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News In Review

October 5, 1998


Outsourcing: Change Management

Outsourcing megadeals are helping an array of companies cope with corporate and industry changes

By Bruce Caldwell

A spike in the number of big outsourcing deals shows businesses turning to outside IT service providers as a way to manage corporate and industry change. The proximity of two multibillion-dollar con- tracts last week-one awarded by Bank One Corp., the other by Boeing Co.-is unprecedented. But given today's wrenching business environment, more such deals are likely-for many of the same reasons.

Businesses undergoing mergers or acquisitions, such as Bank One and Boeing, have turned to outsourcing as a way to ease the transition and to build new infrastructures. Others, such as utilities facing deregulation, are outsourcing to ensure that key applications are compliant with new government policies. And for companies changing the nature of their businesses, such as Ryder System Inc., outsourcers can help set strategy and lay the groundwork for getting new customers.

"Outsourcing has moved from a cost-reduction tactic to a strategic weapon when your company is going through a major change," says Kevin Campbell, global managing partner for business-process management with Andersen Consulting's outsourcing unit. "Companies look to outsourcers for research capabilities, past experience, and a broad set of skills. These things can help the CFO, COO, and CEO when they're going through dramatic change."

Though outsourcing has historically taken place at companies in the midst of change, the trend is accelerating, says Dennis McGuire, president of Technology Partners Inc., a consulting firm that negotiates outsourcing deals for user companies. Some companies need to make major internal changes to compete more effectively, and "it's almost impossible to change culture by yourself," he says. Plus, McGuire says, companies increasingly use joint ventures and partnerships to further business goals-and that tendency extends to outsourcing.

The link between corporate change and outsourcing is evident at Bank One. "The pace of change is very high," says Mike Keller, senior VP of business and partner management for IT at Bank One in Chicago. The former Banc One announced its outsourcing agreements with IBM Global Services and AT&T last Wednesday, and signed off on a $30 billion merger agreement with First Chicago NBD the next day. "The solutions we'll get from IBM and AT&T will help us with the merger," Keller says. IBM has already provided consulting services for planning the IT integration of the banks after the merger.

IBM, under a seven-year, $420 million contract, will manage Bank One's mainframe and midrange computing and its help desk. AT&T Solutions' six-year, $1.4 billion contract includes replacement of Bank One's legacy networks with a single IP platform over the next 18 months, saving Bank One an estimated $100 million over the life of the contract. Both deals will be expanded to include the operations of the former First Chicago.

Rick Roscitt, CEO of AT&T Solutions, says companies are increasingly turning to outsourcers in advance of, or during, major organizational changes. Previously, he says, there was "a reluctance to complicate a merger any more than it already is, so network integration was put off. But spending money to cobble networks together and then come back later to do it right seems like double spending." Now, Roscitt says, companies are of the mind to "do it right the first time." Two of AT&T Solutions' clients have engaged the company to carry out part of their due-diligence phases, where the assets of an acquisition or divestiture are inventoried and evaluated.

Bank One's contracts with IBM and AT&T create the Technology One Alliance, a "virtual corporation" open to the 2,750 IS employees of Bank One for education, training, and other opportunities. The intent is to extend those functions to the 2,200 IT employees of First Chicago. These opportunities, says Marvin Adams, chief information and technology officer at Bank One, should help reduce the attrition rate for IS employees at the bank, as well as for the 550 transferring to AT&T and IBM, to the single digits.

Boeing's five-year, $2 billion contract with IBM Global Services is significant because Boeing had always opposed outsourcing on principle. The company changed its tune when it acquired McDonnell Douglas, which had an outsourcing agreement with IBM. "Our philosophy was in-house management and execution; McDonnell Douglas' was to outsource," says a Boeing spokesman. "The new Boeing had to have a common philosophy." Boeing now evaluates all operations it doesn't consider core competencies to determine if an outside party can do the work "faster, better, and cheaper," the spokesman says. Under its contract, IBM will manage most computer operations and all telecom for Boeing and its recent acquisitions.

DuPont, meanwhile, has made divestitures and acquisitions since it awarded two 10-year outsourcing contracts valued at more than $4 billion to Computer Sciences Corp. and Andersen Consulting last year. "Outsourcers can be even more helpful during a divestiture than during an acquisition," says Bob Ridout, DuPont's CIO. The IT assets of the divested unit are the responsibility of the outsourcer, he explains. DuPont merely adjusts its payment to the outsourcer to match the reduced level of service it buys.

Other companies in the midst of a merger have also recently turned to outsourcing. And IBM Global Services is capturing much of that business. In July, Eckerd Corp. expanded an outsourcing contract with IBM to encompass the 1,100 drugstores operated by J.C. Penney, which acquired Eckerd and its 1,700 drugstores last year. Last month, Cable & Wireless Communications awarded IBM a 10-year, $3 billion contract to help standardize the computing infrastructure among the four telecom companies that were merged last year to create CWC. AT&T, reshaping itself after the spin-offs of Lucent Technologies and NCR, is considering IBM for part of an estimated $2 billion in applications outsourcing contracts.

On The Inside
The heightened strategic role of outsourcers is landing them in boardroom discussions. "Virtually all of our recent outsourcing wins are to dynamically change the way a company operates," says Ian McLaren, operating executive for the Canadian, U.K., and international operations of MCI Systemhouse. "Outsourcing used to be just service-level agreements. The core guts of the business were taboo. Now, it's open boardroom conversation."

Ryder System, in Miami, awarded two 10-year contracts valued at about $1.4 billion to Andersen and IBM last year to help the company divest itself of non-core businesses and develop its capabilities as a global logistics services provider. The deal paid off in July when Ford Motor Co. awarded Ryder a contract to design and manage an integrated just-in-time supply chain and transportation system for Ford's 20 North American manufacturing plants. With Andersen's help, Ryder says it is negotiating strategic "large, targeted, complex deals" similar to the Ford deal.

Utilities Next
Utilities, beset by a rapidly changing regulatory environment that encourages competition, will likely contribute to the next big wave of outsourcing megadeals. Northern Indiana Public Service Co., whose acquisition of Bay State Gas is expected to be final in November, has an outsourcing relationship with IBM Global Services. IBM manages Nipsco's mainframe operations that run its customer service and other applications, and soon will manage operations for Bay State Gas' customer-service applications. Nipsco and IBM also work jointly on application development and maintenance.

IBM has provided support as Nipsco moves ahead with its acquisition of Bay State Gas and unbundles parts of its business, including delivery of electricity and gas, in compliance with the government's new regulation of utilities, says T.J. Aruffo, CIO at Bay State Gas. "The relationship with IBM has been an asset in our ability to make the necessary changes to our applications to support these business changes," Aruffo says.

For New Century Energies, in Denver, outsourcing has eliminated some of the issues that generate resistance to change, says Donald Borgschulte, managing director of IT and services at New Century. When Public Service Co. of Colorado outsourced to IBM Global Services in 1995, it created an IT subsidiary that simplified the integration and standardization issues associated with Public Service's merger last year with Southwestern Public Service Co. to create New Century. All IT infrastructure issues were managed by IBM, Borgschulte explains, making it politically easier to standardize on one customer-information system.

"IBM brought standardization across the two companies, and anything you can do to eliminate differences during a merger is healthy," says Borgschulte.

Like Nipsco, New Century is preparing to launch multiple affiliate companies next year. These companies will divide the work of a utility into separate components, such as distribution, generation, and marketing. Because deregulation lets consumers choose their utility providers, the new affiliate companies won't work together as they had before. New Century is developing a new policy to make clear what IT belongs to the affiliate companies and what is managed centrally by IBM.

Not every alliance, joint venture, or outsourcing contract lives up to expectations. But last week's vote of confidence from two of the country's largest businesses makes it clear that, increasingly, outsourcing is a way to manage change, not avoid it. with additional reporting by Marianne Kolbasuk McGee and Jennifer Mateyaschuk


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