Phases and activities

Six relationship phases of IT outsourcing are defined as scooping, evalua-tion, negotiaevalua-tion, transievalua-tion, middle, and mature phase (Lacity & Willcocks, 2000a). These phases are discussed in this section as they were recognized at the three international based IT outsourcing relationships studied.

Prior to the outsourcing, Rolls-Royce did a capability study of the com-pany’s IT function, identifying core competence and activities. The capabil-ity study raised doubts about the in-house IT function’s abilcapabil-ity to handle the challenges of the company. This was the scooping phase, establishing a goal or vision for the outsourcing. Evaluation and negotiation phases were limited in a time perspective. Rolls-Royce went through a very standard procure-ment process of defining all the pieces that needed to be outsourced, defining what was required, and then inviting bids to the standard request for pro-posal. All the big external outsourcing vendors were involved in the bidding.

The first contract with EDS, the one for the aero business, was negotiated in 1996. The second contract for the industrial business was signed in 1997.

The goal of these phases was first to select the best vendor and then to sign the contract. In the transition phase the major goal of the two parties was to establish agreed upon operational performance. After the contract was signed, there was a ”honeymoon period,” during which the outsourcer gave Rolls-Royce ”anything.” The outsourcer put a new desktop on, because it was more efficient and because they had got the know-how to standardize.

The users got lucky; they got something quick and fashionable, and faster than what the IT department could deliver. All major IT assets and more than a thousand people got transferred to the outsourcer. As service levels were established, the parties moved into the improvement phase, where the overall goal was to achieve value-added services above operational perform-ance. The IT department thought they had got a partner they could manage and control. Problems arose when Rolls-Royce started to add new services and remove old services from the original contract. Rolls-Royce had to pay extra for everything, and the parties had to refer to the contract, and they started quarrelling. Rolls-Royce merged the aero business and the industrial

44

business, and in 2000 they had to realign the contracts to reflect changes in technology, services, and business. The original contracts were made a

“foot” thick. Then in 2000, they tried to make it a trusted one, and they actu-ally went to buy services. It was widely reported in the press that it was a 1.3 billion pound deal over 12 years. When the relationship was extended, the mature phase provided an opportunity for the two parties to learn from past experiences as well as to explore creative options when constructing the new deal.

In the scooping phase, SAS used business, economic and technical criteria to identify potentials for outsourcing. As a part of the company’s huge cost reduction program, the group looked at all kinds of costs, including IT costs.

SIG was at that point of time already a stand-alone company, wholly owned by its largest customer, SAS. The management of SIG looked at different scenarios for survival; one of them was to sell the company to an external service provider. This way SIG could continue to serve its largest customer, and with possibilities of gaining large-scale opportunities, and access IT capabilities. SIG management meant an outsourcer would be a better place for SIG employees. Thus they made a suggestion for their board of directors to sell the company. Selective outsourcing was also considered, but they concluded it would require too much management attention. The objective of the evaluation phase was to select the best and final offer. The SAS board of directors decided in August 2003, to start the process of selling SIG and to establish a frame agreement for buy-back of services. First step was to de-velop an information memorandum describing SAS’ IT governance struc-ture, including a description of SIG as a company in terms of economic con-ditions, assets, and management. An investment banker was also chosen, a short time after the decision, who handled the formalities of the bidding process. Several vendors signed the confidentiality statement and they re-ceived the information memorandum. A few vendors delivered a non-binding bid. All the Nordic vendors quit, first of all because of the size of the deal. The steering committee decided which four vendors should be invited to give binding-bids. One of the invited vendors quit and one of them was later removed from the list. SAS started negotiation with two vendors. Im-portant evaluation criteria were economy, financial strength and persever-ance of partner, sensitivity to SAS’ proposed conditions, and handling of SIG personnel. By December 18, 2004, the outsourcing agreement between SAS and CSC was signed. Due to the fact that SIG was a stand-alone com-pany, they were delivering services to SAS on already established agree-ments, and thus the evaluation and negotiation phases could be done in a relatively short period of time. The outsourcing deal was partly a take-over, and partly a buy-back of services. Technically the transition of shares took place at February 1, 2004. And by this transaction, SAS were transferring IT

45

assets, leases, staff, and management responsibility for delivery of services from an internal IT function to a third-party vendor. About 1100 employees got CSC as a new employer. Intellectual property rights for business applica-tions were kept in SAS. As SAS had already been treating SIG as an external supplier, the scope, costs, levels and responsibilities of the baseline services were already established, but of course some changes were made during negotiation. Later, there was some disagreement around contractual interpre-tations, but no serious problems. And thus, the objective of the transition phase, to establish operational performance, was going relatively straight-forward. Transforming SIG into CSC’s global operating model was, how-ever, a huge program involving a lot of people from the vendor organization.

Although operational performance was not affected, the internal focus of the transformation period took focus away from value-added services.

In the scooping phase, ABB identified IT activities for potential outsourcing.

Although ABB global senior IT management set forth to create a strategic vision of IT in the company, the IT sourcing decisions ended up as a busi-ness decision. As the overall organizational goal was to cut costs, there was also a pressure for significant cost reduction within IT. And a few months later, close to 90% of ABB’s information technology infrastructure opera-tions were outsourced to IBM, including more than 1200 employees in 14 different countries. In the evaluation phase a few potential suppliers were invited to bid for the infrastructure operations. There were not many service providers that could deliver services to a large number of locations in many different countries. ABB were aiming for competition, but one service pro-vider after the other dropped out. In ABB’s opinion one service propro-vider was not capable of delivering the required services at that time, and they were also not focused sufficiently hard on cost reduction. They were disqualified.

Another one declined to bid, because they didn’t believe their chances of success were high enough to justify the investment in bid time and quest. A third one was interested in making the investment and attempt to win the business, but they needed to know ABB as an organization. Due to the very difficult financial situation in ABB, it was difficult for senior executives to spend time with the service provider. Consequently they lost the third one.

ABB already had a long lasting relationship with IBM. A pilot outsourcing to IBM in Sweden and India twelve months before was at that time going reasonably well. And thus, IBM was selected as the best and final offer.

Negotiation was done in two major areas. The first element was the core contract, which was the core service specification. This was negotiated and developed centrally by a global team. The other element was that the ABB countries negotiated their own versions of the contract, underlying the core documents. During the local negotiations, changes to the standard documents were kept at a minimum. This was done to obtain economies of scale. One

46

basic country contract was negotiated globally, with very small country variations. Global sign-off of the agreement was done July 28, 2003. Coun-try agreements were signed locally. Transfer of responsibilities took place in September 2003. It was a ten-year contract helping ABB significantly reduce costs. In the transition phase, the main focus was to establish agreed upon operational performance, including consolidation, rationalization, and stan-dardization of infrastructure. Another important issue was to establish a post-contract management infrastructure and processes. A relationship alignment project between the ABB team and IBM team was set up to take care of this.