Why Shell Created an ‘Ecosystem’ of Three Suppliers When It Outsourced its IT Infrastructure | Article
In September 2008 Hurricane Ike tore through Houston. It was the third deadliest hurricane in U.S. history. One hundred forty-five mile per hour winds tore through one of the Royal Dutch Shell buildings located there, shutting down the Houston data center for four days. The Houston data center is crucial for supporting Shell end users in the Americas.
Just three months earlier, Shell outsourced its entire IT infrastructure to three suppliers: AT&T, which handles managed network services; EDS, an HP company, which takes care of end-user computing and operational integration; and T-Systems, which hosts and stores data. Together, the trio worked like a well-oiled machine to get the energy company up and running.
People tend to pull together in crises. But these three suppliers do the same, day in and day out. Instead of outsourcing to just one supplier that takes care of everything, Shell chose to outsource to best-of-breed suppliers.
IT thinking runs in cycles. What’s the best way to outsource IT: to one supplier or to a consortia of best-of-breed suppliers? “Using multiple suppliers is a market trend,” says Stefan Bucher, T-Systems’ global delivery manager for Shell. Today he says few buyers are giving their entire IT infrastructure to one supplier. “They are dividing up the tasks like Shell did,” he observes.
Shell chose this path because “we get the best innovation and services at the best possible price,” says Jay Crotts, vice president of IT Services for Shell.
Benefits of this approach include:
- Supplier competition. “Competition is the best predictor of future success,” says Crotts.
- Innovation. “This is a good environment to foster collaboration,” says Michael Erickson, supplier manager for the AT&T relationship. “We want them to work together to develop products that will be good for Shell and good for them.”
- Risk reduction. Betty Fruin, supplier manager for the EDS relationship, says the multiple supplier approach “spreads the risk in the event one of the suppliers isn’t performing.”
- Ability to deal in foreign markets. T-Systems, a division of Deutsche Telekom in Germany, is the only non-U.S. supplier on the team. It is able to operate in countries that forbid American workers.
The original challenge
Crotts says Shell originally decided to outsource IT because the company lacked commercial rigor and operational discipline. The department had difficulty meeting the company’s business requirements and its service level compliance was poor. For example, 2,000 out of its 20,000 back-up jobs scheduled to run nightly failed. The service level agreement for this process was one percent.
“We wanted to give the work to people who do it for a living” and stop trying to keep up with “the rapid pace of technological change,” adds Crotts.
Shell had three considerations when it began its supplier selection journey:
- Focus: the ability to focus on strategic issues
- Agility: the ability to respond quickly
- Sustainability: the ability to keep going in 20 countries
At the outset, Shell wanted to outsource its global operation to just one supplier. “That would have been great. But we found it was difficult to do given our scale and depth,” he says.
Shell spent a year talking to IT thought leaders like Gartner and Everest Group, studying the latest IT trends. That’s when its IT leaders came up with the idea of the supplier ecosystem.
The supplier ecosystem
The energy enterprise decided to create an ecosystem of IT suppliers. Currently there are 10 suppliers in the system with three handling its IT infrastructure. (The other seven are Accenture, IBM, Wipro, and Logica for applications and Microsoft, Oracle, and SAP for software foundations.) Shell meets with all 10 on a quarterly basis.
In the case of the infrastructure outsourcing, Shell gave EDS an additional task: a function called operational integrator. Fruin says EDS is responsible for making the disparate parties work together. For example, Fruin recalls the time employees frantically called the help desk because they couldn’t access the applications. “Call volume was much higher than normal,” Fruin says. Then several servers went down.
The solution was not obvious. EDS, as operational integrator, “owns the problem and helps figure out the solution,” explains Fruin. Shell IT calls this “a situation.” In this case, EDS called the other two suppliers, held meetings, and mobilized the right experts. Together they found and wiped out a virus, rebuilt the servers, and got everybody back in business.
The operational integrator removes one of the negatives of using the best-of-breed solutions: finger-pointing among the players. EDS reports to Shell, so there’s only one throat to choke, as they say. “Shell never has to come in and arbitrate,” points out Crotts.
The master services agreements require the three suppliers to have OLAs (Operating Level Agreements) with each other to ensure collaborative behavior in the delivery of the solution. “Our contracts ensure we hold all three suppliers accountable for the entire service delivery,” says Erickson. “This way everyone has a vested interest in delivering for Shell.” Adds Catherine Burns, supplier manager for T-Systems, “We realized we had to make them want to cooperate on their own.”
Initially, however, the three-supplier system “was not ideal” because it took awhile for the trio to learn how to work together, says Crotts. “In the beginning we had 12 to 15 disputes,” says Bucher. “Now it’s rare we have one.”
Currently the partners “are starting to seek each other out,” reports Burns. Adds Bucher, “Now there’s a willingness among all three suppliers to look across the fence to help each other. We collaborate.”
Today Crotts says the threesome can solve a problem in 24-48 hours. This is just 15 months into the relationship. His goal: a two-hour fix.
Shell included penalties to the contract. But Crotts says adding scope is a better incentive. “The option of additional revenue is a much better way to motivate supplier behavior,” he says.
Shell moved 3,500 IT people to its three suppliers on July 1, 2008, in a “big bang” transition. “This was one of the best transitions ever,” Crotts reports. “The transfer gave our people a better career path,” says Crotts.
Rebadging facilitated the requisite knowledge transfer.
Bucher says he was “impressed that Shell understood how to manage a transition.” He says the energy company gave T-Systems six months to complete a thorough due diligence and understand Shell’s business challenges. “This allowed us to devise solutions to implement when we took over,” says Bucher.
Fruin says there was only one unanticipated challenge: All three suppliers underestimated Shell’s complexity. “We are a global corporation. Some of the suppliers had a more regional model,” she says.
Crotts says Shell’s IT infrastructure costs dropped by double digits. Service improved significantly. The systems are more reliable. “Outsourcing made us more efficient,” adds Burns. In addition, she says the team focuses “on new IT solutions to meet our business demands. Outsourcing changed our view of IT itself.”
“The ecosystem is delivering projects and running our systems better than they ever ran before,” says Crotts.
Lessons from the Outsourcing Journal:
- A growing trend is to outsource IT infrastructure to multiple suppliers. This reduces risk, keeps prices competitive, improves service delivery, and allows global participation.
- Hiring one supplier as an operational integrator reduces finger-pointing because that supplier is solely responsible to the buyer. The integrator’s job is to work with the other suppliers when there’s a problem that affects more than one of them.
- In a multi-supplier environment, the buyer has to structure the agreements so they encourage the suppliers to collaborate among each other.