Supply Chain

High Anxiety

How a satellite company monitors the many third-party suppliers in its orbit.
Josh HyattApril 15, 2012

It takes Hughes Communications and its partners four years to design, build, and launch a $400 million satellite. Failure, however, can happen very fast. “The rocket would explode on launch, immediately destroying both it and the satellite,” says Grant Barber, executive vice president and CFO of the $1 billion division of EchoStar.

Further fueling the massive challenge of a satellite launch is the fact that Hughes relies heavily on a network of far-flung partners: primary contractors Loral Space & Communications and The Boeing Co. handle manufacturing at two California sites, while Paris-based Arianespace coordinates the launch from a site in French Guiana. “It is a big decision on our side to make sure that our partners have the capability to deliver,” says Barber.

Hughes’s satellites provide high-speed Internet service to consumers as well as connectivity services to enterprises ranging from gas stations to lottery-equipment makers. Each satellite serves between 600,000 and 1.5 million consumers, requiring multiple pieces of ground equipment that receive and disburse content. “It’s a significant coordination effort,” says Barber.

While Hughes’s stakes may be unusually high, its task — managing a massive coordination effort among many suppliers — is familiar to many companies. More and more companies now rely on third-party partners to maintain flexibility, reduce costs, and enable them to focus on their core activities. In a recent study conducted by CFO Research Services in collaboration with professional services firm Crowe Horwath LLP, senior finance, IT, and line-of-business executives made it clear that third-party relationships are becoming a permanent fixture on the corporate landscape.

An online survey assessed both the value and the risks inherent in partnerships with third-party suppliers, from producers of raw materials to providers of logistics services and other strategic partners. Overall, 60% of respondents reported that they work regularly with third parties, with another 34% working with them on an as-needed basis. About 40% of respondents said that they expect their companies’ use of third parties to increase in the next two years.

The degree to which businesses can comfortably rely on their partners is undoubtedly facilitated by dramatic advances in communications and technology. (Such advances have not been reflected, however, when it comes to how companies make decisions about investing in technology, according to another recent study; see “Uncrossing the Wires” at the end of this article.)

While survey respondents were upbeat about using outside partners, they were hardly naive when it came to understanding the vulnerability involved. In fact, 65% reported that their companies had suffered some harm when a third party did not meet expected quality or performance levels.

At Hughes, managing risk means developing proactive resiliency. Building a satellite requires coordination between both internal efforts — where engineers design the satellite, aligning the beam patterns with the geography that needs to be covered — and external partners, which provide parts from around the world.

The company’s engineers not only participate in choosing the main partners, but also may end up working at partner locations. “We’ve dropped engineers right into the process of the build,” says Barber. “That is done to reduce risk, and to make sure that we know the timing and capabilities of our offering.” The company regularly monitors its partners’ project milestones, a process that includes a series of pass/fail qualifications and reviews, not to mention cash payments based on performance.

While Hughes builds many of the components that are part of the ground infrastructure, it “does a very good job of having dual suppliers for most of our critical components,” Barber says. The primary contractors that build the satellites have double and even triple redundancies for key parts. “As [the partners] subcontract out various pieces, we make sure there are alternatives in place,” says Barber. “That effort begins up front because of the difficulty of changing in midstream.”

That problem points to another aspect of the company’s business that makes its need to manage third-party risk that much more difficult. “Once the satellite is up there and in its appropriate orbital slot,” says Barber, “there’s not much any of us can do.”

Uncrossing the Wires
Everyone can agree that technology is a key ingredient in making partnerships work — just as it is in many other aspects of corporate management. What everyone can’t agree on is how to make the decision to invest in it.

That’s the conclusion of Uncrossing the Wires: Starting — and Sustaining — the Conversation on Technology Value, a recent study conducted by CFO Research Services and online media company TechTarget. The report, which was underwritten by Cisco Systems, is based on more than 600 responses to an online survey conducted among senior finance and IT executives at companies around the world. The research uncovers key areas where CIOs and CFOs agree and, more important, where they diverge on issues ranging from who’s calling the shots to how often the two parties talk.

For example, finance executives tend to give greater weight to IT’s influence over technology buying decisions than IT executives do. Nearly a quarter of CFOs say that the “IT viewpoint outweighs others” when making a technology investment; only 10% of IT executives believe they carry the same weight.

The two groups also disagree on how much business input goes into IT’s proposals for technology. Far more IT executives (70%) than finance executives (59%) credit business users with “providing input to the business case.” The research suggests that CIOs may not be adequately communicating to their CFOs how IT actually makes its technology buying decisions.

The problem, according to the CFO of a large U.S. health-care provider, is that “each [group] lives in its own specialized world, be it finance or IT, and does not always understand the exact needs and limitations of the other.” The solution? According to a controller at a billion-dollar global technology company, “When the CFO and the CIO get together, they both bring something to the table . . . so they have to give equal importance to each other. With good understanding, they could make a good team.” Agreed. — David Owens