Information Technology Sourcing: More Than A Decade of Learning

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Information Technology Sourcing More Than A
Decade of Learning

• Mary C. Lacity

Visit to
January 24, 2003
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Presentation Outline
Research Methods One-to-one IT Sourcing
Overall lessons One-to-many Netsourcing
The Big Yawn Business Process Outsourcing
BAE SYSTEMS Case Study
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RESEARCH METHODCase Studies

• Thirteen year study with multiple coauthors
• 90 case studies, 130 decisions in US, Europe,
  and Australia
• Outsourcing n 98 decisions
• British Aerospace DuPont Inland
  Revenue Enron GM
• IRS Riggs Bank South Australia
  Swiss Bank
• Insourcing/Backsourcing n 18 decisions
• Continental Baking Brown Group MEMC
• Occidental Petroleum Ralston Purina Vista
  Chemicals Westchester County
• Netsourcing n10 decisions
• Corio EDS Host Analytics mySAP Zland
• Business Process Outsourcing n 4 decisions
• BAE SYSTEMS Lloyds of London

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Dupont

• 1997 Signed 4 billion in contracts with CSC
  Accenture
• Outsourced IT infrastructure, applications
  maintenance, desktops
• 3100 people transferred
• Contracts in 22 countries
• Contract is 30,000 lines long, 600 SLA
• Decision process took 18 months
• Transition period took 2 years

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RESEARCH METHODCase Studies

• Multiple stakeholders interviewed at each site...
• Senior executives (CFO, COO, CEO, Treasurer,
  etc..)
• Chief Information Officers (CIO)
• Contract managers
• Supplier account managers and executives
• Key end-users
• Consultants, internal and external lawyers, union
  leaders

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RESEARCH METHODSurveys
CIO-level surveys of Outsourcing
experiences UK US (1997, n101 useable
surveys) Scandinavia (1998, n 40 useable
surveys ) CIO-level survey of Netsourcing
experiences plans 28 countries, (2001, n
274 useable surveys)
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One to One IT Sourcing
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Case Study Outcomesn 116 sourcing
decisions (one-to-one model)
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Success Rates Over Time
CONTRACT DATE(n85 outsourcing decisions with
discernible outcomes)
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Customer Rating of Supplier PerformanceOne-to-One
Outsourcing
1997 US UK data
Overall, suppliers are earning a good
report card, but there were many opportunities
for improvement.
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(No Transcript)
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Proven Practices in IT Sourcing
Selective Sourcing rather than total
outsourcing Joint Senior executive/IT
decisions Internal External Bids Short Term
Contracts Fee-for-service contracts
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Selective Sourcing
N 102 decisions with discernible outcomes
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Managing Sourcing Decisions Through Six Phases
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Core IT Capabilities
Business and IT Vision
Business Systems Thinking
Contract Facilitation
Relationship Builder
IS Leadership Informed Buying
Delivery of IS Service
Design of IT Architecture
Contract Monitoring
Technical Architecture
Technical Doer
Vendor Development
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Managing Sourcing Decisions Through Six Phases
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Strategic Sourcing Decision Framework
Business Factors
Economic Factors
Technical Factors
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Managing Sourcing Decisions Through Six Phases
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Unbridled Demand Major Source of Cost Creep

Example Outsourcing Chauffeur Services at
British Aerospace Before outsourcing, demand was
constricted by 4 car fleet After outsourcing,
demand is unbridled and supplier has increased
fleet to 24 cars to meet demand.
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Managing Sourcing Decisions Through Six Phases
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Relationship ManagementOften Viewed as Dichotomy
Customer
Supplier
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Relationship Management A Stakeholder
Perspective
Customer
IT Managers
Senior Business Managers
IT Staff
IT Users
Trade Union
Subcontractors
Senior Managers
Account Managers
IT Staff
Supplier
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Quotations From Participants
"A good contract does not ensure a good
relationship, but a bad contract does ensure a
bad relationship." -- Bob Ridout, Chief
Information Officer, DuPont This is a
commercial business transaction, not a
partnership. Suppliers have to keep earning the
business everyday. Global Alliance Manager,
DuPont
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Success Rates Over Time
CONTRACT DATE(n85 outsourcing decisions with
discernible outcomes)
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Over Time Deals are startingto look alike!
Neoclassical Contracts SLA Penalties
for non-performance Variable Pricing
Mechanisms for change Relationship Management
Boot camps Transition Phase Activities
Problem Resolution Systems Joint
supplier/customer teams in trenches
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Sources of Customer LearningInstitutional
Isomorphism
Customers own mounting experience
Customers Industry Contacts Incremental
outsourcing Past outsourcing successes and
failures Customers use of external consultants
Customers outsourcing sources Technology
Partners Incorporated ITTUG
(175 billion worth) Outsourcing
Summit Gartner Group Sourcing Interest
Group Michael Corbett Associates Customers
use of external legal firms Customers use
of private public Millbank Tweed
research Shaw Pittman Gartner, Yankee,
Cutter, IDC Over 100 books on
Outsourcing Customers use of external
benchmarkers Gartner Group Compass
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One-to-many Netsourcing
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Netsourcing Business Applications
Netsourcing is the practice of renting or "paying
as you use" access to centrally managed business
applications, made available to multiple users
from a shared facility over the Internet or other
networks via browser-enabled devices.
Netsourcing allows customers to receive
business applications as a service. Netsourcing
is a delivery channel Netsourcing is a pricing
model
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Wacky World of Alphabet
Netsourcing
BSP
SSP
FSP
ASP
MSP
VSP
CSP
xSP
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The Netsourcing Service Stack
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Business Process Outsourcing Early
Lessons,Future Directions
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Business Process Outsouring
With BPO, the supplier owns and operates the
resources, including infrastructure,
applications, and people, to deliver a
business process as a service to customers.
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BPO Survey Size of Marketn 120
Size of Market Year 2000 119.4
billion Year 2005 234.0 billion US Europe
comprise 84 of market
Source Scholl, Rebecca, BPO at the Cross
Roads, presentation At World Outsourcing Summit,
Orlando Florida, 2002.
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BPO Survey Size of Marketn 120
Source Scholl, Rebecca, BPO at the Cross
Roads, presentation At World Outsourcing Summit,
Orlando Florida, 2002.
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BPO Survey Top Driversn 120
Source Scholl, Rebecca, BPO at the Cross
Roads, presentation At World Outsourcing Summit,
Orlando Florida, 2002.
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• Prompted by MA, fragmented, decentralized HR
• Ten Year Contract
• 1.1 billion over 10 years
• 700 HR employees transferred to Exult
• Exult delivers
• Accounts Payable Benefits
• Payroll Regional Staffing
• HR Call center
• HR technology
• Guaranteed cost savings to Bank
• Bank took equity share in Exult will share in
  future profits

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Xchanging Human Resource Services (XHRS)
Xchanging Procurement Services (XPS)
Xchanging Insurance Services (XIS)
Xchanging Claims Services (XCS)
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Transforming Back Office to Front Officeand
Enterprise Partnership for Human Resource
Management
Mary Lacity David Feeny Leslie Willcocks
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Xchanging Human Resource Services (XHRS)
10 year, 250million deal

• Promised benefits to BAE
• 15 savings on baseline HR services
• Service improvement to upper quartile by end of
  year 5
• 20 million investment in technology,
  facilities experts,
• including web-enabled e-hr
• 50 share in profits from external sales

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Research Method
Face-to-face interviews with 15 people
including HR Director, BAE SYSTEMS
Enterprise Relationship Director, BAE SYSTEMS
SBU HR Director, BAE SYSTEMS CEO of
Xchanging Member, BOD, Xchanging
Managing Director, XHRS 3 transferred BAE
managers, now CFO, XCS Head of Service,
XCS Head of Resources, XCS 6 practice
directors (Service, Process, Technology,
Environment, People,
Implementation) Documentations such as financial
reports, practice manuals, performance
assessments, annual reports, memos.
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About Xchanging
Xchanging provides human resources, procurement,
customer administration and accounting services
to over 200 customers including BAE Systems,
Lloyd's and the London Insurance Market.
Xchanging employs over 1,100 people.
Xchanging takes responsibility for the entire
back office, specific functions or a particular
business process and transforms them into fit for
purpose services. In short, Xchanging cost for
profit. Founded by David Andrews in 1999
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About BAE SYSTEMS
Prime contractor and systems integrator in the
air, land, sea, space, and command and control
market sectors. Defense, commercial, civil
markets World-class capabilities in naval
platforms, military aircraft, electronics,
systems integration and other technologies.
Astute
Destroyer
Eurofighter
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About BAE SYSTEMS
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About BAE SYSTEMS
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About BAE SYSTEMSStock Price
Interim Financial Results Reported Sept 12
52 week high 385.50 on Thursday, April 11,
2002 52 week low 158.00 on Wednesday,
November 13, 2002 Average Price 194.10
(50-day)   299.37 (200-day)
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About BAE SYSTEMS
January 1999, British Aerospace announced merger
with Marconi to create BAE SYSTEMS Investors
promised 275 million in annual cost savings
within 3 years
"The proposed merger with Marconi Electronic
Systems is an important step in the consolidation
of the industry in Europe and creates a strong
and highly capable business with significant cost
benefits." -- Sir Richard Evans, Chairman of the
Board, BAE SYSTEMS  
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BAE SYSTEMS HR
In 1999, Terry Morgan, Group HR Director charged
with delivering 15 to 40 cost savings on
annual HR spend of 25 million Group HR was
small, focusing on senior pay benefits,
senior level development, organizational
design 700 HR professionals in SBUs at 70 sites
doing transactional activities such as payroll,
benefits, recruiting, training, HR procurement
Shared Services as solution to cost reduction
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FROM DECENTRALIZED
Head Office
SBU Managing Director
SBU Managing Director
SBU Managing Director
SBU Managing Director
Group HR
SBU Managing Director
SBU HR Director
SBU HR Director
SBU HR Director
SBU HR Director
SBU HR Director
Transactional Activity/ Professional Services
Transactional/ Professional
Transactional/ Professional
Transactional/ Professional
Transactional/ Professional
Head Office
TO SHARED SERVICES
SBU Managing Director
SBU Managing Director
SBU Managing Director
SBU Managing Director
Group HR
SBU Managing Director
Transactional Activity/ Professional Services
SBU HR Director
SBU HR Director
SBU HR Director
SBU HR Director
SBU HR Director
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Four Options forImplementing Shared Services

• Do It Yourself
• Management Consultancy
• Fee-for-service outsourcing
• Enterprise Partnership

Early 2000
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Enterprise Partnership
Spring 2000

David Andrews proposed that BAE SYSTEMS and
Xchanging should form a fifty-fifty jointly-owned
enterprise. The enterprise would be operated
as a strategic business unit within Xchanging,
giving Xchanging the responsibility and
accountability for implementation and subsequent
operations. But both BAE SYSTEMS and Xchanging
would sit on the Joint Board of Directors to
ensure continued customer involvement and
oversight. The enterprise would initially
behave as a traditional outsourcer by
transferring BAE SYSTEMS HR assets and personnel
to the enterprise governed by a ten-year
contract. The enterprise, in turn, would
implement the shared services concept and deliver
HR services back to BAE SYSTEMS. But in the
long run, the enterprise would further leverage
the HR assets and personnel to attract external
HR customers, of which profits would be shared
50/50 with BAE SYSTEMS.
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Enterprise Partnership

"We soon came up with a story--and Terry really
pushed this with his colleagues--about what the
real risk is 'I have got the same people
tomorrow doing the job they are doing today. In
addition to that, I have got all these new
resources with different skill sets that are
coming to help these people do it better than
they did it before and I have got twenty five
million dollars over a five year period to invest
in technology that I have not got today. It is
guaranteed, it is part of this contract. So it
is the same people doing the same job. In
addition to all these other resources that are
going to help make it move, with some incentives
to make it happen that we havent got today, what
is the risk because if it all goes wrong and
these are bad managers, then we just TUPE
transfer everybody back and we take it back
again, so what is the real risk?'" -- Alan
Bailey, XHRS  
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Enterprise Partnership
?

Because, against their normal practice, BAE
SYSTEMS did not do a formal request for proposal,
the HR team wanted to step back and invite
Xchanging and another supplier to compete. At
this stage in April 2000, Xchanging's team was
devastated.   "When we told Xchanging that we
were going to do a beauty parade with Xchanging
and another BPO supplier, I have to say I have
never seen David Andrews so shell-shocked." --
Chris Dickson, Relationship Director, BAE SYSTEMS
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Enterprise Partnership
?
May 2000

Would accept BAE transfers -- Use Exults
existing staff Complete attention to BAE --
Just signed other megadeals Take service as-is
-- BAE to clean up mess first
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Letter of Intent
June 2000

"When I told the CEO of the alternative bidder
that they hadn't been chosen, he did say to me,
'okay, but I would like to thank you for the
fairness of the way the parade went... it was
actually a very thorough process, we had been
given a fair crack of the whip.'"-- Chris
Dickson, Relationship Director, BAE SYSTEMS
Goal was to sign a contract by September 2000,
but
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BAE/Xchanging NegotiationsJune 2000 February
2001
Scope Reduction Eliminate North America
Only 462 UK people to transfer rather than 560
"It is my perspective and obviously it is not
perfect information but certainly I had a very,
very strong view that there were some people in
BAE SYSTEMS that had decided to de-scope the
deal who never really knew what the scope was
but decided what scope they would find
politically acceptable and that was it, that was
the deal they wanted" - David Bauernfeind, CFO
  "So we ended up drawing a line in slightly the
wrong place, in my view, so we still had some
people in BAE SYSTEMS retained HR who were never
going to play the strategic role as designed."
Steve Hodgson, Head of Resources, XHRS
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BAE/Xchanging NegotiationsJune 2000 February
2001
50/50 Joint Ownership 50/50 split in cost
savings, estimated baseline 25m/year YEAR
2001 2002 2003 2004
2005 Percent 10 15
15 15 15
Delivered as a rebate, if 25million costs
transferred, Xchanging would only charge
22.5million 50/50 split on new revenue
generation from external sales
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BAE/Xchanging NegotiationsJune 2000 February
2001
Services As-is measured within 6 months
By year 5, improvement to upper
quartile Governance Joint Board of Directors
CEO of Xchanging and Group HR Head BAE 3
Xchanging execs 2 BAEs non-execs Purpose
Protect the Rights of Shareholders Service
Review Board 3 members from BAE, 3 members
from Xchanging Service specifications, price
approval Purpose Service performance
monitoring Technology Review Board Joint board
to ensure 20 million investment
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Contract in Effect in May 2001
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How Did Xchanging Complete the Transformation?
Xchangings management believes that the
capabilities required to transform a back office
to a front office requires 7 generic business
competencies rather than domain specific
knowledge
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Transformation is Implemented in Four Phases
Preparation
Streamlining
Realignment
Continuous Improvement
2-3mths
3-6mths
6-9mths
Operational
Critical activity
Preparation
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People Competency
People Competency builds champion teams from
transferred employees by unlocking their talent
and energy, primarily through extensive training
programs and direct contact with Xchangings
senior management -- Induction Programs to 430
transfers within 6 weeks -- Management
training -- New job descriptions -- New
Customer-focused culture
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People Competency
Continuous Improvement
Streamlining
Preparation
Re-alignment
Mourning
Forming
Storming
Norming
Performing

• Mechanisms
• Deliverables
• Measures
• Benchmarks
• Gate

• Mechanisms
• Deliverables
• Measures
• Benchmarks
• Gate

• Mechanisms
• Deliverables
• Measures
• Benchmarks
• Gate

• Mechanisms
• Deliverables
• Measures
• Benchmarks
• Gate

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People Competency
On business as usual in short-term  "Richard
Houghton was saying, its business as usual today
guys because we dont want to upset the service.
We are not going to go around now to BAE and say,
'Im not doing that for you any more Mr. Customer
because its not in the service definition yet.'
We have a philosophy that says if he wants you to
do something, you just do it. If there is a
commercial consequence of that we will worry
about it later and talk to your Line Manager but
it is a yes to the customer, not a no." -- Alan
Bailey, XHRS
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People Competency
On business not as usual in long-term  "We
started up by saying 'these are the cost
reduction commitments', I said 'wed have to
double productivity in five years', I said 'in so
far as we can off-set that through third party
revenues by effectively using spare capacity to
deliver services to third parties we will, but
thats what we are going to do'. " -- Richard
Houghton, CEO, XHRS
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People Competency
On training results "The transferred employees
had seen Xchanging's management team, because we
all went to these things, did Q As, stood on
the stage and answered all their questions,
Richard Houghton did all of them, he was
committed to doing these. The employees hadnt
seen that before. They had been in an area where
they didnt see the management very often, didnt
get access to them and then all of a sudden, this
is an enthusiastic team that they are now seeing
and they were part of it, they went back
buzzing." -- Alan Bailey, XHRS
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Service Competency
Define the as-is service, measures service, and
agrees to service targets through a disciplined
methodology called Service1st The goal is to
provide the same levels of service during
transition then move to customer-negotiated
service levels based on individual customer needs.
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Service Competency
Service Objective
Service Specification Reports
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Service Competency
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Service Competency
XCS Service Team As-Is Service 400
service levels drafted Service Review Board
approved in October 2001 But an extra 80
million a year in indirect procurement spend Was
uncovered for fleet, contract labor, recruiting,
stationary, And travel! HR was buying services
from over 200 suppliers, All in decentralized
budgets.
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Sourcing Competency
Xchanging Procurement Services (XPS)
Separate Enterprise Partnership signed November
2001 Worth 800 million over 10 years
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Sourcing Competency
Car Fleets Non-technical contract labor Learning
Development Health Care Recruitment Renumeration
Benefits Stationary
80 million
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Sourcing Competency
Category Expertise
Sourcing Tools
Spend Aggregation
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Sourcing Competency

• On average, 12 savings delivered on categories
  transferred
• Margins range from 5 to 45 depending on
  category

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Example of Un-bundling
Key Cost Elements of Car Leasing
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Environment Competency
Goal create modern and well-branded physical
spaces to build a visible front office for
customers. Physical spaces also foster a front
office mentality Xchanging built, bought
furniture, and decorated new facility By February
2002 Occupancy held up by IT contract with CSC
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Environment Competency

• Preston

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Environment Competency

• Preston Ready!

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• Preston Ready!

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Environment Competency
"Space has a big impact on people's morale and
the perception of their value-- Mike Margetts,
Implementation Practice Director, Xchanging
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Process Competency
Goal is to redesign business processes to reduce
costs and to improve quality through Six Sigma
quality improvement discipline.
s
DPMO

ProcessCapability
Defects Per Million
Yield Opportunities

6 3.4 99.99966
5 233 99.9770
4 6,210 99.37
3 66,807 93.3
2 308,000 69.2
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Process Competency
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Process Competency
Redesigning Processes such as Senior Leader Peer
Review Old process 640 senior leaders did
paper-based peer reviews,
assisted face-to-face by HR personnel New
process e-hr online peer review "What would
have happened before, thirty people would have
happily expanded a task to fill three months and
as it is now, eight people have been busy for a
month--bang! Done." -- Mike Margetts, Head of
Implementation, Xchanging HR Services
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Technology Competency

Goal Build and implement enabling technology on
component driven architecture. Goal Build and
implement e-HR within 6 months Went on a
recruiting rampage on May 1, 2001 Hired 19 full
time technology managers, architects
specialists PeoplePortal went live on October 4,
2001
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e-HR Application Framework
Portal
Data and Process Integration
Reference
Performance
HR Knowledge and Content Mgmt.
Performance Control
Service Management
Core DW (Time Rel)
eForms
People
Relationship
ESS/MSS
Contact Management
CTR

Core Enterprise HRIS
CCI
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Technology Competency
"I think they were absolutely astonished that we
delivered on that, I don't think they expected it
for one minute." -- Richard Houghton, CEO,
Xchanging HR Services   "I think the
peopleportal has been the first sign from within
the business that something has changed,
something has actually happened. I think the
first time it was used, it was used for the
senior leadership population, we were doing an
exercise on pay review so each senior leader
within the business (650) of them had access to
that peopleportal. We had a lot of very good
feedback, it was very good, the technology was
great, it was web based, weve had some very good
feedback but weve also had people who just cant
get the hang of using the technology." -- Kim
Reid, HR Director, BAE SYSTEMS  

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Technology Competency

"I think technology is an expensive resource, so
youve got to be careful with technology, as you
know you can spend a lot of money and not get a
lot of value. So I think technology from our
perspective is very much used when its needed.
Just because we have a service delivery platform
doesnt necessarily mean that every service we
deliver has to be over the Internet, if it
doesnt make sense, we shouldnt do it. So
technology is a bit of a follower in this case,
it definitely follows service, service is always
first and it's rarely that we would be in there
before process because I dont want to put
technology on top of a broken process." -- Steve
Bowen, Technology Practice Director, Xchanging
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Implementation Competency


Goal to orchestrate the timing and resources
required for the Other six competencies.
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Implementation Competency


No Set Formula   "I don't want to tell you the
perfect process for implementation project
management, I actually want to say that I am
prepared to do anything I need to to get things
done....basically it is an anti-approach. Methods
are not really important--the end result is
everything." -- Mike Margetts, seconded from his
role as Practice Director of Xchangings
Implementation competency.
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Implementation Competency


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Implementation Competency


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Findings as of 2002

•  
• Prior to the Xchanging partnership, HR at BAE
  SYSTEMS
• lack of investment,
• lack of leadership,
• lack of employee motivation,
• lack of customer-focused service,
• bureaucratic and inefficient processes, and
• outdated and non-integrated technology.
• Preliminary findings assess the effectiveness of
  using an enterprise partnership as a vehicle for
  transforming this low functioning back office
  into a commercial enterprise.

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Findings
Finding 1 The Enterprise Partnership Model
creates a clash of cultures, but cultural
incompatibility may be just what you need.
"What was obvious to me, the Xchanging people
were part of a small company desperate to
succeed, and that desire to succeed just didn't
exist in the BAE SYSTEMS HR culture." -- David
Bauernfeind, CFO If you left work at half past
six, you were having a late night at BAE. I
mean, that is the BAE culture. I was in at ten
to seven this morning and I'll be here at nine
o'clock tonight and that is the Xchanging
culture. The Xchanging guys I just could
associate with very, very, very easily. From day
one I felt much, much more comfortable. The hard
thing was it was a damned sight harder work, much
more disciplined environment, much more focused
environment. It still took me a little while to
make that leap probably two or three months."
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Findings
Finding 2 The Enterprise Partnership Model
offers multiple short-term implementation phases
that yield faster results and pose less risk than
a single, large-scale project.   "Innovation
doesn't need to be a big idea, it can be lots of
little things...What we like doing is introducing
a bit of change every three months because it has
much more immediate impact rather than building a
great big filthy system." -- David Andrews, CEO
Xchanging   "If you dont do it within three to
six months then you dont do it." -- Mike
Margetts, Implementation Director, Xchanging
94
Findings
Finding 3 The Enterprise Partnership Model views
technology not as a solution, but rather as an
enabler.   "People are altogether more flexible
and creative and clever to fit around a system."
-- Mike Margetts, Implementation Director,
Xchanging "I wanted to see what happened if you
improved business processes and services without
touching IT. That was just a quirk of mine which
was a very lucky break because in fact what we
found was that we could engineer a huge
improvement and do it on the back of the old
legacy system." -- David Andrews, CEO,
Xchanging.
95
Findings
Finding 4 When employing Fee-for-Service
Outsourcing or an Enterprise Partnership Model,
be sure to manage user demand. "We are seeing
some evidence of increased demand with Xchanging
HR Services. It's the early days yet, but demand
for service before XHRS was always restricted
because as an HR Director, you only have the
number of people that you could get your MD to
agree to, so that effectively capped it. Of
course, we have taken that away now and people
can demand ever more and more." -- Steve Hodgson,
Head of Resources, XHRS.
96
Findings
Finding 5 Both Fee-for-Service Outsourcing and
The Enterprise Partnership Model uncover spend
previously hidden in decentralized budgets. "The
cost has increased quite substantially. Were
just having a review on that at the moment. At
the moment that communication isnt clear and it
does look as if costs are going up. But in
reality, were doing a review of it and were
doing some investigation on it, in reality it
probably isnt going up because of Xchanging. It
just means that we need to probably transfer
budget over that hasnt traditionally sat within
the HR team, so that it's all as one and
recharged against that, that total mass, rather
than part left within the business. But it is a
concern." -- Kim Reid, HR Director, BAE SYSTEMS
97
Findings
Finding 6 The Enterprise Partnership Model
delays due diligence until after the contract is
in effect, which speeds the negotiation process
and more fairly distributes the burden of newly
discovered costs. "The quality of the data
about the HR function in terms of not just what
salaries people were on but just who was there,
how many to within 10. Really, really
surprising and if anything that experience, if I
ever needed drilling home about why BAE needed to
do the deal, that did it. If you cant tell how
many people are in your own function within 10
to 20 what chance have you got of providing
value added HR for a business? It was just
shocking." -- David Bauernfeind, CFO, XHRS
98
Findings
Finding 7 The Enterprise Partnership Model
aligns incentives better than fee-for-service
outsourcing. "So if it was a traditional
customer/supplier relationship, I think it would
be very much customer/supplier which perhaps may
not be totally joined up in the middle. You
would get the instance that the customer would
blame the supplier for not delivering a service.
For me, the partnership means that the
accountability for delivering the service into
the business is mine. I have to make sure that
it delivers a seamless service so that myself and
my other HR directors in this business will not
say the reason this went wrong was because
Xchanging did this. If something goes wrong
its because we did it. Its very much a partner
type relationship." -- Kim Reid, HR Director, BAE
SYSTEMS
99
Findings
Finding 8 The Enterprise Partnership Model does
not perfectly align incentives. In the past, the
joint governance between customers and suppliers
we studied led to a managerial schizophrenia.
Because the enterprise's primary customer is also
an owner, the customer has two competing goals
to maximize cost-efficient service delivery from
the enterprise and to maximize the revenue of the
enterprise. How can the customer do both?
Furthermore, if the same executives sit on the
Board of Directors of the customer company and
the enterprise company, which hat should they
wear? Should they be pushing for more services
at a reduced cost, thereby squeezing as much as
they can from the enterprise? Or should they
push for generating more revenues, which distract
the enterprise from their needs?
100
Findings
Finding 9 The Enterprise Partnership Model
benefits from generic business competencies
rather than domain-specific knowledge. "I
always say the best HR people are people who
havent been in the HR function all their lives.
You need a different view. So the Xchanging
team, although they are not HR professionals, it
works probably better that they are not because
if they go in understanding all the pitfalls that
there may be, then theyll never make any
changes, so sometimes it is better." -- Kim Reid,
HR Director, BAE SYSTEMS
101
Findings
Finding 10 The Economics of the Enterprise
Partnership Model need to Work for the Client and
Supplier Without Over-Reliance on Third Party
Revenues. "The business development in year one
at this stage was almost zero because the focus
was lets get our act together in delivering this
to BAE SYSTEMS first before we all turn salesmen
and go out and start selling ourselves. It is
always a hard decision to make because our future
relies on getting third party business in but at
the time it was a management team in XHRS and an
agreement at the Xchanging group level that we
would concentrate on delivering the operation,
getting our act together to get our product out,
get our people to pull together to get the
service center in place. And it was probably
only the beginning of quarter four last year that
now started to be a bit more active in the market
rather just being passive." -- Alan Bailey, New
Business Development, XHRS
102
Findings
"The reality if I just look at it in XHRS is we
have to really work hard not to make this
business work. It is pretty easy to make this
business make money, the hard bit is the time
scale and the growth. So you concentrate resource
and you put their management in place, you remove
the weak people over time and you put in good
technology. You really have to work to not make
that add up to a significantly better position
than you were in before." -- David Bauernfeind,
CFO, XHRS
103
Can Success be Replicated?Ideal Customer Profile
The customer has a large back office spend of at
least 25 million per year and at least 500
employees, making the deal large enough to
attract a competent external supplier   The
customer's back office operations are highly
decentralized, allowing the opportunity for
significant savings from centralization and
standardization   The customer's back office
operations have not received high management
attention historically, allowing the opportunity
for significant savings and service improvement
from better management   The customer's
organization would resist centralizing and
standardizing themselves due to internal
political resistance, unwillingness of senior
management to make the required upfront
investment, or lack of skills and experience of
back office staff to make the transformation.