Outsourcing: The trouble with mega deals
As mega outsoucing deals begin to lose their shine, is it time for selective sourcing to take centre stage?
After a number of public mega-deal outsourcing disasters and disappointments, organisations are becoming more confident about picking and choosing a range of suppliers whilst retaining some control of their IT.
Qantas AU$1.4 billion deal with IBM and Telstra in May, is a classic example of how some companies are shying away from handing over full control of their IT to a third party and are taking a more picky approach.
Andrew Richard, MD of KAZ Technology Services, says that selective sourcing can best be described as taking a vertical or horizontal slice of your business operation and paying someone to do it for you. "It could be anything -- IT services, desktop, service desk, or the management of the datacentre," he says.
Selective sourcing, says Richardson, is a definite trend as it allows customers to more readily identify and achieve benefits, as well as providing better price visibility. "If you look at the mega deals, suppliers were charged with huge responsibility, and a broad and deep chunk of IT operations was being thrown over the fence to a single provider. In most cases they haven't delivered the business benefits expected," he explains.
What is wrong with mega-deals?
Firstly, says Richardson, mega-deals create an environment for the misalignment of business and IT. "They are typically done on a keen price front, where the service provider expects to make money over the long term and manages the contract very tightly."
"What you have in practice is the supplier trying to generate more revenue from the contract to achieve their goals, often by enforcing the deal to the letter. Customers are now saying 'This task used to be really easy, now I have to wait two weeks for it to be done and pay AU$500 for something that used to take half an hour'," he adds.
Selective sourcing allows for a clearer field of responsibility, is often more manageable, allows for easier alignment of the supplier and customer's needs, and more opportunity to choose best of breed partners, says Richardson.
"It gives the CIO the opportunity to take control of a company's IT strategy back from a third party," he says. "The Qantas deal with IBM and Telstra proves that selective sourcing doesn't necessarily have to be small -- it means focused. However, if you are a small corporation you might not have the scale or critical mass to generate a return on outsourcing if you carve it up into smaller chunks," he adds.
| • Outsourcing: The trouble with mega deals |
| • Transparent and flexible |
| • Scrutinising the pros and cons |
| • Case study: Qantas selects IBM and Telstra in AU$1.4 billion deal |
According to Barry Pipella, vice president of strategic sales, IBM Global Services Australia and New Zealand, some companies, particularly mid market companies, are increasingly mixing up in-house talents with a selection of third party vendors.
"Companies are beginning to outsource only the services that will benefit them, rather than bundling everything in together and only seeing the final bottom line price," he says.
Pipella says selective sourcing allows for more transparency. If a company wants to outsource its desktop, the supplier will give a price on the desktop alone, not a bundled package figure for a lot of stuff the customer might not want. "Companies are getting a price for exactly what they asked for, for example AU$65 per month per desktop, and it is more transparent," he says.
Also riding the crest of the selective sourcing wave is a willingness of the outsourcing suppliers to adapt to change, says Pipella.
"Selective sourcing is linked with on-demand services and is really about a better, clearer and more collaborative service that brings flexibility -- these are the true benefits," he says. Add to that the ability to change as market dynamics change, it allows businesses to be more cost effective than before, he says.
"We've developed a multi-vendor integrated services management methodology to road map sole sourcing agreements," says Pipella. "We help with management and governance and assist a lot of companies handle contracts with two, three, four, or five providers," he says.
Pipella says at the fore of selective sourcing is the issue of measurement and clear objectives. "It means suppliers are always up for scrutiny," he says.
A Natural Evolution
Robert Schwartz, managing director of telecommunications services company Damovo, which includes the Commonwealth Bank amongst its clients, says that selective sourcing is more of an evolution from the big bang approach than a trend.
"What we are seeing is clients saying that an outsourcer did a good job in certain areas but not others, and it's a better model to have three or four partners who add specific value in specific areas, rather than to totally insource or totally outsource to one provider," he says.
"The ATO is a classic example of a company going through this process. Before it did most of it's outsourcing through EDS, and could see that EDS offers a lot of value in X, Y, and Z, but also that they'd be better off forging direct relationships with some companies," says Schwartz. "I don't care what sort of organisation you are, you can't be all things to all people. If I am talking to you at my level of competence and you tell someone else, the message can get lost."
Guy Barnes, Asia-Pacific outsourcing director at Unisys, agrees there is a definite trend to "parcel out discrete IT components to better match buyer needs."
"There is a perception that it is less risky after many well publicised mega deal failures and with a lot of press interest around this it has raised awareness in the CIO community," says Barnes. "It is the government and larger companies who have lived through the mega deals, the parceling up of the business into big chunks, that are driving the selective sourcing trend," he adds.
| • Outsourcing: The trouble with mega deals |
| • Transparent and flexible |
| • Scrutinising the pros and cons |
| • Case study: Qantas selects IBM and Telstra in AU$1.4 billion deal |
However there are management risks tied up with selective sourcing, he warns. "There is a huge cost to managing multiple vendors, as every different provider multiplies the number of communication channels and the cost of administrating and governing the contract," he says.
The benefits of better aligning the needs of the customer with the capabilities of the provider are, however, obvious, he says. "Not every company has the best competence across a portfolio of services."
"Secondly, the buyer can get the suppliers to sharpen their pricing, whereas when everything is bundled together it becomes more difficult to benchmark and aggressively demand price efficiency across the components of a deal. Discrete packages are more visible in the tendering process, so there is a definite benefit from a price and visibility perspective," says Barnes.
But the other extreme of having too many suppliers is also not ideal, he warns. "The industry is still working out what the right number of suppliers is. Qantas has gone from a dozen to a few, which is more manageable for them and closer to the right answer. It's not one supplier and it's not many, it's a few," he says.
A downside of having too many suppliers, says Barnes, is it can limit the scope of creativity of commercial models, such as joint ventures. "We did a deal with a Western Australian bank three years ago for IT services and it was a joint venture. If this bank had split their IT portfolio into discrete bundles we wouldn't have been able to do this. The fact that we had the whole scope allowed us to have a creative commercial model, a joint venture, which we both have a stake in, both get dividends from, and it can only happen with that kind of scale," says Barnes.
According to Dimension Data's CTO Gerard Florian, sometimes selective sourcing comes about as technology becomes more mature and ingrained in business processes.
"A lot of IT or engineer type folk don't want to get into the mundane side of things, for example going through firewall logs on a monthly basis, so the tech people remain in-house to focus on the process side and get a third party to come in and do the mundane stuff, staff satisfaction goes up, and the company retains control of the important stuff," he says.
Florian says that unlike the five-or-10 year contracts that have been typical of the larger mega deals, customers are now looking for a time frame which is reflective of the business environment. "They're not looking at three months, more like three years," says Florian.
Florian says people want a more flexible support arrangement. "They want to provide some base services, for example if the business decides it wants to implement a new call centre strategy the outsourcing contracts needs to be able to accommodate that kind of change," says Florian. "Some of these larger mega contracts seem very rigid and stifle innovation, and if you come along with a change of business strategy, it is treated as a variation and can be expensive.
| • Outsourcing: The trouble with mega deals |
| • Transparent and flexible |
| • Scrutinising the pros and cons |
| • Case study: Qantas selects IBM and Telstra in AU$1.4 billion deal |
In May Qantas announced an outsourcing agreement with IBM and Telstra for its future IT infrastructure -- and it was a selective sourcing deal.Under the agreement, collectively worth AU$1.4 billion, IBM will handle the delivery of data centre operations, mainframe and mid-range computing, and other managed services over 10 years. Telstra will be responsible for domestic data, voice, and desktop services over seven years. In recent years, Qantas has forged strategic alliances with Telstra for its domestic communications network and desktop services, IBM and Oracle for business e-enablement, SITA for international network, and Amadeus for ticketing, reservations, inventory, and departure control.
"This is absolutely a selective sourcing agreement," says Fiona Balfour, CIO of Qantas. "Qantas is an old and big IT shop, in aviation terms, dating back to the early 1960s, and we have done everything ourselves for a long time," she says.
"We've built a managed services organisation, brought in people, trained them up as lawyers or commercial deal managers, and have a very high level of literacy in IT and IT services using that team of people to manage a handful of strategic deals," she says.
In the past, Qantas found itself dealing with around 200 separate suppliers. "This was not adding much value to the airline. IBM does that for a living," says Balfour.
Balfour says the fundamental driver for going down the selective sourcing route was the age of Qantas's datacentre. "It was designed in 1969, built in 1970 and implemented in 1971 and has had a 30-year design life, and we couldn't renovate it. So we could either build another one or do a deal," says Balfour. "We had to go and do something that delivers better economics for our company, and that's what we've done," she adds.
It's been six years since Qantas first dipped its toe in outsourcing, says Balfour. Telstra has provided it with its thick pipes for voice and data, with Qantas still owning most of the infrastructure. "Over the last couple of years it's become clear that we can no longer do everything ourselves so we looked around the world at what others are doing," says Balfour.
"A decade ago there was a trend towards outsourcing the whole of IT and airlines such as Air Canada and American Airlines went down this route but it was not successful," says Balfour. "It worked financially but the organisations lost control of their IT and of their application development costs and that's the bit of IT that adds the most value to a business," she adds.
Balfour says that Qantas had a policy of keeping IT in-house until she became CIO and formalised the selective sourcing strategy. "We decided we will outsource the commodity infrastructure components, and if we can go to market and buy in a service, we will do that," she says.
There are two parts to IBM's agreement with Qantas. Firstly, IBM will migrate Qantas' servers to a shared infrastructure at an IBM data centre in Sydney, which will enable Qantas to access processing power and storage capacity on an on-demand basis. Using a variable pricing model, Qantas will pay only for the computing power it uses, which has the potential to reduce the airline's IT costs significantly.
Secondly, IBM Global Services will manage a range of services, including service desk support, security, and change management, across all of Qantas' IT service providers.
"The deal will involve 600 UNIX servers redeployed onto a Linux service arm, and likewise all our mainframes," says Balfour. A "greening clause" has also been built into the agreement which means that under the terms of the agreement, the servers and mainframes will be refreshed every five years and thereafter.
On the voice and data side, Telstra has been running Qantas's desktop for two years. "Some parts of this we were not happy with and so we have reshaped the deal and it now also contains a greening clause," says Balfour. "Telstra will renew our voice and data network, will move us onto an end to end IP infrastructure and that will allow us to do nice things with applications," she adds.
Application support, architecture and planning, IT and security policy will continue to be managed and supported in-house by Qantas. "We may not always do these things in-house, we may get a third party to do it, but the intent is to manage and maintain a workforce in-house that can do those things that drive the greatest value," she says.
Balfour says deals are made on a pay-as-you-go basis. "Some years we carry more passengers than others so we have to max up IT up to meet maximum demands. If we need more processing capacity one month than the previous month we need to be able to flex up and down," she says.
Balfour says selective outsourcing allows Qantas to move IT infrastructure costs up and down according to the shape of the business, which is "particularly important for an airline".
Qantas, in its new agreement with IBM and Telstra, has basically moved its fixed costs to variable costs, says Barry Pipella, vice president of strategic sales, IBM Global Services Australia and New Zealand, giving it more flexibility.
"Qantas now has overall around six suppliers, we do the IT, Telstra does the network, Amadeus does the ticketing, and so on, and we've worked closely with the governance model to assist them in managing this, as well as things like disaster recovery which is a good basis for trust," says Pipella.
This article was first published in Technology & Business magazine.
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| • Outsourcing: The trouble with mega deals |
| • Transparent and flexible |
| • Scrutinising the pros and cons |
| • Case study: Qantas selects IBM and Telstra in AU$1.4 billion deal |