When BP (formerly known as British Petroleum), one of the world’s most prominent oil and gas companies, arrived in Colombia, South America, it found that the infrastructure from the local telecommunications provider had “room for improvement.” So they built an international satellite dish for communications to Houston, Texas. But communications within the South American republic itself were hampered by three ranges of the Andes Mountains and the Sierra Nevada de Santa Marta (the highest coastal mountain range in the world) and thick rainforests in-between. For their operations in these remote areas, BP built two microwaves. Just three years later, BP found itself at a fork in the road.
Javier Lopez, BP Colombia’s digital business manager recalls the two-pronged predicament. “We needed to flexibilize our IT costs because we were facing a huge development in the fields. We needed to grow probably three times bigger than we were.” But that meant finding a lot of highly skilled IT people and offering them attractive career paths when BP already faced a challenge with not being able to offer a good future to its existing 75 IT employees in Colombia. They had even considered the costly tactic of sending the employees overseas to increase their technology skills. “It was a financial and a people difficulties situation,” says Lopez. “We decided instead to go for outsourcing our local telecommunications network.”
Getronics was awarded the contract, BP’s IT folks changed their ID badges to the outsourcer’s, and they continued to provide services and received the same compensation. This solution to BP’s people problem also aided Getronics, who had arrived without existing operations in Colombia. “They came with just a couple of experts to try to get the operation up and running,” Lopez remembers.
The 1995 contract has been extended twice and, in 2000, a second contract was added for BP’s Common Operating Environment (COE) support (help desk and desktop). No surprise, considering the successful results of the cost-cutting initiatives. According to Lopez, the telecommunications initiative has saved over $1M (US) from BP’s budgeted $6M for the past two years, and the original COE budget of $2.2M (US) is currently budgeted at below $1M.
Even more impressive is Getronics’ solution for replacement of the microwaves. “There was only voice 10 years ago when they were brought in,” Lopez says, “and Getronics came to us with an idea on how to get extra capacity on data without spending huge amounts of money.” Replacement of the microwaves was estimated to cost in the range of $10M (US); an alternative solution of changing the technology behind the microwaves, in terms of multiplexing, would cost $1M. “But they came with an idea that only cost $60,000 and increased the bandwidth capability for data by four times without touching the voice capacity.”
How did BP ensure such effective results in achieving its business goals?
They achieved success by making sure Getronics’ interests were aligned with BP’s. “We did a risk-reward scheme,” says BP’s manager. “Since we knew how much IT services were costing us, we told them ‘this is your baseline for the first year, and your services shouldn’t cost us more. And if you save a dollar out of that number, then it’s a 50/50 split. But if you spend more than a dollar more than the baseline, then you will have to pay on a 50/50 split.’ So they get a reward for operational cost savings, or they run a risk if they spend over the budget.”
The trick is, the baseline is a moving target. Each year, the baseline is renegotiated, based on the savings from the prior year. “So each year they have to prove again that they can save more money,” comments Lopez. “And they did produce extra savings in every year except the first one, which was difficult because they needed to get things ready for the work.”
BP then took another step toward effectiveness and making its costs more flexible when it structured pricing for the COE services by “seat count,” rather than a fixed sum. “That flexibility of being charged by how many computers we are using is very useful for our environment,” Lopez explains. “Because our field production varies, so do our costs. And the only way you can do that is by having a flexible contract like the seat count.”
Nailing Down Excellence in Service
History illustrates an important facet of the quality of service BP sought from its service provider. Through the Pacific Railroad Act in 1862, U.S. President Abraham Lincoln authorized the construction of a transcontinental railway. As it was a risky, expensive venture to build such a rail line, the government sweetened the pot. It would grant loans of $16,000 per mile of track through the Plains, $32,000 per mile through the desert and $48,000 per mile through the Rocky Mountains and Sierra Nevada range. But the incentive plan had a catch – a railroad company would have to finance and lay the first 40 miles itself in order to qualify for the government funds.
Theodore Judah, who founded Central Pacific Railroad Company, set out to accomplish that goal. Unfortunately, his company’s financial backers (including Leland Stanford and Mark Hopkins) just wanted to throw down tracks in a haphazard manner as quickly as could be done to collect the government money. Judah, who wanted the transcontinental line to be constructed soundly even if it took longer, ended up having to find new backers.
Lopez explains BP’s strategy to ensure they wouldn’t have a situation on their hands similar to the railroad incident. “Saving money is one thing, but throwing out good service because you want to save money is another thing. So what we did was mix the risk-reward scheme with a quality theme. For instance, if in a quarter we find out from the customer satisfaction survey that the customers are getting unsatisfactory service; or if I as the contract manager, feel that they are not providing me good service in terms of contract management; then I can go from minus one percent to plus four percent over the total invoice cost and penalize them or give them a bonus for that amount. So they are always motivated not only to cut costs but also to provide us with good service so they can receive an extra four percent on the total cost of the contract. We started with one and four percent, but the current contract is minus five percent and plus five percent. So it is a bigger reward but also a bigger risk.”
The strategy has worked well, and the high quality of work is reflected in the customer satisfaction surveys, consistently rating Getronics in Colombia at top levels nearing 100%.
Nevertheless, it takes more than cost savings and great services for an outsourcing relationship to be sustained successfully over the long term. One word describes why the BP-Getronics relationship works so well, Lopez says. Trust.
“You either trust them, or you shouldn’t do outsourcing. The vendor needs to be very professional and deliver on what they promise, or you will start losing confidence. After all, you give them your budget, and they go out and spend it on your behalf. So you need to be able to trust them on everything they do.”
Lessons from the Outsourcing Journal
- Risk-reward pricing structures provide incentives to the supplier and keep the interests of both parties aligned throughout the life of the contract.
- In evaluating potential suppliers, be sure to check their references with current and past clients, determining whether the supplier delivers on what it promises.
- A per-usage pricing structure will provide more flexibility in costs than a fixed-fee structure.