Evaluating Success in an Outsourcing Relationship | Article

back officeAll companies that experience successful outcomes in their outsourcing initiatives have two crucial foundational characteristics. First, the client company knows, and makes sure the service provider knows up front, exactly what outcomes the client wants to buy. Second, they govern the relationship on an ongoing basis to ensure the outcomes can continue to be achieved, and they periodically evaluate the relationship and outcomes to pinpoint what may need to change to meet the objectives.

At Outsourcing Center, where we study the world’s most successful relationships in our annual Outsourcing Excellence Awards program, both buyers and service providers continually cite these aspects as high on their list of keys to success. However, many industry studies year after year find that many companies continually make the mistake of not deploying these aspects in their outsourcing initiatives.

KB Home, the fifth largest builder in the United States, outsourced most of its IT infrastructure to Perot Systems in 2002. Its expertise in building quality homes extends to building a highly successful outsourcing relationship. This outsourcing relationship is a finalist in our 2007 awards program. Here’s a look at how they did all the right things to achieve success.

Achieving Outcomes Starts with Building a Firm Foundation

In 2002, KB Home began to examine its options for outsourcing its IT needs. The company had quickly expanded and did not have the resources internally to implement world-class infrastructure components that could scale quickly and economically to support growth.

“We had the model but not the internal resources needed to drive our IT standards all the way back through our systems and to take advantage of that strategy,” states Brian Bruce, CIO of KB Home. He says the company always strives to bring best practices into the organization.

The company also wanted a higher performance from the IT systems at a relatively lower cost while optimizing the infrastructure and applications in order to be more strategic in releasing new applications across the company.

With these goals in mind, KB Home worked with a third-party consultant who assisted with a six-month provider-selection process resulting in RFP bids. The company was looking for a provider that would meet the following criteria:

  • Demonstrate best practices and a proven track record
  • Possess not only IT infrastructure and applications management capabilities but also IT leadership that knew how to drive change at KB Home
  • Have proven capabilities in efficiency and productivity gains that would reduce costs over time.

The key driver for provider selection was an outsourcer that would take a partnering approach to the relationship. Bruce says, “We did not want to outsource the service in a traditional manner. We were seeking a provider that we could partner with and develop an environment that would be collaborative and productive.”

KB Home selected Perot Systems, an outsourcing provider with a proven history of a strong partnering mind-set in relationships, and signed a seven-year contract.

One very important strategy was that KB Home’s business owners and IT met to agree on an overall transition plan, thus ensuring they would meet the needs of the business owners and end users. They then followed up with periodic reviews to address execution and feedback.

The companies worked together closely during the transition phase of their relationship and thus managed to avoid pitfalls. They successfully transitioned 28 KB Home IT employees to the provider’s team. Management from both companies met with all affected employees individually and discussed how the change would impact them. Perot Systems also had dedicated HR personnel at KB Home to better respond to individual concerns.

An early strategy was to eliminate all Perot Systems’ business cards and drive recognition as one organization–KB Home IT–regardless of which company is responsible for an IT function. Another tactic was to bring the team together by having the employees wear KB Home shirts. “We didn’t want a culture of us-versus-them and having our business stakeholders think they’re calling a third party for help,” explains Bruce.

Governance Structure

Their service level agreements (SLAs) also reflect a collaborative, partnering perspective. As Bruce explains, if an issue occurs, they put the penalty into a bank. As long as the provider makes a determined effort and meets the SLA in the following three months, it is absolved of that penalty and doesn’t pay the money to KB Home.

They have a joint IT leadership team that meets weekly. “The team prioritizes everything we do–whether it’s a request for system fixes, enhancements, a new application, or a request from an individual user to get help with a PC. Having a prioritization scheme and governance structure ensures we are doing the right work at the right time. It also ensures that all of our IT investments tie back to our common process model and that we are driving consistent IT direction.”

Making IT decisions from a jointly managed, collaborative approach eliminates finger-pointing and also removes the barrier between the two organizations, according to Bruce. “This has really helped outside of IT.”

Taking a best-practice approach, their governance structure facilitates making sure both companies’ interests stay aligned. Annually, they jointly revisit the KB Home annual technology plan, scope of services, and operational SLAs. “We review them to ensure alignment,” says Bruce.

They have a formal status review and scorecard tracking on a monthly basis. But this partnering team really shines when it comes to monitoring performance. “We have performance management processes down to the team and individual levels,” says Bruce. “We hold people accountable for their annual objectives.”

That accountability includes Bruce. One of his key mandates is to drive standardization and common system use. He says the governance structure in this relationship, mandating the way people funnel IT requests to the joint IT team–allows him to “evaluate if we are we doing the right things.”

The Gold Standard in Evaluating Relationship Effectiveness

Bruce, who was formerly a consultant with a major IT consulting and outsourcing firm before joining KB Home, describes the gold standard for evaluating relationship effectiveness. “If you ever have to go back to the contract, you know you have an issue with your client,” he says. “So I measure our relationship with Perot Systems by how well we get through the difficult things and how accommodating they are when we’re outside the strict letter of the contract.”

Bruce adds, “Frankly, if there are changes we want to make or if culturally things are different, we want to know that they’re going to take a partnering approach and not just hold us to a contract to maximize revenue.”

Bruce says that Perot Systems continually demonstrates this accommodation. “We have examples on a month-to-month basis where something will go wrong and they may not be contractually obligated but they clearly feel a broad sense of ownership for the performance of our department.” Furthermore, in their monthly SLA discussions, Bruce says they agree in deciding what to count based on what’s good for IT, not what’s good for Perot Systems.

The agreement gives KB Home the flexibility to scale services up and down. “The annual review gives us the flexibility to change and move people into the right buckets around our organization in order to deliver better service,” says Bruce.

Were there unexpected challenges that tested their outsourcing agreement’s flexibility? Definitely. But their collaborative, partnering approach and continual effort at aligning interests have paid off.

Bruce says a big challenge was the dramatic slowdown in the homebuilding industry the past few years. They had to shift from being in high-growth mode to one of weathering the storm and still beat the competition. That required making sure they kept costs low.

Another challenge arose when KB Home decided to expand its business model to include a strategic agreement to co-design homes with Martha Stewart as well as building condominiums and town homes in select cities.

“All of those business-model changes required us to go in and enhance the IT systems to be more flexible and support those changes. We got through it successfully together,” explains Bruce.

At every turn they exihibited teamwork and shared values–both in and out of the office. Functioning as KB Home IT, they have one organization chart. Team members rely on each other to come together and deliver quality work.

Outcomes Achieved

What else has the duo accomplished thus far in the relationship? Bruce says the benefits of outsourcing–using Perot Systems’ infrastructure and resources that are shared with other clients–allows KB Home to achieve higher system performance at a lower cost and have access to otherwise-unaffordable high-availability storage systems, back-up systems, virus management and spam detection, and other key infrastructure components.

KB Home also reduced the cost structure of key services by using leveraged offerings from Perot Systems.

Another key accomplishment was their effort in Sarbanes-Oxley compliance. The joint team reengineered core IT processes, documented workflows, implemented key controls, and consistently receives high marks from auditors.

Customer-satisfaction surveys yielded a 180-degree turnaround, Bruce comments. “IT went from a low-value, necessary-evil cost center to a department that is delivering services, value, productivity, integrity improvements, and new systems,” he says.

It’s more than just a matter of improving the image of IT at KB Home. Bruce says IT is now a service-oriented organization, as opposed to simply a necessary provider. “We now align our IT resources with key business initiatives. This alignment allows the company to focus better on delivering homes to buyers and on gaining market share.”

Commitment

As Bruce points out, every outsourcing client at some point needs to answer important questions: Do we want the relationship to continue? Did we get the value that we need in order to justify this relationship? Would we do it again or would we try something else?

He reports that KB Home is very pleased with Perot Systems’ services. “We feel they’ve been a valuable partner and helped us to achieve success that would not be as seamless had we done it ourselves.”

Both parties report that they share four critical values: integrity, respect, commitment, and trust. These values must be demonstrated at an individual level as well as a company level. They each act in a manner consistent with their shared belief that this partnership is critical to the success of both companies.

Bruce says their commitment to delivering great service is not just a principle and that it permeates all aspects of their environment. Twice a year they solicit feedback through a formal process and take concrete steps based on actionable responses.

One result of the process was establishing a cross-functional group to “gather input for a consistent coherent, articulated recognition program. “The program ties appropriate motivation and rewards to the strength of our team,” says Bruce. The group was structured on BUILD–an acronym for Best practices every day, Urgency in actions, Innovation in solutions, Leadership in decisions, and Dedication to teamwork and integrity.

“BUILD generated a great deal of enthusiasm at KB Home, and it also demonstrated commitment to our people,” says Bruce. “This would not have been possible without having shared values with Perot Systems. It’s a relationship built on mutual trust.”

When it comes to success in getting the outcomes the buyer wants to pay for in outsourcing, KB Home and Perot Systems know exactly what to do.

Lessons from Outsourcing Journal:

  • Success in outsourcing starts with the buyer determining up front exactly what service outcomes it wants to buy and then making sure the service provider knows this.
  • An effective governance structure is crucial to outsourcing success. The governance structure should include periodic evaluation of the relationship and outcomes to pinpoint what may need to change to meet the agreed-upon objectives.
  • Outsourcing is an effective strategy for implementing world-class IT infrastructure that scales quickly and economically to support the client’s growth.
  • Outsourcing is an effective strategy for ensuring not only world-class IT resources but also change-management ability to drive standards and best practices throughout the client’s organization.
  • One strategy for establishing service level agreements (SLAs) that reflect a collaborative, partnering perspective is for the service to provider to put the penalty into a bank if there is an issue. As long as the provider makes a determined effort and meets the SLA within an agreed-upon time limit, the client absolves the provider of the penalty.


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