In 2003, Fluor signed a $351m, seven-year contract with IBM Global Services, one of Big Blue's hallmark On Demand deals that year. In a press release, IBM said the deal would result in "substantial cost savings to Fluor...the streamlining of numerous core work processes and flexible usage-based pricing that enables Fluor to access computing resources as needed to support growing businesses."
How'd that work out?
"They were not innovating; they were not working as a partner for innovation," says VP of IS Taylor. But he doesn't blame IBM alone (which declined to comment on its relationship with Fluor). "We were putting the entire relationship in a place that's just commodity-based," admits Taylor. "If you want to say, 'Give me some value add,' there was no way for [IBM] to get compensated for that under the contract." Once price becomes the primary focus, you're locked in. "If you approached outsourcing as a price play, but now you want innovation, it's hard to move the provider around to that way of thinking," says Ed Hansen, partner in law firm Morgan, Lewis & Bockius's global outsourcing practice.
"You can't change the business model on them in the middle of the deal." The provider didn't build in any governance dollars for innovation, and chances are the buyer didn't either.
It's no wonder that the IT leaders who are reportedly most disappointed with the level of innovation provided by their IT service providers originally engaged in outsourcing to cut costs or because of competitive or business pressure, according to CIO's survey. That was certainly true for Fluor. "We had gotten too big in terms of cost, and we wanted to improve efficiency and consistency globally," says Taylor. When measured against those objectives, he says, "outsourcing was the best thing we did." But it hardly lent itself to outside-the-box thinking.
"You put the vendor in a narrow box when you say we want you to do this well and less expensively," says David Rutchik, a partner with Pace Harmon. CIOs may have more of a shot at innovation on marquee deals, Rutchik says, but innovation “still has to be a function of the customer's knowledge of his own business and processes, what he really wants, and his ability to articulate that."
What happens after the ink dries
According to CIO's survey, impediments to innovation include cultural and communications issues, the lack of skills within the supplier, internal resistance and internal budget restraints. But the simplest reason is that innovation was probably never written into the contract in a meaningful and effective way. Once the vendor's sales team and the buyer's procurement group part ways and day-to-day management begins, what the outsourcer is and is not legally obligated to do suddenly becomes crystal clear. "That person with the strategic vision no longer influences the behaviour of the vendor. The people responsible for the P&L take over and all that great stuff never happens," says outsourcing attorney Hansen.
"Everyone is in such a rush to get these deals done, they end up disappointed because [they] haven't had the right conversations," says Gartner's Anderson. Even if they have had discussions about "innovation" or "transformation," definitions remain fuzzy. "[A vendor] telling you they can provide 'innovative solutions to your business needs' is the same as them telling you they will 'implement your system based on proven methodologies,'" says Hansen. "Everyone says it, but it means nothing."
Even if the two sides do come to a consensus about what's meant by innovation, building a contract around those definitions is difficult. At Entergy Nuclear, Smith realised that his hopes for input and innovation from SAIC were never going to happen because they were not in the contract. "I had a kind of a selfish view of it," says Smith. "Contract be damned, you know, we brought you in here for a reason and that had to do with what else you could bring to the table." The excitement he had about SAIC using its nuclear domain expertise to come up with new ideas for IT faded. "All the talk about how they could show us how to do new things better...it never happened," says Smith. "Everyone turned back to the pure utility view."
An architectural council set up as part of the outsourcing deal and led by an Entergy CTO and technical leads provided by SAIC did a good job of setting standards but, according to Smith, it never played a role in bringing viable emerging trends to the business. On the occasions that SAIC did present Smith with ideas, "they'd say, Here's something new, what do you think about it?" says Smith. "The next question was, How much are you willing to pay? That's not want I want to hear from my value-add buddy. They didn't understand my business.
"I didn't expect them to live at the nuclear plant," he says, "but they could spend a week there." Smith included SAIC employees in all his own meetings, but the further he went up SAIC's chain of command, the less they knew. The one innovation for which the business was most hungry-wireless capability-"turned into discussion of SLAs and how to restructure them," says Smith. "They wanted to set it up so each wireless point was treated the same as a server or router." (Entergy implemented the wireless project with limited help from SAIC.)
"The further we got downstream from the deal, the more we got over our illusions about what the relationship with SAIC might be in the area of innovation," says Smith. "We couldn't figure out how to measure innovation and ultimately we had to decide whether we wanted them to manage the IT utility or innovate, because we weren't hitting either."
Willingness to innovate only decreases over time, says BAE's Fecteau. It is an open secret that the beginning of the outsourcing relationship is a money-losing proposition for outsourcers; they make it up on the back end. If you try to renegotiate to improve or expand services, the provider puts in a less experienced and cheaper team, says Fecteau. "They can still deliver exactly to the SLA, but there is no thought about improving or innovating," he says. To get that, "you have to build a new kind of contract."