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Enterprise-wide
Value in IT Outsourcing Engagements Given the downturn in today’s global economy, it is not hard to imagine that there would be a significant decrease in IT spending. However, companies, recognizing the inherent value of IT to the overall business, are instead investing increased amounts in IT. In fact, IT budgets are projected to increase despite layoffs and cutbacks among numerous companies. Gartner Dataquest projects that by 2005 the typical North American company will devote 10 percent of revenue to IT spending – up from 7.5% in 2003. This continuing increase in IT spending points to an overall change in the IT industry: the transformation from a tactical overhead expense to a strategic business asset with investment, benefits and value. Companies that have wrestled with IT infrastructure and staffing issues for years are turning to outsourcing in order to solve internal problems. Various factors such as economic trends and shifts in business strategy have accelerated this increased interest in outsourcing IT functions. Additionally, this new wave of companies entering the outsourcing marketplace has increased expectations and is demanding tangible value.
The SMB marketplace is filled with promise. Mid-size companies often need even more help than larger companies – they often lack or cannot afford the necessary staff, technology, or processes to run streamlined operations, and they need a wider range of services. In the past, it has been difficult for many mid-sized companies to find, or for that matter, afford, a large service provider because the typical mid-size customer didn’t fit into the market that many service providers were after. As mid-sized companies undertake more aggressive growth strategies and demonstrate increasing power in the marketplace, they are demanding more for their outsourcing dollar. As a result, service providers are being forced to demonstrate value by emphasizing an alignment with business objectives as well as overall business performance and not just standard economic factors. Verizon Information Technologies, Inc. (Verizon IT) is one service provider that has taken a consultative approach to outsourcing and is showing its customers how to assign overall business value to an outsourcing engagement by positioning itself to become a valuable business and technological asset, instead of simply a service vendor. A New Marketplace
Requires New Strategies: Challenges In Middle Market Outsourcing In order for service providers to meet the new demands of middle market companies, they are faced with the challenge of restructuring the entire outsourcing relationship from approach to execution. Because of its unique position as a mid-size company, Verizon IT understands the ins and outs and common headaches of a mid-size company, a distinct advantage when providing services for its mid-size customers. Verizon IT recommends outsourcing service providers focus on:
To maximize the overall business impact of outsourcing, buyers must look for vendor qualities that exceed the current industry norm. Vendors that have attributes such as similar corporate culture, industry leadership and innovation, and commitment to customer objectives form the value-added benefits that now define the most successful outsourcing relationships. When asked how Verizon IT exceeds industry expectations in working with potential clients, Director of Global Sales, Bob Batson responds, “At Verizon IT, we value the true business alliance we have with all of our customers. We grow our business only if our customers grow theirs. Approaching potential clients with the knowledge that we want to cultivate a strategic relationship, not just a contract, gives us the upper hand over our competition. Obviously, each opportunity must rest on its own merits, but our flexible approach allows us to continue to seek out and pursue this type of relationship when opportunities arise.” Meeting The Challenge: Assigning Long-Term
Value It was once considered good business practice to simply specify mutually agreed upon deliverables and metrics over a five-year contract. Attaining or exceeding deliverables was considered excellence. However, this approach is no longer meeting the buyer’s goals. Today’s challenge is to create long-term and flexible service relationships that are engineered to adapt to changing business needs. Verizon IT successfully approaches its outsourcing business by creating a strategic business alliance and outlines several key areas that impact the success of an IT sourcing engagement. Defining Long-Term Value
By defining value, seeking critical drivers and building a business case, Verizon IT has created a successful formula to engage middle market companies and meet their demands for more value in an outsourcing engagement. Verizon IT has learned that tying strategy into a financial business initiative rather than simply focusing on economic ROI, gains the trust of their customer and many times convinces them to outsource more services than originally intended. A Case For Business Value: Highlights For Children
Magazine Until recently, HFC ran its own in-house data center operation. As the company's information management needs grew and became more complex, HFC’s management was spending more and more time making technology decisions. To better focus on the company’s core competencies and the children they serve, HFC decided to outsource its data center functions. HFC began looking for an information management provider who was not only technologically proficient, but also shared the company's business and cultural values. They wanted a long-term solution provider who would enable them to avoid the fixed costs associated with owning and running an in-house data center, as well as provide HFC the flexibility to vary its IT costs based on changing needs. Additionally, because its subscriber lists contain children's names and addresses, the company placed a high priority on data security. Verizon IT assures maximum security in every aspect of its business, from the physical buildings to its software, to the way it screens, hires and trains employees. The security assurances, shared values, flexibility and scalability were the drivers behind HFC’s decision to outsource with Verizon IT. When asked about what characteristics they sought in an outsourcing provider, Elmer Meider, President of HFC, commented, “One of the most important qualities we look for in a vendor is a company that shares our values. We are the type of company that tends to look at vendors as partners. We had to be sure that whomever we partnered with was the kind of company we wanted to be involved with on a long-term basis.” Another driving factor and of key importance to HFC, is the availability and scalability of the IT solution they chose. With 99.99 percent availability, Verizon IT's world-class data center has the capacity to support HFC future growth. It also gives HFC the financial flexibility to vary its costs based on current need. “One of the biggest benefits we have had with the Verizon IT partnership is the ability to react to what our business units are requesting. We have used Verizon IT’s influence with third parties to meet those needs. Frankly, sometimes with amazing speed. It is only with a vendor that we have a true partnership with, do we see results like this,” states Vaughn Graham, Vice President of Information Services for HFC. Meider discusses the intangible benefits of having an outsourcing vendor as a strategic partner, “I believe that we are one of Verizon IT’s smallest clients in terms of dollar value – but we are treated as if HFC is its biggest account. The speed with which they address our issues and the strategic recommendations they make for our business growth go far beyond a traditional outsourcing relationship. When you are a fairly small player you expect to be put on the backburner, but Verizon IT has not done that. I am confident through this outsourcing engagement we have saved money, but the intangible factors are a much bigger benefit to us.” Creating An Effective SLA To Meet Customer
Needs The struggle that companies face is primarily due to poor expectation management, unforeseen cost increases and doubtful service quality improvement. According to Meta Group research, by 2004, 50 percent of ITOs will meet SLA targets. The remaining companies will consider "change vendor" alternatives. This prediction sends a strong message to outsourcing providers, stating that vendors need to meet SLA expectations or the customer will move on to contract another vendor who can meet service goals. Verizon IT designs and implements its SLAs with and around a central concept: the customer’s business drivers. The units of measure for the agreement are aligned with both the customer’s business, as well as Verizon IT services. These customer-specific units of measurement are derived from the understanding of the customer’s:
Developing an SLA now requires outsourcing service providers to focus less on economic ROI and to focus more on increasing knowledge about the intangibles of a company, such as its corporate culture, growth strategies and business drivers. Using this strategic knowledge to craft an SLA will ultimately bring greater rewards to both parties. Structure the
SLA Around Critical Transactions “Verizon IT structured an agreement based on a cost per transaction for the nation’s largest medical transaction processing firm. The SLA was built specifically around the availability of Verizon’s solution and the items that were geared to those specific transactions. By sticking to revenue drivers, we were able to build a business case tied into the SLA,” states Mike Luebke, President of Verizon IT. Define Critical
Drivers
Service Provider=Strategic Partner It isn’t always what is said during the negotiation process, it is also what is not said that can win the contract. According to Verizon IT Vice President of IT Services Del Jenkins, “The savvy outsourcer will bring in a team to talk directly to the operators of the business to determine various things, above and beyond the RFP.” Often what pushes the vendor ahead of the pack in the RFP process is the ability to address the underlying business drivers – the factors either causing the buyer to put a project out to bid or directly related to that project. Jenkins adds, “If a vendor can come in and address the needs of the potential buyer beyond the black and white requirements specified in the RFP, there is an increased chance of success. This is a huge factor when customers choose their vendors. Winning an IT contract is an art, not a science. The fact is a lot of companies can provide IT services. At the end of the day, it is all about whom a company wants to buy from.” Find The Value-Add According to Batson, “Verizon IT’s services not only allow companies to realize daily operations efficiencies, but also allow them to assert their long-term, strategic goals whether it is to implement a CRM solution to increase their customer service and win add-on business or develop new products, enabling customers to focus on their core competencies resulting in competitive advantage or an increase in market share.” Concluding
Thoughts Verizon IT has illustrated its ability to reach middle market companies by utilizing a strategic partnership mindset. Verizon IT recommends that a good starting point is to define objectives and set realistic expectations by understanding a company’s motivating drivers. Verizon IT has also proven that demonstrating a strong business case and assigning overall business value to the project can convince mid-tier companies that outsourcing would be a good fit. Specifically, Verizon IT’s solution recommends a mix of quantitative and qualitative measures:
Verizon IT demonstrates how businesses and outsourcers are developing outsourcing agreements beyond price-focused, commodity-based relationships to true value-added business strategic alliance. Verizon IT’s example of becoming a strategic partner and not just a service provider has proven to be a successful and winning strategy to break into the middle market.
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