Steely-Eyed
Some disappointed executives say they have been troubled by reduced access to key data and by vendor inflexibility to their changing business needs. Others claim that as more technologies become commodities, falling costs are not being passed on to them by their service providers. The litany of concerns is rounded out by poor communication, overdependence on the outsourcer, internal resistance, and competition between outsourcers that undermines service levels in the name of price.
Whatever the perils, plenty decide they need all the help they can get. SMI's corporate leadership arrived at such a view. In 1998 the company, which makes steel sheets, plates, pipes, construction materials, and railway products, merged with Sumitomo Sitix to create an entity with combined sales in 1999 of more than $8.5 billion. The merger was part of a push to develop business in other engineering fields, such as manufacture of silicon wafers for use in semiconductors, but it also added to the complexity of disparate IT systems — a problem that threatened to hold the company back.
"Working with IBM will enable us to build an integrated information network for systems that are currently dispersed throughout the country," explains Michio Kubota, general manager of SMI's information systems department. IBM was given responsibility for the development, maintenance, and operation of SMI's existing steel production, sales, distribution, and administrative systems. Management believes that by streamlining and standardizing the software programs used inside the company and by integrating ad hoc hardware systems, the company will boost its productivity.
Far from just passing the buck, SMI believes the move was necessary if it is to secure its place in the new economy. Many industry sectors in Japan have taken a liking to the concept of Web-based vertical industry trading hubs, and SMI wants a slice of the action. The successful transfer of its extended supply chain to the Internet is key. "We intend to link users, trading companies, steel service centers, and affiliated companies via an electronic network," Kubota says. Takao Endoh, general manager of industrial and distribution sector services at IBM Global Services Japan, adds: "We will help SMI to manage its business even better than it currently does."
First Flush of Romance
Mutual backslapping of this kind is to be expected. The honeymoon period is just beginning; expectations are at their highest. But SMI will learn, as countless others have, that maintaining the passion is no easy task.
Outsourcing is a two-way street in which both parties put much at stake. For the customer, it may include selling assets to the outsourcer and transferring staff. The outsourcer may need to make a substantial monetary investment in acquiring assets, absorbing people, and putting in new facilities, equipment, and systems. And none of this happens overnight.
"Time is needed for interpretation and understanding of responsibilities, and for expectations to align on both ends," says David Bell, Hong Kong-based CFO of Manulife Financial, a division of a global insurance group based in Canada. "Relationships and partnership building are the most important factors in an outsourcing agreement. SLA (service level agreement) issues are much easier to manage than soft issues such as people and communication management." Bell says regular communication between senior managers is key.
He should know. Last year, Manulife entered a $13 million, five year arrangement with Sema, a global services company headquartered in London. Under the contract, Sema took responsibility for Manulife's data center facility including mainframe and Unix systems, printing, and network backbone management. The contract also covered data center disaster recovery measures for mission critical applications. But Manulife held on to ownership and control of technical strategy, direction and design, security management, network management, and the help desk. Of the 18 Manulife staffers who worked in the areas to be outsourced, 12 were transferred to Sema. Six stayed behind, along with a dozen technical staffers with functional responsibilities that were not outsourced.
Outsourcing emerged as a viable alternative in 1998, when the company was reviewing the cost-effectiveness of its data center operations. At the time, Manulife was considering upgrading and expanding its existing data center in Hong Kong to accommodate business growth. By that point, the data center had been operational for eight years without major upgrades. The company was also having trouble finding staff for its push to near 24-hour-a-day online services. "Shift operators are much more difficult to hire and retain, particularly for smaller IT operations," says Ellen Mok, the company's CIO. Outsourcing eases that problem for Manulife and brings other benefits, such as automatic access to operating systems upgrades.
"This deal took a lot of time and effort," Bell says. More than a year was spent evaluating the options and hammering out the details. But ensuring that all the elements of a good contract were in place has paid dividends. "We've had a very smooth transition," says Bell. "Our business units are satisfied with the service performance of the outsourcer. Service channels are now more formal, resulting in greater transparency of service tracking and problem reporting for users." Indeed, Manulife is so pleased that the company recently extended its service agreement to cover additional open systems services.
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