Creating Flexibility for Outsourcing Turbulence
Not everyone goes to Australia seeking boomerangs and didgeridoos, emu eggs and crocodiles or world-class golf courses. Some actually travel to the Land Down Under to observe a unique and highly successful approach to managing the outsourcing relationship between the Australian Taxation Office (ATO) and EDS. “We’ve had a number of international visitors come to see how we manage this contract. People are interested in why it’s working so well,” comments Bob Leach, Assistant Commissioner of IT Services.
It’s worth studying because, when obstacles impact a business alliance, it breaks or the union becomes stronger. And this alliance has been taxed with chaotic challenges from its inception. Flexibility from both partners usually is the strongest thread that holds alliances together at such times but, in this Aussie story, flexibility is a byproduct of a “Relationship Management Principles” approach they jointly developed.
The issues they faced could have been their undoing, potentially as destructive as the Great Grasshopper Year of 1874 in the U.S., when tree limbs broke under the weight of thousands of grasshoppers that even ate harnesses and hoe handles. But, unlike the grasshopper plague, the ATO and EDS alliance only grew stronger because of daunting challenges.
Leach credits their success to working daily within the framework of their relationship management principles. “We are a joint team; and our joint purpose is to deliver the right services, at the right time to achieve our joint business outcomes.”
The parties in many outsourcing relationships focus much of their effort on building mutual trust in the first few months or year. Their objective is to manage the relationship from something far more effective than a contract. In the ATO-EDS relationship, however, they started with trust, based on the relationship principles as their foundation.
Probing Potential Partners
Even before the Australian Government mandated market testing IT across the entire government, the ATO had already started the process of working with external service providers to deliver IT services. Assistant Commissioner Leach says they had reached the stage where they didn’t have all the necessary IT resources and expertise in-house. It was not only about dollars, but was an effort to gain access to economies of scale and expertise they would need. The ATO has offices in all major regional centers and major metropolitan areas of Australia. They also have small offices in small towns, field offices and a mobile office platform for educating citizens about taxes. IT was managed centrally, but each major branch office had an IT component to provide first-level support services.
The outsourcer would need to provide all installation and configuration support, maintenance, operations and capacity planning associated with infrastructure for mainframe, midrange, desktop, all standalone systems, a large data warehouse system, all Web services, helpdesk, printing, mobile computing platform, and IT infrastructure for a new public key infrastructure leading the world in eCommerce technologies. The winning bidder also would support the Microsoft office suite of products, provide hardware and operating system, third-party tools support, as well as all network and telecommunications facilities for the ATO.
EDS, with worldwide technical capabilities, proven track record and a willingness to be flexible, was the successful bidder for the ATO contract. The Request for Tender included three additional requirements:
- The outsourcer would be obligated to acquire all ATO IT infrastructure and bring it to the level needed to meet the required services.
- Because the telecommunications industry in Australia was undergoing enormous competitive adjustments and privatization, the ATO wanted some leverage to change, add, remove or re-price services. So the five-year outsourcing agreement had a separate two-year timeframe with one-year extensions for the telecommunications component. For the outsourcer awarded the contract and, thus, looking at making capital investments in the telecommunications service component, this would require flexibility.
- Part of the intent of the government’s outsourcing initiative was to help expand the capabilities of the IT industry in Australia, so the ATO contract included an industry development component. The outsourcer would be required to fulfill a certain percentage of its services by subcontracting with a number of local Australian companies, some even without a national presence.
“Through all the evaluation and discussions we had with EDS, it was always about how the ATO wanted to do business and how EDS would fit their practices and procedures to meet the ATO needs, as opposed to how EDS could put in an internationally recognized EDS infrastructure,” says Leach.
Little did the ATO know how important EDS’ willingness to be flexible in meeting the ATO’s needs would become.
In a hurricane, the central “eye” area of the storm is actually the calmest spot among the turbulence. It’s much the same in an outsourcing relationship that, like the ATO and EDS, is centered on principles that build an effective partnership at the outset. Despite the unexpected events that might bombard their plans, a relationship built on trust and commitment toward their mutual goals will survive the storms. Some will become even stronger because of the storms.
The ATO retained applications development, architectural functions and IT security in-house, and EDS assumed its responsibilities for the IT infrastructure services in June 1999. It had been only 11 weeks since the contract was signed. But, as often happens in the transition phase of outsourcing relationships, the workload in the first few weeks of the contract was beyond what had been anticipated. That workload placed an interesting strain on their relationship principles and guidelines.
Y2k problems were just around the corner, but even before that hurdle, came tax reform. According to Leach, it was the largest reform of the Australian taxation regime since taxation in Australia started, and all of the changes were underpinned by technology. It meant that EDS had to continue providing services to the ATO at contracted service levels and, at the same time, had to satisfy all the requirements of the tax reform. Reputations of both EDS and the ATO were on the line.
With deadlines that were close to impossible to meet, EDS achieved business capability solutions at each required date. EDS also demonstrated its flexibility by changing operational procedures to suit the changing requirements of the Australian Taxation Office. The outsourcer also was flexible enough to change its own management structure from centralized procurement and management activities in Sydney, Australia to satisfy the changing business requirements of the ATO in Canberra.
After the Dust Settled
To top it all off, EDS has exceeded the government’s required target for development of the Australian IT industry by more than 219%.
Leach believes the most valuable aspect is “the relationship itself.” It’s not a partnership, because the commercial risk is not equal. In his words, it’s a very strong business alliance. Even so, it’s unique because of the approach they took in developing the principles by which they would interact. Trust. Open, honest communication. Attitude of commitment toward the ATO’s business goals. Can-do attitude.
He advises companies considering outsourcing to make sure both parties understand their mutual expectations. To build for success, he says it’s important to “get a management structure and working principles in place as early as possible.”
And there’s no substitute for flexibility!
Lessons from the Outsourcing Journal
- Although it’s easier to manage an outsourcing deal from the contract rather than from a relationship aspect, the outcome will be better if managed by relationship principles.
- Whether a supplier will be flexible during the ongoing relationship should be noticeable during due diligence and contract negotiations.
- Large, world-class suppliers have the resources, technology and expertise to deliver good services, or they would not be in business. The differentiating factor is the supplier’s approach to managing the relationship itself.