust both parties have developed enables IBM, when a service level is below baseline (but not to a level tied to penalties), to not wait for National Steel to do anything. IBM finds out what happened and how it happened then alerts the buyer of the plan they already have in place to correct the situation. “Both of us feel that the best place for our written agreement is on a shelf,” explains Davis. “Since we communicate very closely and honestly with each other, we solve problems without having to pull the contract off the shelf and point to paragraph 4 on page 37, second sentence, where it says what to do.”

Adding Topsoil to the Deal

At an executive level, they talk quarterly about opportunities National Steel has and what resources IBM can bring to bear to help National Steel’s objectives and generate revenue for IBM also. As their relationship flourishes, IBM continues to add more value. Davis says the relationship has saved the quarter of a million dollars he used to spend for advice from big-name consulting firms. “Any time I have a need to learn something about a different type of technology or have someone come in and do an evaluation of something going on here, IBM has been able to provide some very good talent to us.”

Because of their partnership attitudes, IBM finds ways that National Steel can utilize technology to get better value ‚?? even, at times, if it means less revenue for the supplier. Again, it’s a mechanism that builds trust. The result is that their relationship has now expanded, and IBM is handling some other areas of business for National Steel (such as building a data warehouse) that are not covered by the 1998 contract.

Davis says there are a variety of ways IBM has gone beyond the scope of the contract to act as a partner. “A good example is that they put on a technology show for us where they showed us the new IBM hardware and new IBM direction in terms of mainframe operating system software. And consultants came and spent time educating our executives on e-commerce and the direction that is going.” As a result, IBM is now influencing National Steel’s e-commerce direction.

Lessons from the Outsourcing Primer

  • When the parties to an outsourcing agreement communicate openly and honestly, they begin to build a foundation of trust that can then lead to additional revenue opportunities.
  • When a service level is not being met, a world-class supplier will determine why and how to solve the problem, even without the buyer prompting it.
  • In a successful outsourcing “partnership,” both parties look out for the needs of the other.


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