IT Management
Meta Group, The Business of IT Portfolio Management: Balancing Risk, Innovation, and ROI
IT portfolio management is a disciplined and structured approach of continuous, repeatable, and easily sustainable processes designed to map business requirements to technology decisions. Using a financial metaphor as the foundation, IT portfolio management enables organizations to categorize, evaluate, prioritize, purchase, and manage technology assets — hardware, software, and people — and projects. It also enables organizations to align IT spending, related to these assets and projects, with current and future business needs to achieve an acceptable balance of risk and reward.
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Computerworld, 5/17/02: Q&A: Sears CIO says IT departments to stay separate after Lands' End purchase
By CAROL SLIWA
Jerry Miller, CIO at Sears, Roebuck & Co. in Hoffman Estates, Ill., discussed the IT implications of the company's purchase of Dodgeville, Wis.-based catalog and online retailer Lands' End Inc. with Computerworld (see story). Interview excerpts follow:
Q: Will your IT departments fuse?
A: We're going to operate this as a wholly owned subsidiary. So they're going to have their IT department.
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Outsourcing
Retail Banker International, 5/13/02: Outsourcing to IBM - only Bank One shows dissent
American Express has just signed one of the largest-ever outsourcing deals in the financial industry, but Bank One is cutting back its relationship with IBM. While the two US banks are primarily looking to control costs and operations, Scotiabank and National Bank of Canada are more interested in the creative input that IBM can bring. Beatrice Arnfield looks at four North American financial institutions with different approaches to the way they manage their relationship with outsourced service provider IBM Global Services
THE $4 billion, 7-year outsourcing contract signed between Amex and IBM in March is one of the largest outsourcing deals in the financial services industry. Amex is hoping to save hundreds of millions of dollars in IT costs by gaining utility-like access to IBM's computing resources. IBM is delivering on-demand computing to the Amex facilities in Phoenix and Minneapolis. It will also provide technical support services on site at Amex locations around the world.
Under the contract, 2,000 Amex IT employees have transferred to IBM. However, core technology competencies - such as IT strategy, technological relationships and the development and maintenance of applications and databases - will remain under Amex's control. Application development for new business initiatives is never outsourced, said Steve Karl, Amex's senior vice president of technology operations. "Our specific purpose was to get the greatest level of flexibility on volume level, even in a hyper-growth situation," said Karl. "We would not have pursued this deal without the prospect of economic savings. IBM is a scale player in both hardware and software, and not just in supplying its own hardware. Because its customers require a variety of systems, IBM Global Services is the number one or two client for hardware supplied by its main competitors and it offers economies of scale in buying from these competitors.
"We wanted to guard against the pitfalls that clients of other technology companies have experienced, where costs grow unpredictably. This concern resulted in Amex's opting for the out-tasking model, which I see as a significant departure from usual outsourcing deals."
The key issues for Amex were decision-making and control. "We wanted to create a structure that would allow us to retain control and to set annual targets and budgets," Karl said. "The only activities that we considered for out-sourcing were ones that had a commodity nature. These included all activities in the data centre, mainframe and mid- range computers and end-user support. Enterprise architecture and the direction of technology will continue to remain the domain of American Express."
Managing expectations is a challenge, said Karl. "I am responsible for IT infrastructure and I liaise with my colleagues who manage technology for the lines of business and sit on the boards of these businesses. Suppliers are not directly in contact with the lines of business. I need to educate and inform my colleagues and their business partners."
Bank One set up the Technology One Alliance with IBM and AT&T in 1998 to provide the bank with "world-class networking and computing services to support its aggressive e-business and growth strategy". To the initial $1.4 billion, 6-year contract, further contracts were added. These included $465 million to AT&T's networking professional services unit and $588 million to IBM Global Services for expanded data centre operations, including help-desk support, management of the bank's mainframe computers and mid-range servers.
"We expect to be able to deliver even more value by extending the scope of the Technology One Alliance across our whole corporation," Bank One said in a statement at the time.
Two years later, the bank had a new chairman and chief executive, Jamie Dimon, who, with his chief information officer Austin Adams, set about reducing costs. Outsourced services were seen as one of the areas where costs could be cut. The company said that improved efficiencies in operations and technology contributed to the 7 percent decline in non- interest payments for the first quarter of 2002, compared with last year's first quarter. "Our efforts to control wasteful spending have enhanced the margins in our business, even with increased investment in technology and marketing," said Dimon.
Speaking at NACHA's payments conference in April, Dimon elaborated on his experiences of cost cutting at Bank One. "I've been at Bank One for 2 years and we've spent a lot of time basically fixing our infrastructure. We've been cutting our costs. Since I've been here, overheads have gone from $10.6 billion to $9.2 billion. One hundred percent of that has been waste, bureaucracy and waste, nothing more. It is an absolute shame for any company to have that sort of waste. A high cost producer will not survive. We have cut costs and we have invested $500 million a year more in systems than a couple of years ago.
"Bank One is taking up the management of all of its telecoms and data centres. We're doing all of our consolidations. We're massively upgrading all of our capabilities, bank workstations, ACH, wire rooms, financial reporting systems, because I think the backbone of any bank is how you invest in your technology system."
Although Bank One is still working with IBM, the basis of the relationship has changed, with previously outsourced operations taken back in-house. Adams commented to American Banker: "Out-sourcing contracts necessarily imply a profit margin for the outsourcer. If you are able to attract and retain the right skill sets in-house, then frankly, I think that is a better resolution."
Scotiabank signed an outsourcing contract with IBM on 1 May 2001. "Cost cutting was not the main reason for outsourcing," said Peggy Mulligan, executive vice president of systems and operations, "nor was it just the availability of systems and staff. What we wanted was to leverage the intellectual ability of IBM."
A year into the outsourcing agreement, Mulligan is satisfied that the bank's aims are being realised. "We now have a greatly enhanced back-up facility with 4-hour complete DBR (disaster back-up recovery) time," she said. "I run half marathons, and I could have run between our main site and the old back-up site. I said that, if I could run between the two sites, then they weren't far enough apart."
IBM's solution was to buy the old back-up site and move the facility to a more appropriate secondary site. "I wanted to achieve a new back-up site as an outcome of the contract," Mulligan said. "This required very aggressive technology, which IBM brought. We are now in the planning and testing stages, and the project is due to be ready in mid-October. It will have taken 18 months, which is very positive, given the amount of activity.
"Outsourcing is both easier and more challenging than doing everything in-house. It is easier for an outsourcer to bring good solutions, using their global experts. The things that IBM is bringing are of tremendous benefit to our operational performance. The challenge is that I am overwhelmed by the number of high-quality ideas they present."
To help her sift through and weigh up new ideas, Mulligan is assisted by the innovation or I-Team, which is made up of IBM and bank staff in equal numbers. "They are looking for new ideas and, when they come up with something, a few of them meet with business line partners. I meet with the I-Team once every 3 weeks.
"If I can find an innovative solution, we get exclusive use of it for 6 months. Then IBM can sell it to others. These days, you can't stay ahead of everyone else for long. I am satisfied with the way IBM keeps our business confidential."
As part of her research before outsourcing to IBM, Mulligan visited Australia's Westpac, which also out-sources to IBM and has an innovations team. "I am happy to partner with non-competing banks," she said, "and to share development costs, ideas and tests.
"In my opinion, I have control of what I have to have control of - the architectural needs and business needs. I don't have to have day-to-day control and I don't need to know how the inside of a box works. The concept of bringing something back in-house is scary. Yes, IBM is making a margin, but on the other hand it has the right talent. I might need ten people to do a job in-house, but the same job could be done by two expert people. You get value, and it has to be more cost efficient. Based on 7-year projections, the net present value of our savings is 10 percent.
"I'm happy to have the experts when I need them. I don't just have a staff of 450 to call on. I have access to 30,000."
National Bank of Canada became the first Canadian bank to outsource its operations when it signed a contract with IBM in 1994. It now outsources 100 percent of its retail operations and 80 percent of its total operations. The contract was renewed for a further 10 years in December 2001, 2 years before the old contract would have expired.
"We are very satisfied with our business relationship with IBM," con- firmed Michel Labonte, senior vice president of finance and control at National Bank. "Our renewal of the contract speaks for itself." Under the agreement, IBM will continue to manage the operations of the bank's IT infrastructure, including its web environment and call centres. National Bank and IBM will also be researching new e-business projects. The development and maintenance of end-user applications is outsourced to Canadian company Cognicase, while telecommunications is outsourced to Bell Canada. "The value of the contract with IBM is US$700 million and (that of) other outsourcing deals perhaps US$450 million," Labonte said.
The main project implemented by IBM and Cognicase is National Bank's transactional e-commerce infrastructure, which went live 2 years ago and provides internet access for commercial and retail banking customers.
Cost was one of three reasons for outsourcing, explains Labonte. "The second reason was to get access, on a constant basis, to expertise," he said. "We couldn't get that ourselves, given the size of our operation. We are a bank. Our staffing is related to banking, not to IT. IBM can both attract and keep IT staff and give them a better career. The third reason was to innovate. Our partners integrate new technology at a faster rate.
"On costs, we have achieved what we wanted to achieve. We have saved money but, because we were not very fat to begin with, our savings have been around 10 percent, whereas a fatter organisation could save up to 25 percent."
According to Labonte, benchmarking and transparent pricing are essential. "In the short term, say 2 to 3 years, if a bank goes to tender, it can get a better price," he said. "But we don't go out to tender; we have just signed a new contract with IBM, and of course prices can't be fixed for 10 years. We renegotiate every 3 years and we also negotiate prices for additional work that we could request within that 3-year period. After the initial saving, we've relied on benchmarks to evaluate performance and set good prices."
Management commitment on the part of the outsourcer is essential, according to Labonte. "One way of enhancing commitment is for the bank to set the bonus of the IBM managers it works with. The bonus is tied to the objective fixed by National Bank. That is different from having a supplier relationship, because the IBM staff have incentive remuneration.
"The outsourcer must know you well. They must know your strategy, become part of the inner circle of the company. We are enhancing our governance model under the new contract and improving the way that we are working together. The strongest value added comes from there."
According to Labonte, National Bank has 100 IT people working in-house and 1,000 working for outsourcers. Operations retained in-house consist of IT architecture design, management of contracts and billing, quality control and overall project management.
Continued tactical outsourcing will cause significant degradation of productivity and customer retention. The agile organizations of the future will skill up to the challenge of strategic IT sourcing.
For more than 30 years the high-tech industry has experienced a series of long stretches of promising productivity, interrupted by moments of harsh reality. In this “post-e” era of uncertainty, user organizations are re-evaluating initiatives and attempting to define the elusive business value they desperately seek from their IT assets. Service providers are re-inventing their companies to take advantage of the massive adoption of the Internet and prepare for the next battle of value propositions that are being constructed around business process and vertical industry solutions.
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