CIOs Forge Vendor Collectives to Extract Business Benefits

Getting the best from your IT suppliers takes more than sharp contract negotiations.

Top-tier CIOs are forming vendor collectives wherein rivals such as Oracle and SAP, Cisco and AT&T, Hewlett-Packard and IBM tamp down their competitive instincts to work together on business problems both fundamental and futuristic. Traditional methods of managing IT suppliers—mainly playing rival vendors off each other and negotiating ever-tighter contract terms—stymie creativity and ultimately limit the business benefits both sides get from the relationship, says Alan Matula, CIO of Royal Dutch Shell.

In a bid to uncover game-changing IT, Matula and other CIOs are getting vendors to abide by new rules for their behavior when delivering technology, collaborating on business problems and, as the collective gels, opening up research and development work.

Filippo Passerini, group president of global business services and CIO of Procter & Gamble, credits the close collection of his vendors with helping save the company $900 million in operations costs in the past several years while increasing service levels to employees. Also, select IT providers, including Cisco, HP, IBM and Xerox, have come to know P&G processes so well that they’ve helped cut in half the time it takes the $82.6 billion consumer-products giant to acquire and divest companies, he says.

Robert Webb, CIO of Hilton Worldwide, a privately held global hotel chain, says that he expects his five major vendors to work with each other and with Hilton’s internal IT to imagine new technology or methods “well beyond contractual terms with those providers.”

Of course, when your company is a household name and you wield an IT budget in the billions, suppliers listen. But the vendor management techniques underneath these high-powered collectives are beginning to spread. “CIOs will increasingly have to rely on ecosystems to do the work they need done,” says Chris Andrews, an analyst at Forrester Research. “This is a big shift,” he says. Ralph Szygenda, who, as General Motors’ first CIO from 1996 to 2009, created one of the first major IT vendor collectives, now consults with vendors big and small about how this kind of deep, and sometimes uncomfortable, partnership leads to more revenue for them. Why? Because, he says, CIOs need the help.

Cloud computing, outsourcing and hosted applications make the CIO’s job far more complicated than it was 10 years ago, Szygenda says. If IT vendors work with, not against, each other to make a common customer more profitable, the money flows to everyone, he says. “Customer companies become amazingly more efficient, the CIO has helped the CEO grow, and the IT vendor sells a bunch more to that company because if it’s good, the CIO wants more of it.”

For CIOs, the payoff is in both the smoother delivery of technology and services and the potential to discover new technology—or ways to use it—before competitors do. But cultivating these relationships takes dedication and big chunks of time from the CIO. Special staff positions and different hiring priorities are also required. So is insight into the strategic direction of your company; you want to recognize a competitive leg up when you see one in an IT supplier’s existing products or early ruminations about plans for the future.

“It takes an enormous amount of energy and a lot of lead time,” Matula says. “I consider this a competitive advantage.”

Getting Started

In 2008, Matula created an ecosystem of 11 IT suppliers, including AT&T, Cisco, Microsoft, Oracle and SAP. They are a raucous and powerful group culled from the hundreds of vendors Shell used to use.

“We wanted the best in the industry and we wanted access to scale and reach. We also wanted new ideas,” he says. The idea for the collective came out of his frustration with vendor research and development and Shell’s own need for breakthrough technology.

“Innovation [for] the enterprise has been sucked out of Silicon Valley,” he says. Vendors are directing brainpower to consumer technology at the expense of innovation for enterprise computing, he says. Shell doesn’t ignore consumerization; it uses internal social networks and personalized employee newsfeeds, for example. But bigger issues loom. “Consumer stuff has its value and CIOs have to accommodate consumer innovation,” he says. “But bringing iPads into the enterprise is not going to move my needle.”

In the 1990s, Shell worked with IBM to design chips for high-performance computing, Matula says. Since then, though, CIOs have generally rewarded commoditization of IT, forcing vendors to compete primarily on product price. “We rode that curve really hard for a number of years, but we lost that intimacy between their R&D and our R&D,” he says. One reason Matula wanted to award the majority of his budget to fewer vendors was to be able to influence not only product features, but also the direction of their R&D, he says. “If I could get even 5 percent of the R&D budgets of [my vendors] targeted for differentiating possibilities across my businesses, I’d be ecstatic.”

Shell sorts its 11 suppliers into three categories—foundation technology, infrastructure, and applications—and stipulates that they cannot poach business from a fellow ecosystem member. Fellow foundation vendors Oracle and SAP, for example, cannot go after ERP or financials business that the other company already supplies to Shell.

In a given year, Shell awards ecosystem suppliers between $1.8 billion and $2 billion, or about half of its annual IT budget of approximately $3.6 billion. Spending so much with so few vendors buys Shell access to those vendors’ best talent and lets it influence their product features and larger research efforts, says Boris Van Der Weele, supplier manager of Shell’s consulting providers, such as Accenture, Deloitte and McKinsey.

All 11 ecosystem vendors meet with Shell every quarter, in person and via telepresence and Web conferencing, to update Shell’s IT governance committee on significant projects. Every month, Matula holds his “one-pager,” a meeting where his supplier managers update him on any problems and on what’s going on with each ecosystem supplier’s work, in a summary kept to one printed page.

Once a year, one of the vendors hosts fellow ecosystem members to discuss their work at Shell. Microsoft hosted in 2009 and SAP hosted in 2010. One initiative that came out of these annual brainstorms was a project between HP and Microsoft to devise ways to better configure SharePoint, Microsoft’s collaboration software, for HP machines, Matula says.

Hilton has an Innovation Collaborative of five vendors. It started with traditional outsourcing agreements, mostly five-year deals. As the suppliers proved themselves during the past two years, though, Webb has come to trust them more and involves them in work strategic to Hilton’s future. Ongoing projects involve both the tactical, such as revamping Hilton­.­com to improve mobile access, and more far-reaching work in customer and revenue analytics, Webb says.

Early on, though, a migration of Hilton’s data center to IBM’s hit snags that delayed the project. Webb’s team wanted more testing of the servers and applications before pressing ahead—a situation that Webb says IBM failed to plan for. Hilton extracted financial penalties stipulated in its contract with IBM, but it also learned to communicate better about its own risk tolerance, Webb says. “Good partners hold each other accountable for promises made and kept.”

Passerini doesn’t want P&G’s IT staff to do too much mothering of suppliers, preferring to discuss business issues the company faces and what his expectations are for how the vendors will conduct themselves. The vendors have to take it from there. “If we become too involved with instructing our partners on how to do their jobs, we lose the benefit of working with best-in-class technology partners,” he says. “Our job is to make sure they are connected to the business, understand the challenges and have clear direction on what is needed.”

P&G’s annual Goldmine event gathers the CEOs and others from its key vendors to refine the process of working together and discuss core P&G issues. Fifteen CEOs attended last year’s event, including those from Accenture, Cisco, HP, ­InfoSys, SAP and Xerox, Passerini says. “We expect these partners to cooperate, one with the other, to deliver solutions that will improve P&G’s business. They are willing to do so because they know that there is value in it for them and we help them grow.”

Indeed, vendors also have to get something out of a collective or they wouldn’t cooperate. Often CIOs will agree to be a reference for a given product or service and to participate in white papers and media interviews.

But there are more valuable benefits to trade.

In 2009, P&G didn’t buy Cisco’s latest telepresence technology for just a handful of sites; it promised to go big. P&G deployed telepresence in 43 locations around the world immediately; it’s now in over 80. The implementation saves P&G $4 in travel costs for every $1 it spends on telepresence, Passerini says, but also promotes innovation among product developers across the globe. Cisco, meanwhile, gained a respected customer reference, valuable field testing for a large rollout, and feedback that it incorporated into product upgrades.

In a similar vein, Hilton is a test bed for new analytics technology from IBM—a marquee implementation that informs product design in a technology segment that IBM has declared a strategic priority.

Find the intersection of what your company wants to accomplish and where your vendor wants to go, advises Craig Jones, Shell’s senior supplier manager handling HP and Microsoft. “Aligned interests lead to a project you both agree is important,” he says. “You both are responsible for the success or failure.”

Hire the Enemy

Making a collective work isn’t simply a matter of issuing new edicts and seeing traditional competitive behaviors among vendors vanish. IT organizations first have to change their own attitudes and, perhaps, job descriptions.

“There are people who will say you shouldn’t be too cozy with suppliers. Suppliers will take advantage of you,” Van Der Weele acknowledges. But without an atmosphere of trust and civility, bigger things aren’t possible, he says. “The Shell ecosystem aspiration is to be a system based on equality and trust and having a positive, respectful interaction,” he says. “That isn’t always easy because originally we were old-school and hard-nosed in procurement. I’m not saying we’ve cracked the code, but our ecosystem is striving for it.”

Szygenda’s consulting work focuses on the gap between vendor sales and IT practitioners. Most sales agents haven’t managed IT groups and most CIOs have not sold products, he says. Helping each side figure out what motivates the other can lead to the discovery of areas for common benefit.

Matula agrees. To close the knowledge gap, Shell created the position of supplier manager and filled the jobs with technical sales and account managers from IT vendors. Van Der Weele was a global business manager at Microsoft. Jones was a global account manager at BMC Software and a director of strategic planning at Logica. He also did political fundraising for ten years. Gregg Parsley, who manages the Shell IT sourcing strategy, spent 16 years at IBM and five at BMC.

“We decided to hire the enemy, and that has provided an enormous advantage,” Matula says.

People with that background bring insider knowledge about the sales process, quota pressures and how vendors segment and view deals, says Webb at Hilton. He, too, has hired vendor employees for such insight. Then he sends his IT staffers and vendor representatives to training in topics such as communications, personal style and change management. “We know there are tensions. Many of them are caused by people thinking that it’s just about beating up the supplier or nickel-and-diming the customer,” he says. “It takes time to develop and absorb a common process for how we will work.”

Training in clear communication, on top of creating a process for interacting, leads to smoother projects, says Shell’s Jones. Shell has asked HP and Microsoft to work together to improve the end user experience for Shell employees, combining HP’s end user compute services, client hardware and Microsoft software. Every quarter, staff from the two vendors and their counterparts on Jones’s team jointly update the oil company’s IT governance group on what they’re working on. With all parties in the room, everyone hears the same story, he says. “In my career, I’ve seen plenty of examples where it’s not like that and the story takes twists and turns.”

Shell also expects vendors to minimize their sales presence and interact just technologist to technologist. Matula notes that one by-product of the up to 10-year contracts Shell has signed with foundation vendors Cisco, Microsoft, Oracle and SAP is that those vendors know they don’t have to compete again every year or two to continue working with Shell. “We do long-term deals because we don’t want salespeople [here],” he says.

Instead, Matula asks vendors to send technical architects and other experts. For example, on a project with HP to develop seismic sensors for finding oil, Shell works with a team of scientists led by an HP Fellow who is also an “enterprise services futurist” specializing in how IT shapes business, society and culture.

A Window Into the Vendor’s R&D

The past five years have been tumultuous for Shell as a global recession and wars in the Middle East have caused its revenues to yo-yo from $319 billion in 2006 up to $458 billion in 2008, down to $285 billion in 2009 and up to $368 billion last year. Net profit margins are about two-thirds of what they were in 2006.

Shell is by no means floundering; it’s the second-biggest oil company in the world, behind Exxon. But to reach Shell’s goal of becoming “the most competitive and innovative energy company in the world,” as CEO Peter Voser puts it, it must not only be more efficient but also more imaginative.

CIO Matula contemplates big questions vital to Shell’s future. In scenario planning out to 2050, for example, the company forecasts a decrease in the use of oil worldwide, replaced in part by natural gas. The trick is getting that gas. Frequently, rock beds that are considered too difficult to mine for coal hold natural gas, but the fuel industry hasn’t perfected the processes of assessing its quality and extracting it. The more educated an oil company can be going into exploration, the more effective—that is, lucrative—new ventures will likely turn out.

Through the vendor ecosystem, Matula’s staff learned of sensor technology that HP Labs had been developing that are 1,000 times more sensitive than those on the market today. Shell’s IT group, like many, understands the large business issues their company faces. But unlike other IT groups, Shell’s has a window into vendor R&D work. The ecosystem engendered extra collaboration with HP, called the Voyager project. “We only found it because we described a problem,” he says, a give-and-take allowed by Shell’s close ties to its trusted IT vendors.

Early field tests have shown promising results, a Shell spokeswoman says.

What Shell wants to do is foreign to some vendors. Microsoft, for example, was at first reluctant to open its R&D doors, Parsley says. He says Shell persisted with its R&D requests and eventually Microsoft agreed to share information about its research. Microsoft now runs a program to connect major customers to its R&D group that Parsley considers “quite promising.”

Microsoft, Cisco and AT&T engineers are working together to improve the compatibility of their unified communications products for Shell, Jones says. So far, the three vendors have developed technology to integrate video from Microsoft’s Office Communicator with Cisco’s telepresence system, underpinned by AT&T’s network, he says.

At Hilton, Webb sets aside funds for exploratory work in areas of mutual interest, such as analytics with IBM and location-based services with AT&T. Influencing product direction can be a big advantage, Passerini adds. P&G last year worked with Xerox on mobile printing software for the iPad, iPhone and iPod Touch. Xerox will sell the software to other customers, but P&G got it first and got it built the way it wanted.

The ownership of the intellectual property that results from such collaborations varies. Shell usually lets the vendor have the intellectual property as an enticement to collaborate, Matula says. It will sometimes retain rights to how software is configured, but not to the application itself. Sometimes Shell will keep the rights to software extensions that it considers a competitive advantage, such as one developed for Microsoft SharePoint that analyzes patterns in oil and gas well data to predict failures.

Shell recently posed what it calls a Grand Challenge, a simple question with big implications. How can Shell improve its application development? In the past, Van Der Weele, who is supplier manager of the key vendors working on this issue, might have asked each vendor to do its own analysis, then had his staff compare the four reports and draw conclusions. Instead, he asked the four to collaborate and write one report recommending improvements. Since each vendor had worked in different areas of Shell, together they covered more ground than any would have alone, he says.

“Even if you get the best subject-matter expert from McKinsey or Gartner, he can have great ideas but not [know] how to do it at Shell,” he says. “This was best-in-class consulting from people who really know Shell inside-out.”

The Wave of the Future

Although forming a vendor ecosystem may seem like something only elite, big-spending CIOs can do, it’s how vendor management will evolve in the next several years, says Andrews from Forrester. Business shifts will demand it. As companies embed technology into products and services, IT needs help keeping up, he says. Then, to get any competitive advantage from technology-laden products, CIOs will want access to vendor R&D. “If vendor management means only cutting costs, it won’t happen,” he says.

Still, a change in approach has to be wholehearted and not just used as a tactic, Matula says. Collaboration—vendors with the IT group and vendors with each other—requires ongoing meetings where business goals are shared by all parties and everyday behavior reflects those changes, he says. (See “Rules of Engagement.”)

“The industry doesn’t naturally collaborate,” Matula says. “But for us, it happens more because we’ve built a social fabric.”

Follow Senior Editor Kim S. Nash on Twitter: @knash99.