Reacting to Stakeholder Changes

Transformational outsourcing initiatives may not fail in execution, but they always have hiccups. Many other authors have covered the day-to-day project management and people management challenges extensively.^[2] I want to focus on one particular type of hiccup that is especially important for transformational outsourcing: a change in one of the initiative’s key stakeholders. When new individuals enter the game, they must be brought on board. Without their support, the initiative will be placed at substantial risk. For example, the outsourcing provider could be acquired. Company executives would want to make sure the new parent would continue to encourage the provider to honor its commitments. If, instead, it sets a new corporate direction, this could undermine the long-term relationship on which the transformation depends.

For example, a European IT outsourcing provider—let’s call it Snow- den, Ltd. (not its real name)—had been actively crafting private finance initiatives in the central UK government in the late 1990s. A Japanese information-technology company acquired majority ownership of Snow- den in 1990, but the company was allowed to operate independently. Faced with steep operating losses in the unit in 2000, Snowden’s parent decided to step in. Snowden had not participated in transformational outsourcing deals, but its work was important to government clients, and some of its obligations were complex. When parent company management reviewed Snowden’s contracts, they found that a number of private finance initiatives did not meet their standards for profitability.^[3] Parent company management immediately sought to renegotiate these. And government executives found themselves unexpectedly pressured to provide higher fees.

Executives with open-book relationships were better able to navigate this disruption. According to one Snowden client:

We have always tried to work in an open relationship where challenges and problems that need to be faced are dealt with in an open and frank manner. Each side recognizes the value of opening their books to the other party. When we face a problem, for us as customers or them as suppliers, we put our heads together and see how best to resolve it in the interest of both parties. We put our investment in the positive development of the partnership, rather than defense of respective positions.^[4]

This executive encouraged his counterparts at Snowden’s parent to continue in this kind of relationship, and together they worked out the financial issue. This executive continues: ‘‘For a while, we were uncertain about their commitment to the relationship. Those issues have been cleared away. The relationship is now in a strong and growing position.’’

Our small universe of transformational outsourcing cases does not have any examples in which the company changed ownership during its transformation. Leaving hostile takeovers aside, this shows that selling out and taking the initiative to transform seem to be mutually exclusive leadership choices. If a CEO decides to commit to a program of transformation, he or she is not shopping the company at the same time. The cognitive dissonance would simply be too great.

Public-sector initiatives are buffeted by changes in political administration. In some governments, top executives of departments and agencies change with every election. This leads them to take a unique approach to transformational outsourcing—one only found in the public sector. (We will talk more about this in the next chapter.) British Commonwealth countries avoid this dilemma by giving public-sector executives employment contracts for terms that make sense for the challenges they face. In these governments, when the administration changes, executives leading transformational outsourcing initiatives must bring new policy makers on board to keep their base of support solid. Peter Bareau at NS&I cleared this hurdle. Egos notwithstanding, we don’t have any examples of a new administration trying to stop or undo a transformational outsourcing initiative.

On the surface, we might think that replacing key individuals in the company’s leadership team presents the greatest threat to the continuity of a transformational outsourcing initiative. According to our limited data, this seems not to be true. In 20 examples, we have two cases in which the CEOs left in the middle of the transformation. In both cases, they oversaw the implementation of new capabilities, and they made sure their organizations used them. But they did not wait around long enough to capture all the strategic benefits these would deliver over the coming years.

In both cases, the new CEOs who took over set different priorities from those of the original transformational architects. In one, the change of leadership is very recent, so the ultimate impact is unclear. The other company, an intermediary organization that matches buyers and sellers of commodity products, has been highly successful. Here’s the story.

In 1986, this company, let’s call it Agora plc (not its real name), moved its business from a face-to-face market to distributed trading using remote computer screens and telephones. To accomplish this, it implemented a large information-technology infrastructure. By 1992, the costs, service issues, and inflexibility of this relatively undisciplined systems environment were stretching management’s ability to cope. For example, information technology represented 30 percent of the organization’s expenses and 20 percent of its staff, yet a seemingly simple systems change was estimated to take nine months to complete and cost 1 million ($1.66 million).

The CEO worked with a multinational technology company to create one of the earliest transformational outsourcing initiatives. He championed the radical notion that he could improve the cost and reliability of information-technology operations by outsourcing IT and use the funds that would be liberated to invest in flexible new capabilities. He started this all rolling with a five-year outsourcing and consulting arrangement. By 1993, he had resigned over an issue with the board on IT performance. His replacement lasted until 1995, when he, too, resigned over the board’s lack of support for the new electronic-trading capabilities he wanted. His successor was able to preside over the implementation of these capabilities, which totally changed the way the company did business.

By 1997, Agora cut fixed IT costs by 40 percent and reallocated these funds to building a flexible contracting and information service. Despite two additional CEOs, neither of whom found information-technology issues important enough to merit his personal attention, the company can introduce new products and services more nimbly and cost-effectively. It stands at the forefront among its direct competitors in products, service, and efficiency. Approximately half of Agora’s staff currently works for the outsourcing supplier.

How could all this happen amid disruptive changes in leadership? I am reluctant to grant all the credit to the outsourcing provider, but I cannot think of any other plausible explanation. Every time Agora replaced its CEO, the transformational outsourcing initiative hiccupped, but it did not stop. The provider’s consistent focus enabled it to push ahead; Agora was the beneficiary. Does this mean I recommend undertaking these initiatives without CEO leadership? Absolutely not. It does mean that, with the right outsourcing partner, one visionary CEO can set an initiative in motion that reaches well beyond his or her term in office. For owners and investors, this surprising result holds great promise. They can rely, at least in part, on the leadership of the partner company to shoulder some of the burden of strategic execution. It’s like having a buddy with whom to go to the health club. When your motivation for working out flags, she provides enough energy for both of you, and vice versa. As a result, the time frame over which you can sustain a healthy agenda extends dramatically, and the trajectory improves (see Exhibit 10.1).

Exhibit 10.1: Partner leadership helps sustain strategic progress.

^[2]See Mary Lacity and Leslie Willcocks, Global Information Technology Outsourcing: In Search of Business Advantage (New York: John Wiley & Sons, 2001); Maurice Greaver, Strategic Outsourcing: A Structured Approach to Outsourcing Decisions and Initiatives (New York: AMACOM, 1999); Simon Domberger, The Contracting Organization: A Strategic Guide to Outsourcing (New York: Oxford University Press, 1999); Steven M. Bragg, Outsourcing: A Guide to Selecting the Correct Business Unit, Negotiating the Contract, Maintaining Control of the Process (New York: John Wiley & Sons, 1998).

^[3]Gareth Morgan, ‘‘Spending Watchdog Slams Court IT System,’’ Management Consultancy, May 28, 2003, www.managementconsultancy.co.uk/News/1132304.

^[4]Personal interview with UK government executive on January 8, 2003.