Anatomy of an outsourcing operation

If you’re facing transplant surgery, you want a number of vital questions answered. Do I really need this in the first place? What’s it going to cost? Have I found the best team to perform the operation? Am I prepared to face the post-operation challenges? And maybe most important of all, am I going to be healthier at the end of the day?

When Canadian Pacific Railway contemplated ‘transplanting’ its IT infrastructure in 2003, via a seven-year, $200 million outsourcing operation, it had to ask itself all these questions and many more. With the benefit of a couple of years’ hindsight, we can now determine whether or not the operation was a success. Fortunately, we can tell you that the patient has survived, so we can regard this as an outsourcing anatomy lesson, not a post-mortem.

Diagnosing the Malady

Recognizing that it might benefit from a health check, CPR undertook an outsourcing study that looked at various aspects of IT as well as business processes that were quite dependent on IT.

CPR’s track record

Canadian Pacific Railway is a transcontinental carrier operating in Canada and the U.S. Its 14,000-mile rail network serves Canada and the U.S. Northeast and Midwest regions.
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This examination revealed that the company’s IT infrastructure was suffering from a case of chronic malnourishment, resulting from the fact that IT had to compete with the rest of the business for capital investment. If it came to buying more locomotives, fixing more track, or investing in IT, the money would usually be allocated to the core business.

Noted Allen Borak, Vice President Business Information and Technology Services, “We were falling farther and farther behind in the IT infrastructure world, and it was becoming clear that the only way we were going to be able to keep it closer to state-of-the-art was to give it to somebody who could make the necessary investments. And that’s exactly what played out.”

Having already outsourced its desktop environment to EDS and its networks to Bell Canada, the company now decided to outsource all of its mainframes, mid-range equipment, and networking inside the data centre.

The company canvassed the marketplace in search of the right expertise to perform the operation and finally landed on IBM Canada, which appeared to have the right capabilities and could demonstrate them through very solid references. As a result, IBM was asked to put together a formal proposal, and negotiations then followed, based on that proposal.

Deciding on the treatment

Before offering yourself up for a major operation, you want to make darned sure you know exactly what you’re getting into, and what it’s going to cost. Major outsourcing deals are no different.

According to Director, Supply, Gabriel Terrenzio, who led the negotiations for CPR, arriving at the final deal involved three stages. First came the aforementioned outsourcing study, which looked at gross economics. Then came a “deeper dive”, proof-of-concept stage, for which CPR engaged the services of advisory firm Everest Group Canada. And once the results of the “deeper dive” stage looked promising, CPR then engaged in the detailed contract negotiations with IBM Canada.

Everest’s main role was to help galvanize the two organizations, from a technical perspective, as the companies tried to define what outsourced services would be provided, and what the service-level expectations should be. Everest also offered some key tips in structuring the relationship, such as inserting language into the contract assigning responsibility to IBM for things that weren’t thought of at the time the agreement was being negotiated.

As for the actual hammering out of the deal itself, Terrenzio described it as three months of very intense negotiations.

“Because it’s a long-term agreement we had to try to anticipate change, and make sure that we had contractual and business-term leeway to deal with change,” he said. “Then came price. We knew generally what the financial envelope was, but once we got into granular details there were certain disconnects, and we had to work hard to make sure that those dollar numbers met our own financial hurdles.”

Naturally, CPR had legal counsel in the room to make sure the company’s negotiating team was doing and saying the right things. And also, importantly, CPR made sure that it had the necessary pipeline in to its executives when there were key decisions to be made.

“It was a lot of work but there was a terrific outcome, because that kind of adversity brings the best out in people,” said Terrenzio.

Prepping for the procedure

One of CPR’s biggest challenges with respect to the deal was around inventory — trying to find, catalogue and account for all of the infrastructure gear that the company had accumulated over 25 years. Much of that work boiled down to finding people with the best institutional memory as to where and why the equipment was there.

“Doing the inventory was a big task — bigger than we expected,” said Borak. “One of the things that consumed a lot of time was working out the economics around the assets. Do we keep them and run them to end of life and then have IBM refresh them? Do we transfer them to IBM at the beginning of the deal and take a write-down? All those kinds of issues. It took a lot of financial work right at the last minute to make those decisions, so if I were doing it again, I’d plan that out a little better.”

As with any large outsourcing deal, there were also a number of people issues involved. About 100 CPR employees would be transferred to IBM, as CPR’s mainframe and data facilities in Calgary and Toronto migrated to IBM facilities in the two cities.

CPR had moved its head office to Calgary in 1996, although most of the staff associated with the data centre remained in Toronto. From an HR perspective, the Calgary IT staff did not present much of a problem. Most of them had joined after 1996, and in the dynamic Calgary business environment, people are used to moving around. The IT staff in Toronto, however, were mostly longtime CPR employees whose career aspiration was to work for a railway company. For them, being outsourced was a bigger deal, especially when commuting problems were added to the mix.

“To IBM’s credit, they were able to offer most of the Toronto people the flexibility to work from home, which was very beneficial to them” said Borak. “When I talk to the people now in Toronto who were outsourced, by and large they’re pretty pleased with the way it’s working.”

Both companies had a dedicated HR person working on staff issues throughout the entire deal. And according to Borak, this helped considerably.

As well, CPR was very open and forthright in telling people exactly what the company was doing and why. “It didn’t get sprung on them one morning,” said Borak. “They knew that a potential deal was coming for several months. And I would certainly say that this was an important thing to do.”

The operation’s bottom line

For individuals facing a major operation, there’s no expectation that they will come out ahead financially at the end of the day. But with outsourcing, that’s often the main objective of the operation. Such was the case with CPR — bottom-line savings were the key driver of the deal. And in terms of hard economics, it has worked out well for the company. CPR has been able to reduce its costs by between 15 and 20 percent.

“We went into the deal looking for cost

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