Monday, March 01, 2004

IT managers demand that their outsourcing vendors help them innovate and make strategic changes, not just run the back office
When Blue Cross Blue Shield of Massachusetts inked a 10-year, $320 million outsourcing deal with EDS in December, CIO Carl Ascenzo made it clear he wanted the service provider to do more than just keep his servers running and his help desk humming. The health insurer was looking to automate key administrative services--such as member-eligibility verification--and deliver more of the self-serve applications that benefits recipients demand. "EDS has to help us deliver value to our customers so that we maintain our business competitiveness," Ascenzo says.
Businesses for years have farmed out IT and routine back-office functions such as payroll processing and call-center operations. More and more, CIOs and department heads say they want outsourcers that can help them drive strategic change throughout their companies. They want to achieve goals such as giving customers real-time information and self-service. Businesses need to respond to more-agile global competitors on budgets that have grown little since the economic downturn, and that's why this year will bring more growth in IT and business-process-outsourcing services.

To respond, vendors are pitching richer offerings that combine IT, back-office, and business-consulting expertise--services that some label business-transformation outsourcing.

Sales of business-process-outsourcing services will increase 8% this year to reach $131 billion, research firm Gartner predicts, and they're expected to hit $173 billion in 2007. The demanding business environment is driving that growth, says Gartner analyst Linda Cohen. "The whole idea is to transfer ownership of assets and get access to a capability I don't have today," she says. InformationWeek Research's first-quarter Priorities survey of 400 business-technology executives finds 35% say their companies will spend more on IT consulting and outsourcing services this year, while 15% expect to spend less. Three in 10 say they'll engage in some form of business-process outsourcing.

As part of its broad outsourcing agreement with Blue Cross Blue Shield of Massachusetts, EDS will implement its MetaVance health-care enterprise system. The software automates payer processes such as claims processing and provider management. What's most important to Ascenzo is that it will help his company keep pace with changes in the health-care industry, such as the nascent trend of individuals doing more to manage their own health-care spending. As that grows, so will the need for more individualized access to information. "In the future, members will become much more involved in determining the course of their own health care," he says. "MetaVance gives us a core data structure that allows us to meet those very personalized individual needs as the market evolves."

EDS won Blue Cross Blue Shield of Massachusetts' business as much on its health-care expertise as on its IT skills. "Outsourcing relationships are becoming more about strategic partnering, and as we go forward, we need to align with someone who brings not just computing scale but who understands our business," Ascenzo says.

EDS will roll out more services that combine IT and business-process knowledge, because savvy IT execs are demanding them, says Dave Clementz, EDS's executive VP of service delivery. "You can drive a lot of cost savings through outsourcing, but if that's all you get, then shame on you because you've left a lot of value on the table," says the former CIO at ChevronTexaco Corp. "Once you've streamlined and standardized your infrastructure, you then have an opportunity to rethink how work flows through the organization and how you connect with suppliers and customers."

CIOs are more willing to engage in strategic outsourcing deals that go well beyond technology, says Stuart Clements, a partner at consulting and outsourcing firm Accenture. "They've been in a difficult situation because they can't get the budget or operational space to make the changes that they know are needed," he says. "With [business-transformation outsourcing], they can reduce infrastructure costs and then reinvest that in modernization of other areas of the business."

Rick Hamilton, senior VP and CIO at DFS Group Ltd., which operates luxury retail outlets at airports worldwide, says that the outsourcing deals he approves increasingly will be strategic rather than tactical as the company adapts to a harsher travel market. "After 9/11, we looked down the barrel of having to transform the way we run our business. We're continuing to look to outsourcing as a means to do that," he says.

Outsourcing isn't going to have a transformational impact if it's isolated in the CIO's office. Karen Rueff, VP for executive resources at Lincoln Financial Group, and CIO Jason Glazier worked together to find a way to move more of the human-resources administration to a Web-based, self-service platform so HR staff could focus more on talent-management and -retention strategies and less on day-to-day operations. After consulting with Glazier and other executives, Rueff hired IBM to redesign and run a number of Lincoln's HR systems. "This isn't just a matter of moving the same work from one vendor to another but really creating a totally different solution so that the way we deliver HR support is different," Rueff says.

Glazier expects IBM to improve as well as run operations. "This is about business transformation for us," he says. Business-process outsourcing "is taking existing processes and letting someone else do them. This deal is significantly upgrading our process."

Under a 10-year "business-transformation-outsourcing" contract, IBM will build and deliver a number of self-service human-resources tools for Lincoln, including a portal that employees can use to access all HR, payroll, and benefits services. Some components of the project will become operational early this year.
As more technology-driven business processes are delivered by third parties, CIOs expect to spend more time crafting and monitoring outsourcing deals, applying the skills they've learned managing internal projects. "The IT organizations of the future are going to be less doers than vendor managers, supply-and-demand managers, and facilitators. Those are the skill sets," says Paul Donovan, CIO at ING U.S. Financial Services. Donovan struck a seven-year, $600 million outsourcing contract with IBM last month. Among other things, Donovan will grade IBM's performance on its ability to help ING explore new service offerings such as wireless account access for customers. "The contract won't be a success if we just do IT services," Donovan says.

CIOs can play a critical role in providing a big-picture view: making sure line-of-business executives don't construct outsourcing agreements for their branch that crimp business operations elsewhere in the company. "Technology has done more outsourcing than most areas, so we're very familiar with the terms you want to have to protect [yourself]," says Lincoln Financial CIO Glazier. In hammering out the IBM contract, Glazier worked closely with Rueff on details such as service-level agreements, the frequency of software upgrades, application-development costs, and other parts of the deal heavily related to IT. He also had to make sure the plan wouldn't disrupt Lincoln's internally run networks and applications.

DFS Group CIO Hamilton says increased outsourcing at his company means that he's more often managing project groups consisting wholly of IT professionals employed by third parties. To make it work, DFS Group has called the "cops." That is, the company places outside contractors into "Community Of Practice" groups that are required to meet and conduct business as though they were internal DFS Group employees. "That way we can be sure that the people who handle our networking are out in front of our application-development contractors in terms of supporting the changes they're going to be making," Hamilton says.

As part of its efforts to control costs when the travel market was decimated following the Sept. 11, 2001, attacks, DFS turned to offshore provider Cognizant Technology Solutions Corp. to build a single inventory-management application that can be pushed to product managers worldwide. It replaces several legacy applications that ran in different regions that were expensive to maintain and couldn't communicate with each other. DFS also plans to use Cognizant for a more-advanced redesign of its business applications that could eventually have the company using Web services to tap into the supply chains of suppliers such as Louis Vuitton Malletier and Gucci Group N.V.

The emergence of offshore providers that can deliver advanced services is another force spurring growth in the outsourcing market. Hamilton says Cognizant's use of low-cost, highly skilled Indian labor lets him consider projects that might otherwise be difficult to justify. "Offshoring brings a resource pool that I couldn't possibly replicate here," he says. "They provide skills on demand, which is essential because we're an organization that is shooting in one direction one day and another on the next day." In December, Cognizant disclosed plans to add 600,000 square feet of office space in India this year to meet booming demand for its services.

Lincoln Financial also uses foreign outsourcing to help make the numbers work on its HR project with IBM. IBM will operate an employee help desk for Lincoln from Edmonton, Alberta. The center offers a cost structure that's less than a U.S. operation but more than one located in India or another emerging market. As the company gains a comfort level with IBM's operations, the help desk may be moved to a location in a lower-cost, more-distant country, Glazier says. "There was an offshore option that would have been cheaper, but we didn't want to go there right now," he says. "That implies a lot of change. But if we make changes to the offshoring mix at a later date, we will reap the benefits. That's a key thing I put into the contract."

As more Indian IT firms develop strong business-process expertise, more of this advanced outsourcing will move offshore as the cost falls. Corporate spending on offshore business-process outsourcing will grow from $1.8 billion in 2003 to in excess of $26 billion by 2007, Gartner predicts. Operations in India are expected to capture about half of those sales.

Whether through domestic or offshore partnering, more technology and business executives are looking for providers that can offer IT, business-process, and consulting services in a single contract. Creating that sort of busi- ness-transformation capability is what drove IBM's purchase of PricewaterhouseCoopers' consulting arm in 2002. "It wasn't until we acquired them that we could provide a credible offering," says Bill Matson, general manager for HR business-transformation outsourcing at IBM.

IBM's strategy going forward will be to seek deals that require both its infrastructure and consulting services, Mat- son says. "If a customer says, 'We just want you to run payroll the way we've always run it,' we typically wouldn't be interested in that kind of deal," he contends. Matson sees no shortage of demand for such "higher-order services" because support organizations "are being told to cut costs by 10% to 15% while improving services. You run out of solutions when you try do it all by yourself

By Paul McDougall