Cutting Costs with Multiple Outsourcers

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The more complex management structures at GM and P&G help those companies to focus their attention on vendor relationships. At GM, Goebel describes an "unusually thin layer" of IT staff who focus almost exclusively on vendor management because so much of IT is outsourced. This "thin layer" comes to about 2000 people around the world, and most focus on managing outsourcing vendor relationships, she says. At P&G, the existence of a massive shared services department makes it simpler to place all outsourcing relationships under one group.

Keeping Track of Vendors

With multiple outsourcers, sometimes the sheer number of relationships to be managed means you'll also need to automate. Such was the case in April 2000 when Cheryl Rowden took over as director of IT finance at Verizon Wireless. The wireless provider doesn't outsource IT infrastructure but regularly brings in consultants from a stable of 150 vendors to work on IT projects. "It was clear that I could never add enough headcount to track all of these relationships," Rowden says.

Verizon Wireless wanted to competitively bid on consulting services from a wide variety of vendors, so it set up a structured system to compare vendors and then handle payments. The following year, Rowden selected InSite, a Web-based services procurement application from Chicago-based Fieldglass. With her staff trained in the application, they currently track 110 active vendors that consult with Verizon Wireless. During the first year, the competitive bidding process saved Verizon Wireless 17 percent of its approximate $US100 million total IT spending on consulting services. The savings came as a result of putting everything out to bid, thereby getting services at a lower cost. Using the application has also allowed her to compare vendor performance and reward those who do well. And vendors have not been complaining, she says, because the streamlined systems, which also keep track of what the company owes to vendors, mean they get paid in "record time".

Lawyers working on outsourcing deals advise clients to use a software application to track vendor relationships and performance, and to help create regular reports and dashboards. "The relationship management people and IT people in charge of outsourcing deals need to live and breathe this kind of stuff," says Kevin Colangelo, a senior associate at Kramer Levin Naftalis & Frankel who works on large outsourcing deals.

Play Well Together

Collecting and storing hard facts on vendor performance provides ammunition when you need to get tough. Copas of Russell Stover says that after years of experience working with multiple vendors, he has learned that it pays to be forceful at times - especially when those vendors aren't cooperating with one another. Six months ago, for example, he was rolling out point-of-sale systems in his stores, which involved his ERP outsourcer OneNeck IT Services, NT specialists at another smaller outsourcer called IT21 and several other groups working on installing broadband. One of those groups, a third-party aggregator, was supposed to provide an IP feed but ended up squabbling with some of the other vendors. "I wrote them a letter and cancelled their contract," Copas says. "At the end of the day, ideally, we're not sure who's working for who. We just have to get the job done."

Copas has learned over the years to monitor outsourcing vendors from the start. He makes sure that he has a clear set of performance indicators in his contract, such as uptime percentages for major systems and data centres, so that he can go back on a regular basis to track performance. "If there are violations, the SLA bells start ringing and money changes hands," he says. When he took over the IT department at Russell Stover in June 1999, he determined that the current outsourcer was doing a poor job and considered bringing the Baan ERP system back in-house. But fearing he would have trouble finding the talent, he decided to outsource the ERP system to OneNeck. Soon after, he outsourced payroll to ADP, the company's EDI manufacturing system to Sterling Commerce and desktop support to IT21. Recently, he outsourced the Web site to MarketLive. For the most part, those vendors work well together, he says.

David Karabinos, EquaTerra's chief operating officer, says that companies should draft contract agreements that enforce cooperation. One example is the "operating level agreement", which can require that providers work together for the company's benefit. Joe Hogan, vice president of worldwide marketing, strategy and alliances for HP Managed Services, says all parties - including the client and other outsourcing providers - usually sit down and spell out the need for cooperation at the start of any deal. "Sometimes it's a handshake; other times it means signing an integrated service-level agreement," Hogan says.

Copas would agree.

"You have to manage your relationships so that you don't have finger-pointing," he says. Simply put, he advises CIOs to make it clear at the start of contract negotiations that the vendors risk losing the job if finger-pointing starts. "You have to say: 'Look, we're the customer, and you're here to solve the problem.' If they can't play that way, they're not a good partner for us."

To Go Multiple Or Not?

For some companies, staying with a single outsourcing vendor is still the way to go

When Tom Conophy, executive vice president and CTO at Starwood Hotels & Resorts Worldwide, started thinking about replacing the company's legacy systems and outsourcing vendor in 2003, he considered breaking up the long-standing deal it had with IBM. In September 2004, however, Starwood signed a seven-year, $US100 million outsourcing deal with HP to build a new reservation system and run the bulk of its IT services.

"In the end, we felt we could avoid the extra legal negotiations, contract definitions and handoffs we would have had to deal with had we gone with four or five different providers," says Conophy. "We wanted to avoid the complexity and the finger-pointing."

While a growing number of companies choose to work with three to five outsourcing vendors (some juggling many more), companies that feel they are in the driver's seat with their vendor may not need more. "Companies should stay with what they know, who they trust and what they perceive to be a good deal," says Dane Anderson, program director of xxxMeta Group'sxxx Technology Research Services. "There is no one right number of outsourcing partners."

Conophy says that the decision to award the major contract to one vendor hinged in part on HP's agreement to undergo third-party benchmarking "to a greater degree" than IBM, and to allow Starwood to retain intellectual property for the codeveloped system. Starwood also manages smaller outsourcing contracts with Unisys for broadband services on its properties and several other smaller providers for telephony, but it now considers HP its major outsourcing partner.

Some large outsourcers are so eager to get the big deals right now that they are willing to make concessions - such as agreeing to regular third-party benchmarking - in order to get new business. "Vendors are very hungry and willing to bend over backward to procure the clients," says Howard Spilko, partner and cohead of the outsourcing and technology transactions group at the law firm Kramer, Levin Naftalis & Frankel. In Starwood's case, the company has been rewarded for choosing one vendor with the ability to closely monitor the vendor's progress and benchmark its service-level agreements against other outsourcers during the life of the contract.

"We're in it for the long haul," says Conophy. "But the regular report card will allow us to validate that the relationship is where it should be."

Copyright © 2007 IDG Communications, Inc.

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