InformationWeek
Defining The Business Value Of Technology
November 16, 1998
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Lubrizol Corp., a Wickliffe, Ohio, chemicals company, has also put a critical project into the hands of an integrator, hiring Deloitte Consulting to jointly manage a $40 million revamp of its financial, sales, distribution, materials-management, and plant-maintenance software systems worldwide. The U.S. portion of the SAP implementation went live in March and a second phase for Lubrizol systems in Europe is expected to be completed in April 1999, giving the company unified systems worldwide.
Lubrizol and Deloitte have worked so well together that Yannick Le Couedic, Lubrizol's VP of MIS, often feels as if Deloitte consultants, technicians, and other staffers are part of his company. "Our companies have similar cultures, stressing open communications and collaboration," Le Couedic says. "The human side has played an extremely important role in making this partnership work. Their people and ours have been working together shoulder-to-shoulder for 18 months."The decision to use a systems integrator for the enterprise resource planning project, one of the most complex IT efforts the company has undertaken, wasn't difficult, Le Couedic says. Though its own staff knows the technology and the chemicals business, Lubrizol has relied heavily on a methodology "road map" provided by Deloitte to keep the project on schedule and within budget. "Given the magnitude of this, we needed people who have done the job before," Le Couedic says. Deloitte's global presence has been important for the European portion of the ERP project, Le Couedic notes. Deloitte brought in experts on European standards, customs, and specifications.
Of course, not everyone is satisfied with their integrators and outsourcers. "They're not as responsive as we need them to be," says an IT executive at an insurance company that hired Andersen Consulting to help with a PeopleSoft ERP implementation. The executive requested anonymity because his company still uses Andersen. "They followed the contract literally, but if any changes came along, such as needing an additional set of reports that we hadn't anticipated, they said it was out of scope and the contract had to be renegotiated and they needed more money and time."
Because of such difficulties, the executive says, "people in the IS department were frustrated, and half who were working on the project left by the time it was over." But in the end, the implementation was successful, and "senior management loves Andersen," the source says.
Some integrators underestimate the difficulty of a project, says William Synwoldt, VP of IT and CIO at Niagara Mohawk Power Corp. in Syracuse, N.Y. Synwoldt recalls having a slew of problems when the utility hired one of the big integrators--he declined to identify which one--to install a customer database.
"They hadn't implemented a system like that before and didn't understand the complexity of the applications," Synwoldt says. "The problem was they didn't understand what they didn't know. They couldn't see the pitfalls in front of them." That project failed, Synwoldt says, but Niagara Mohawk has since hired Andersen Consulting to help install a similar system, and that's progressing on schedule. But before bringing in Andersen, Niagara made sure the service provider understood the utility's system.Some companies have looked at what integrators and outsourcers offer and see no compelling reasons to use them at all. Retailer Office Depot Inc. in Delray Beach, Fla., in recent years has stared down major IT projects--such as integrating systems from eight acquired companies, developing new order-entry and warehouse inventory-management systems, implementing a customized ERP project, launching a new Web site, and installing Windows NT and OS/2 point-of-sale systems--all without outside help.
"We trust our own people," says William Seltzer, executive VP and CIO at Office Depot. "We have a group of high-quality technology experts, and when necessary, we've retrained people to learn new technologies. When you go to [service providers], you get a senior consultant or partner charging $5,000 a day. They're very knowledgeable, but they don't have the vision it takes to provide data support for a business that's grown to $9 billion from zero in 12 years." Service providers, he adds, "could send the cream of the crop and we'd end up with people with less experience than most of my VPs have. We aren't dummies around here."
Vincent Phillips, VP of Web systems at Charles Schwab & Co. in San Francisco, says Schwab doesn't use service providers for its E-commerce initiatives because the pace of the market is too fast. "In Internet time, product conception to customer usage happens in 90 days," Phillips says. "That doesn't leave room for [a process] where you have to make a clear business case, come up with specs, give them to a developer, and complete the product. You're doing all those things simultaneously. Also, a lot of our requirements in E-commerce are ambiguous, and my experience with integrators is they have to know exactly what you want."
Some companies that use service providers on some projects avoid going outside on other kinds of tasks. Granite Construction Inc., a Watsonville, Calif., construction company that hired PricewaterhouseCoopers to review code for year 2000 compliance, is doing all of the conversion and testing itself. "We want to have complete control over that," says Granite MIS director Larry Hazen. "A lot of that code directly affects our customers, and we feel our people understand the systems better."Other Challenges
Managing a relationship with an integrator or outsourcer is among the biggest difficulties. Those challenges include achieving a consistent level of service, measuring responsiveness, improving service levels, resolving differences, tracking changes, and keeping down costs and prices. Integrator/outsourcer pricing is one of the most difficult areas to get a handle on. There's really no price list available, so it's difficult for organizations to figure out if they're getting a fair deal, says Alan Gonchar, president of Compass America Inc., a Reston, Va., company that helps clients negotiate and evaluate outsourcing and systems integration agreements.
"Every deal ends up being a custom deal, whether it's systems integration or outsourcing," Gonchar says. "It's on a deal-by-deal basis. We'll tell our clients that compared to best-of-breed contracts, we believe what they're paying for a given level of quality and volume is too much or about right, based on our database of what it's costing others."
Gonchar does say costs for IT services are continuing to rise. But costs are climbing at IT organizations as well. "What you're betting on with systems integrators is that they'll be able to do a better job than anyone else," he says.
At the bottom of the list of IT manager priorities are paying incentives to and collecting penalties from integrators. But Gonchar says these will become increasingly important to the success of alliances with integrators and outsourcers. He says clients need to be more willing to do risk/reward types of deals, where there is an upside for the service provider if it exceeds contract objectives--or penalties if it falls short.
Ben Trowbridge, director of business development for outsourcing at Ernst & Young, says that when companies enter into formal joint ventures with their outsourcing vendors, they become business partners with mutual objectives. This alliance fosters a level of communications and understanding that's often not possible with standard outsourcing buyer-supplier contracts, he says. "Neither has an advantage, and both have to do the right things," explains Trowbridge. "Outsourcing at times may mean polite struggle."One concern that came up in interviews with IT managers is whether integrators and outsourcers can remain objective when recommending systems and software. Those service providers that are affiliated with IT vendors--such as IBM, Compaq/Digital, and HP--have to guard against favoring their company's products over those of competitors.
"IBM wanted to do a review of our IT infrastructure, but we felt they were dwelling too much on their own products," says Hazen of Granite Construction. "I believe there is some [bias]. If you know you want to go with an IBM solution, then you bring them in as experts. But otherwise, we want to get an independent view."
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