The Benefits and Risks of Business Transformation Outsourcing (BTO)

Ask most CIOs about the biggest benefits of outsourcing relationships, and "innovation" is unlikely to top their lists. Conventional wisdom holds that outsourcers can do only what they’re told—they can help reduce costs and manage technology efficiently, but they can’t innovate or help a company use IT to transform the way it does business.

But a new marketing push by some of the largest IT outsourcers is aiming to change that belief. Dubbed Business Transformation Outsourcing, or BTO, the providers claim that new types of outsourcing relationships can help initiate technology-based business transformations—rather than simply lowering costs.

It’s too early to tell if BTO will deliver on its promise or just turn out to be a ploy to sell strategy consulting on top of traditional IT services, but the term’s very existence is another clear indicator that enterprises are seeking creative ways to get consultants to assume more risk and responsibility for delivering business innovation.

An Innovative Edge?

"The idea that you continue to have joint accountability and vested interest in what happens seems to make a lot of sense," says Lou Delery, vice president of operations for AT&T Consumer Services, describing a BTO-like structure he calls "cosourcing" that his company chose for a $2.6 billion deal with Accenture.

While stopping shy of an actual joint venture, the deal’s structure aims to reward consultants for delivering ongoing innovation by creating a new organization staffed by both AT&T and Accenture employees, with its own pro-forma P&L and gain-sharing provisions, according to Delery. Technology investment decisions are guided by a quarter-to-quarter master plan and financial metrics.

The genesis of the deal, he says, was AT&T’s realization that it had fallen behind on key technologies in its consumer sales and customer care operations—such as CRM, personalization and self-service—and that it needed a partner to help it deploy innovative technologies quickly and strategically to achieve business goals such as customer retention.

"Technology had changed dramatically, and [our] ability to serve customers was lagging a little bit," says Delery. At the same time, however, he adds that AT&T knew that "one of the things you have to be very careful about with outsourcing was taking a part of your business and giving it to another company." So in negotiating the deal, the company made sure it would retain all control over business direction, marketing strategies, product offering definitions and the "customer experience blueprint."

"Cosourcing allows you to retain quite a bit of control," says Delery, while also creating the right incentives for ongoing innovation on the part of outsourcers. "They have an incentive to make the technology work even [better]. There’s a certain committed investment that they’re making and we’re making." The deal structure also helped AT&T reduce its up-front capital outlays and retain IT talent within AT&T, Delery claims. AT&T has subsequently added a similar $500 million deal with Accenture for credit and accounts receivable management.

Benefits of Offshore

Other enterprises have attempted to reap the benefits of outsourced innovation using more traditional deal structures. In 1999, when Ron Glickman became senior vice president and CIO of San Francisco-based DFS (Duty Free Shoppers) Group, a unit of Mo¿Hennessy Louis Vuitton, he found that the IT operation was badly in need of a transformation. "The organization was perceived as a cost to be minimized and not very strategic," he says, and it was split into 10 different regions supporting the company’s luxury products stores.

Glickman quickly started exploring opportunities to remove cost and improve service. "It was clear to us from the beginning that we had to do both," he says. So he created a map that involved outsourcing key IT processes such as systems development to Cognizant Technology Solutions, a vendor with extensive offshore development capabilities.

Glickman then negotiated a three-year deal that commits a guaranteed revenue stream to Cognizant with the capability to add projects on a pay-as-you-go basis. "We don’t do gain-sharing [as does AT&T]," says Glickman, "but as they come up with ideas to reduce our costs, we redeploy some of those dollars into other projects."

Thirty percent of the Cognizant team is dispersed throughout DFS’s operating environments, and 70 percent is offshore, mainly in India. The result? "It’s working great," says Glickman, who points to specific technology successes driven by Cognizant recommendations. DFS had legacy merchandising systems running in 10 different locations, for example, which Cognizant was able to consolidate onto a single IBM AS400. Glickman says the vendor also found a way to rearchitect DFS’s data warehouse environment for faster reporting and a single view of enterprisewide data.

BTO, Ill-Defined?

According to Agilent Vice President and CIO Marty Chuck, who led his IT team through a major transformation when the company spun out from Hewlett-Packard in 1999, transformation outsourcing is a concept that exists in the eyes of the beholder.

"One person’s outsourcing, or management consulting, or vendor software purchase is business transformation to them," says Chuck. "You do BTO for a couple of reasons—improve capabilities, reduce cost, lower risk. You’re either transforming, or you’re outsourcing, or your doing both—they’re neither mutually exclusive nor married."

To help facilitate the Agilent divestiture, Chuck cloned a copy of HP’s IT infrastructure. Unfortunately, that design was twice as expensive and 10 times the complexity of what the new company would ultimately need. It was also burdened with thousands of legacy applications. So Chuck turned to a group of trusted vendors to help drive a transformation. "We kind of got a kick in the rear when we left HP to fundamentally transform ourselves," says Chuck, who realized he needed to make dramatic changes quickly to resize and rationalize the infrastructure.

Chuck began by consolidating Agilent’s technology spending so that it could be "pointed at our significant partners"—a small handful of major vendors such as Oracle and Deloitte Consulting. He then proceeded to involve those vendors in helping drive the company’s transformation to an environment consisting of fewer integrated applications, such as ERP, that could serve as the basis for further innovation. The end result was a 50 percent reduction in IT spending while maintaining "substantially the same" service levels.

"Before, we pretty much kept our body shop vendors at arm’s length," explains Chuck, describing Agilent’s deepening BTO relationship with Deloitte Consulting (and the other select vendors). "Now [we’re] beginning to use them to help put together an integrated IT strategy. Our relationship with them is much more involved. The value is much higher." In addition to helping to identify growth opportunities and figure out how to prioritize projects, says Chuck, "they tell me everything that is going on in my organization that does not align with my strategy."

Chuck’s conclusion? "As much as IT organizations like to believe that they’re innovators, they can’t innovate as fast as partners who are deeper in the areas they want to innovate," Chuck explains. "I can do IT better by knitting together vendors."

Buzzword du Jour?

Despite its promise, the BTO concept certainly has critics. "BTO promises to solve all the problems you don’t know you have yet," says Stan Lepeak, a vice president in the technical services practice at Meta Group. "It’s a very nebulous term." Lepeak isn’t convinced an outsourcer can take over an IT-driven business process and also transform it. "Three to five years down the road, how do I know that I’ll still be competitive?" he asks.

He cites the challenges of measuring BTO’s success without clear benchmarks, motivating and retaining internal leaders who are left with only a skeleton staff, and managing competitive conflicts with vendors who may be servicing multiple industry players.

"The pieces are really just being put together," Lepeak says. "It’s a natural next step, but we’re looking at a five- to 10-year maturation process." He says vendors that require a steady diet of big deals are currently pushing BTO. "It’s a way of saying we want to kind of run a lot of their business," he says.

Others claim that the value in BTO-type deals actually lies less with vendor innovation than with access to state-of-the-art third-party technology, which lets enterprises fundamentally restructure labor-intensive functions and more quickly introduce innovations at a lower cost. Peter Bendor-Samuel, CEO of Everest Group, a Dallas-based outsourcing advisory company, cites the example of HR, "a business process that’s chronically underinvested.

"Are we really innovating in HR?" Bendor-Samuel asks. "We are, but we’re all doing it the same way. You have an opportunity for a big investment to be leveraged across industries." He claims that BTO-type deals will allow enterprises to leverage "other people’s money"—capital investments by outsourcers in new technology platforms that support, for example, customer or employee self-service capabilities.

"If the suppliers would just stick to that story, that’s where the real value is," claims Bendor-Samuel, implying that the "innovation" component of the BTO pitch is just marketing hype. "The reason they’re trying to lead you down the other garden path is they want the extra margin for the customization piece of it," he says.

It’s All About Structure

Unlike traditional outsourcing, the industry has not yet developed standard structures for BTO deals—each is unique. Regardless, customers and vendors say a deal’s structure is a key to success.

Business transformation is "not just smart people sitting around, but about traction, getting it to work," says Agilent’s Chuck. "The creativity part I think I can buy; the innovation is about having a governance structure, weaving the great ideas into supporting your company’s strategy. You have to have a very clear governance model."

Many BTO deals are structured as joint ventures or close variants. "These have to be gain-sharing deals," insists Meta Group’s Lepeak. "It can’t be an us-and-them; it has to be a we. It doesn’t need to be a joint venture, but it has to be pretty darn close."

The best BTO deals incorporate standard outsourcing terms such as operating and service-level agreements, clear definitions of roles and responsibilities, and incentives. And they also provide mechanisms for dealing with total unknowns. "You want to be able to modify what you have," says AT&T’s Delery, who says his company’s deal with Accenture allows either side to come to a steering committee and say, "Our business or your business has changed," and to discuss what that shift means for the relationship.

Whether BTO will become a dominant form of outsourcing relationships remains to be seen. However, it is clear that the bar is being raised on the outsourcing community by its own marketing initiatives. And CIOs should be ready to wring every advantage out of the new reality.

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Copyright © 2003 IDG Communications, Inc.

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