Outsourcing – When the Mission Changes, IT Does Too

When Jerry Gross came aboard as executive vice president and CIO of Washington Mutual in June 2001, he had an open mind about outsourcing. The Seattle-based bank’s 10-year, $533 million outsourcing deal with IBM Global Services (IGS) dated back to 1996. As part of that deal, IGS provided desktop support, network services, help desk, network management, architecture and strategy for the $17.7 billion company. Having just inked a deal with IGS himself in his previous position as the group executive of technology, operations and e-commerce of Sydney, Australia-based Westpac Banking, Gross wasn’t averse to the idea.

To learn the lay of the land, Gross conducted focus groups with employees inside and outside IT, reviewed customer satisfaction data and compared notes with his peers. “I went through a fairly exhaustive process to find out what people’s perceptions were of the services we were providing to them as customers, both internal and external,” Gross says.

He found that IT’s service levels were less than satisfying. For instance, it took up to a month to deploy a new computer for an employee. Another red flag: Calls to the help desk weren’t getting answered in acceptable time. As a result, IT was getting a bad name.

Gross determined that the IGS deal, which made sense in 1996 when WaMu was in rapid growth mode (the company has acquired 32 companies in the past 20 years), was no longer serving the bank well. During the late ’90s, WaMu relied on outsourcing just to keep the business running. But once the acquisitions slowed, the CEO made operational excellence and customer service top corporate goals. Outsourcing was negatively affecting those two new priorities. “It occurred to me that in some cases it would be better to reinsource back into the WaMu IT group because the functions involved such close interaction with customers,” Gross explains.

But first, Gross says, he needed to get his house in order. Most technology development and strategy had been distributed to the business units, which had in turn further outsourced some of their IT to yet more providers, including IBM and Accenture. In effect, Gross says, there were a number of players internally and externally providing strategy and architecture advice to the company, ultimately fragmenting the IT department and the company.

So Gross restructured the IT department in an attempt to get everyone “rowing in the same direction.” Gross also wanted to begin running the technology department like a business. “We forced ourselves to be price-competitive with external service providers,” he says. “We began to model ourselves after an IGS or other service provider.” Gross implemented the Balanced Scorecard method of creating specific, quantifiable goals and monitoring performance as a way to stay on top of service levels.

The restructuring was key to proving to the business that WaMu’s IT division could reinsource further activities. “We were able to raise the quality of service levels and build trust and credibility with the business units,” Gross explains.

At that point, Gross decided to take back the help desk, network management, architecture and strategy work?”all of the resources that directly affected our customers,” he says. Although Gross would not reveal the costs, a business case analysis indicated that the company would see a return on the initial costs of insourcing within nine to 12 months. But Gross points out, “Reinsourcing wasn’t just about the cost. It was about the service levels and the value proposition to your customers. The benefits that one can get when service levels are improved are immeasurable.”

So he simply picked up the phone and called IGS. “They weren’t surprised when I contacted them,” Gross recalls. “When you’re in the IT services business, negotiation is a fact of life.” Armed with a lawyer on his IT team and the knowledge that WaMu’s size gave it great power in the negotiations, Gross worked through the legal issues and penalties involved in restructuring the contract and terminating some services. (IGS now provides only desktop support and hosting services.) To ease the negotiations, Gross made it clear that he “wasn’t just picking on them.” It was part of a larger strategy to extract greater value from all of WaMu’s vendors.

“When the writing is on the wall that the restructuring is going to take place, [outsourcers] are reasonable,” Gross says. It’s a sign of the times for service providers. “They’re feeling the slowdown,” agrees Shaw Pittman’s Murphy. “There’s more pressure on them to be accommodating.”

The biggest chunk of the reinsourcing?the help desk?took most of 2002. It was completely reabsorbed by December. Gross has staffed it with former IGS contractors and new hires. New strategic work, such as creating a single enterprise customer view, has already begun. And service levels are heading north. Now employees needing PCs wait days rather than weeks.

Gross says he would never again sign a long-term outsourcing contract. “It’s too difficult to maintain accountability and maintain passion,” he says.