Outsourcing Excellence Award – Best Partnership Award Winners – Owens & Minor and Perot Systems Corporation
Like bookends, Owens & Minor, Inc. (O&M) and its outsourcing provider, Perot Systems Corporation, encapsulate excellence and innovation in technology for supply chain management solutions to the provider segments of the US healthcare industry. Since 2001, the pair has racked up numerous industry awards for its innovations and influence in technology.
When they began their IT outsourcing relationship in 1998, O&M was new to outsourcing. Paul Higday, O&M’s Vice President, Information Technology & Program Development, recalls: “We were not ready to give up everything – we thought that would be too big a change.” But by 2002 O&M realized some mutual opportunities for value creation had been left on the table in 1998.
Determined to capture that value, along with benefits from greater economies of scale, O&M went to market seeking proposals for its mainframe (already outsourced to another company), data hosting, security and other IT functions not previously outsourced.
Perot Systems was the source of ideas for 80% of the savings opportunities identified for the new contract in 2002. Even so, Higday relates that the decision came down to cultural fit and a partnership attitude – “how they would treat us in situations when the chips are down.”
A Look at the DNA of Partner Attitudes
Back in the 90’s, they founded their relationship on cultural fit, which included the fact that both companies place high value in honesty, integrity, teaming and trust. Those elements have only grown stronger in importance, as the pair jointly takes on even more strategic initiatives. Today, this relationship is unique in its open and trusting atmosphere as well as the depth of involvement of Perot Systems in the day-to-day and strategic operations of O&M. “Perot Systems’ people are in every single strategic planning session or leadership or directors’ meeting that we have at O&M,” states Higday, “and they have the same access to any of our executives and teams that I would have. They can go talk to our CEO, and they have the ability to bring up ideas and even get bonuses from O&M for cutting costs. Culturally, we’ve integrated them completely. They feel like they are our own employees. It works great.”
He adds: “I’ve worked with other outsourcing partners in prior positions in my career, and it was very rare that the outsourcer was sitting at the table with its customer in strategic planning.”
Enabling a Heightened Sense of Purpose
At the heart of their second contract (2002) is transformation of the way O&M conducts its IT projects and investments. At that time, O&M was spending roughly 90% of its IT budget on support for existing systems, and only 17 of 139 people on the account were working on new products or value-add enhancements. “That’s not the ratio we wanted,” recalls Higday. “We wanted people focused on innovating for the future, not on supporting the past.”
One year later, that 17 increased by 176% to 47 people who were focused on strategic development projects – two-thirds of the way to their goal of a 50-50 mix in use of resources.
The companies’ second outsourcing contract also includes a unique, two-sided incentive to achieve their overall objectives. First, a gainsharing plan is connected to Perot Systems’ performance of systems support: if Perot Systems goes to O&M with an idea that enables the provider to perform systems support with fewer dollars or people, they each are awarded a percentage share of the savings.
The other half of the incentive arrangement pertains to a risk-sharing agreement for IT development. Under this plan, O&M comes up with an idea for a new system and tells Perot Systems the development cost it is willing to invest. If the provider figures out a way to do it at a lower cost while still meeting the service level agreements, Perot Systems keeps the overage; if the provider spends more than the original agreed-upon price, Perot Systems picks up that tab. Several ideas have been successfully implemented under this risk-sharing plan.
“We come up with an idea together that is a couple of years ahead of the industry,” explains Higday. “Then we start working to develop it. Sometimes we productize it to sell to other companies, and sometimes we just use it internally.”
Internally, for example, their innovations have resulted in a highly scalable, fault-tolerant systems architecture for handling order fulfillment over the Web. Not only does it reduce costs and facilitate international business, but it also increases the quality of status information O&M can pass on to its customers. Moreover, capacity to handle peak transaction volumes has increased by 500 percent.
These days, O&M and Perot Systems sometimes offer a joint solution to hospitals. Capitalizing on O&M’s healthcare provider core competencies and Perot Systems’ IT presents a unique, blended, top-rate outsourced solution for their mutual customers. There are no incentive arrangements tied to these joint activities, adds Higday. “There doesn’t need to be an incentive. We have a really great partnership arrangement and trust each other.”
“It may be that a hospital is outsourcing its IT to Perot Systems, and then they want to set up a situation for a medical supplies distributor and ask Perot to help them find one,” Higday explains. “Or there are situations where a hospital is using O&M’s IT solutions for managing medical supplies distribution, and then they want to outsource the rest of their IT; so we bring in Perot Systems.”
Their highly successful outsourcing partnership has opened the gates for a new line of business for O&M. They now have 235 people providing outsourced distribution services (moving products around in hospitals) – logistics services, not just IT solutions. According to Higday, O&M would never have become an outsourcer had it not known, from the relationship with Perot Systems, how outsourcing works successfully.
“We say to our customers, ‘We know every single reason why you’re worried about outsourcing because we went through our own contractual arrangements twice,'” Higday explains.
He says O&M just developed a new service, which is outsourcing a hospital’s entire supply chain process (and people). The contract O&M is using is modeled on its own contract for the relationship with Perot Systems. Their partner approach to their relationship even extended here. “We sat down with Perot Systems and showed them our contract draft,” says Higday. “And they told us, flat out, the heartburn items and helped us draft a better contract for us to give to our customers.”
View on Relationship-Building:
- “Our customers don’t know who works for Perot Systems and who works for O&M because, culturally, we treat each other as teammates.”
- “Initially, we at O&M lost a customer soon after the initial contract signing. Perot Systems responded with an adjustment of our contractual terms, which allowed us to reduce spending without incurring contract penalties.”
- “Both Perot Systems and O&M are open and honest in communications. We trust each other to be dealt with fairly and professionally. We both share business drivers to decisions, rather than withholding information for negotiating power/posturing.”