Sharing The Risks And Rewards Of Outsourcing

AT&T's consumer unit is a strong believer in outsourcing. In the past several years, the nation's largest consumer long-distance company has signed two large outsourcing deals with Computer Sciences Corp.: a 10-year, $300 million contract for application support and a seven-year, $1 billion deal for management of applications for billing, credit and collections, ordering, and provisioning. It also handed over its data-processing centers and 2,000 employees to IBM Global Services under a 10-year pact worth $4 billion.

So AT&T Consumer was frustrated when it couldn't find a good deal to outsource its customer-service and sales operations, which include call centers and telemarketing operations. The division began soliciting outsourcing proposals for those operations in 2000. But none of the bidders came back with the right combination of service-level agreements and cost savings, says Howard McNally, senior VP of operations at AT&T Consumer.

McNally was ready to pull the plug on his outsourcing plans last summer and keep the customer-service and telemarketing functions in-house. "We had closed the request for proposals process down when Accenture came to us and said they had an idea," he says.

The idea offered by the IT consulting and services firm was a shared-risk, "co-sourcing" arrangement under which Accenture would manage AT&T's customer care and telemarketing operations for a set price. The deal would produce substantial savings for AT&T--and could generate hefty profits for Accenture if it did the job well.

The shared-risk arrangement between the two companies is "one of the most visible examples of a growing trend of risk-and-reward relationships between supplier and customer," says Stephen Lane, Aberdeen Group's IT services research director. Accenture has a similar deal with KLM Royal Dutch Airlines.

Most outsourcing contracts are structured so that a company hands over control of its IT operations or business processes to a service provider that has expertise in handling those tasks. In return, the company expects to save money and improve the quality of service it provides to customers. But conventional outsourcing has always carried a degree of risk for both sides. Companies lose day-to-day control of critical IT systems and business processes such as human resources, customer service, and sales. Outsourcing service providers, meanwhile, often have to make large up-front investments to purchase their clients' IT operations and employees.

One benefit of outsourcing is that it lets a company focus on its core business. If technology doesn't provide a competitive advantage, many companies don't see why they should spend the time and effort to build and manage a staff and infrastructure to handle things that can be managed better and less expensively by others that specialize in providing those services.

That's why outsourcing appeals to AT&T. Its consumer unit has 60 million customers, handles 300 million voice calls a day, and generates $19 billion in annual revenue from local and long-distance voice, data, and Internet services. Its core business is developing and managing the network that carries all that traffic.

The company wanted someone else to handle service calls from customers and to make sales calls to potential customers. "We were looking for more efficient and effective ways to do business with our customers," McNally says. "We also wanted to speed up the plans we have for Web access and self-service applications."

Accenture proposed to improve AT&T Consumer's customer-service and sales operations for about half of the $5 billion it would have cost AT&T Consumer to do so through 2007. It was just the type of creative approach McNally had been looking for. But translating a clever idea into contract specifics takes time. McNally and his staff moved a team of Accenture negotiators into AT&T Consumer's offices and began hammering out the deal's particulars. McNally says he spent a lot of time with Accenture's negotiators during the second half of 2001, even dining with them once or twice a week.

At the bargaining table, McNally and his staff would present their needs to Accenture and listen to their proposals. "We'd talk about places where we would give and places they would give," he says. "It's important to have a relationship based on trust with the people you're negotiating with."

During a six-month period, about 100 AT&T Consumer employees from human resources, finance, and IT participated in the negotiations. AT&T Consumer made it clear to Accenture that it had the capability and willingness to continue to manage customer service and sales internally if the service provider couldn't deliver cost savings. To meet AT&T Consumer's cost objectives, Accenture wanted the ability to investigate how customer-relationship management technology could reduce the carrier's sales costs through more targeted telemarketing campaigns.

In the end, Accenture agreed to spearhead initiatives to automate customer service and telemarketing and assume responsibility for customer-service levels. If the cost to run these operations over five years exceeds the negotiated $2.6 billion contract, AT&T Consumer isn't obligated to pay Accenture any additional fees. If Accenture can run things for less money, it can pocket the savings.

Savings has always been one of the main drivers behind outsourcing decisions. Ideally, a customer gets good service at a lower cost, and the service provider makes money because it can provide those services in the most efficient manner. For AT&T Consumer, the cost savings are built into the contract, Aberdeen Group's Lane says. "The company already knows it will cut its customer service and telemarketing costs roughly in half."

Accenture's willingness to sign the contract shows its confidence in its ability to cut AT&T Consumer's costs while retaining high levels of service, Lane says.

Of course, there still could be problems. In any outsourcing venture, the buyer is looking for a sharing of risk, says Kathy England, AT&T Consumer's IT vendor-management director. "The attractiveness of a joint venture such as this is both cost savings and the assumption of risk by both parties."

The five-year contract gives both companies a compelling interest in the project's success, McNally says. AT&T Consumer continues to be responsible for establishing strategic business direction, defining marketing strategies, and designing product offerings. Accenture takes responsibility for implementing and maintaining the Web-based technology that will drive improvements in AT&T Consumer's long-distance sales and customer-care initiatives.

By the end of this month, the companies will have created a customer-service and sales organization within AT&T Consumer that's staffed by 4,300 AT&T employees and based in the company's Morristown, N.J., facilities. Accenture is providing 240 consultants to conduct continuous analysis of the organization's IT systems and implement technology to improve processes. Bill Stake, formerly VP of AT&T Consumer's sales and customer-care division, heads the joint operation. He reports to McNally and Jon Harrington, a senior partner at Accenture.

AT&T Consumer retains final say regarding contact with AT&T customers. At the same time, Accenture provides the expertise to develop and implement new automated customer-service products, such as VoiceXML-based applications and natural-language recognition systems that build on AT&T's own research.

Accenture will take the lead in speeding development of AT&T Consumer's Web-based self-service applications and integrated voice-response systems, McNally says. These projects eventually will let AT&T Consumer cut overhead costs, including personnel.

AT&T Customer will hold Accenture to service levels negotiated in their contract. McNally wouldn't provide specific metrics, but he says, "AT&T Consumer and Accenture have agreed upon the appropriate amount of time it takes an operator to answer a customer-service call and how much each telemarketing sale and customer transaction should cost AT&T Consumer."

AT&T Consumer is rolling out the customer-service and sales organization in phases. For the first three months of this year, it made no decisions without McNally's approval. In April, McNally empowered Stake and the organization to make its own decisions regarding vendor relations and internal procedures.

The organization is in charge of its own day-to-day operations, including regulating the size of its staff, which can reduce costs, McNally says. "They can manage the organization the way they want to as long as they don't violate the service levels that we've negotiated."

Tough economic conditions in the telecom market play to the strengths of outsourcing, or in this case co-sourcing, says Peter Iannone, president of TPI, a consulting advisory firm that specializes in IT and business-process outsourcing negotiation. "A telco such as AT&T derives little competitive advantage in its marketplace by running its own telemarketing or call-center functions," he says.

TPI advised AT&T Consumer during its negotiations with Accenture. "Whenever a company negotiates for an outsourcing contract, it's balancing trade-offs between costs, service levels, and the ability to use the latest technology," Iannone says. "The negotiation process sometimes brings out creativity between the service provider and the buyer."