In late 2000, Call-Net Enterprises, better known as Sprint Canada, was looking for ways to trim expenses. Serge Babin, a senior vice-president and Call-Net’s chief technology officer, reviewed all his firm’s IT functions before deciding to hand his internal IT network, operating systems, desktops and help desk over to EDS Canada in a five-year deal worth about $80 million.
It might seem odd that a telecom firm, whose expertise is in networking, would hand off its internal IT operations to a third party. Babin notes, however, that Sprint Canada’s core strengths lie in operating and selling space on a national telecom and data network – not in managing local area networks.
“I just didn’t have the scale to do some of the things I wanted to do,” he says. “For example, on the help desk, we only had between 10 and 12 agents. I couldn’t afford to go out and acquire the latest help desk software and the tools and the training and the management acumen required to run the business.”
Sprint Canada isn’t alone in seeking outside help to run its internal IT business. Even financial institutions that once considered their networks strategic parts of their company are looking for help from outsourcers. In March, IBM Canada inked a deal with National Bank Financial, which will see IBM handle most of National’s IT operations over the next eight years in return for $200 million. That followed a December, 2002 agreement between Hewlett-Packard and CIBC worth US$1.5 billion over seven years.
The reasons for outsourcing a network vary. Most outfits seek cutting-edge technology and more efficient IT processes in addition to cost savings. Despite the potential benefits, outsourcing won’t be a good fit for all companies. Outsourcing agreements can be lengthy and involve difficult negotiations, so if a company is happy with its existing network and IT staff, it may decide to keep its network operations in-house.
For EDS Canada, one of the country’s market leaders in outsourcing, running other companies’ networks is the fastest growing part of EDS’s business, says Terrance McGrath, vice-president of communications services for EDS.
“In the past two-and-a-half years the revenue has grown four times,” he says.
Generally, McGrath notes, large enterprises are the businesses most interested in outsourcing their network operations.
“That’s where you get the most bang for your buck,” he explains.
The overall Canadian outsourcing market, which includes networks and desktops, is growing at about eight per cent per year, says Dan McLean, an analyst with IDC Canada.
“It’s not spectacular growth, but it’s steady,” he notes.
In 2003, IDC estimates the Canadian network and desktop outsourcing market will be worth about $1.2 billion, growing to $1.6 billion by 2007.
McGrath believes there are two reasons why companies are more inclined to outsource their LAN and/or WAN. The first is that on the carrier side, network services are now a commodity that can be easily managed by an outside provider like EDS. And on the customer side, network technology has become more complicated and companies can no longer afford to retain and manage the expertise that more complex networks require in-house.
Often what ultimately pushes a customer into an outsourcing agreement is an impending network upgrade, McGrath explains.
“Many networks have just had pieces bolted on over time,” he says. “Few organizations have the expertise or money to put together an entirely new network. We can bring them broader technical capabilities, better relationships with the carriers and more redundancy.”
Eventually, outsourcers should be able to offer services on-demand, says Paul Rozen, a principal with IBM Canada’s network solutions group.
“We’re seeing organizations moving towards being able to do IT on an on-demand basis and being able to pick and choose the services to address any specific problem they might have,” he explains.
The human factor
While acquiring new technology is a key part of any outsourcing deal, dealing with people and processes is just as important, Rozen says.
“It’s a three-legged stool,” he explains. “If you focus on one without looking at the other two, the stool will topple over.”
On the process side, customers like an outsourcer to act as a single point of contact, Rozen notes.
“The phrase I’m hearing from customers is that they want one throat to choke,” he says. “So they’re looking for someone who will handle all the vendor relationships on the customer’s behalf.”
Many of the concerns from customers handing their networks over to IBM are focused on human resources and processes, Rozen says.
“You need to do a lot of planning around how the transition from the customer to the outsourcer is handled,” he notes. “That’s where most outsourcing deals fail is in the planning stage, when not enough planning has been done.”
For example, Rozen says, both the customer and outsourcer need to ensure that any IT staff being transferred to the outsourcer will fit into the new organization.
Staff transfers usually aren’t a problem, EDS’s McGrath says.
“We often need the expertise of the internal staff, so it’s not a concern for us to take them on,” he explains.
About 40 per cent of EDS Canada’s entire staff have come to the company through outsourcing deals, McGrath notes.
Call-Net’s Babin says communicating with his IT staff was key to making his outsourcing deal work.
“As soon as we made the decision on the scope of the outsourcing, I had a roundtable meeting with all the employees that were going to be affected,” he says. “I told them, ‘Here’s what we’re doing, we’re not done yet and we’re going to need your help to pull some data together.'”
Babin believes the clincher for his employees was that they’d be moving to a leader in IT operations.
“EDS has several 300-person call centres,” he says. “They could provide the employees with a career path, moving them into management and supervisory roles that I couldn’t offer.”
All 85 of Call-Net’s internal IT staff were offered jobs with EDS. Eighty-three of them accepted positions at the outsourcer, Babin says.
Obstacles along the way
Overall, Call-Net is pleased with its decision to outsource. Babin estimates the firm has saved between 15 per cent and 20 per cent of its overall annual IT budget. The original business case called for a 15 per cent savings.
There have been hurdles along the way, though.
The first hurdle to any outsourcing deal is the negotiating.
IDC’s McLean notes that negotiating a contract can take months, and in the case of some large enterprise contracts, more than a year.
In some instances, companies can spend a lot of valuable time talking back and forth without ever reaching a satisfactory arrangement.
Call-Net and EDS spent several months negotiating before finalizing a contract, Babin says.
One of the earliest problems that cropped up after the deal was signed was setting service level agreements. Call-Net didn’t keep a lot of internal documentation on such items as mean time to repair and mean time between failures. So when the outsourcing deal with EDS began in September, 2001, Call-Net left the SLAs as working objectives that would be reviewed after six months.
“There was some concern that certain services weren’t being delivered the way they should have been,” Babin says. “But we didn’t have anything in place. We were building it on the go.”
A second area of concern for Call-Net was that EDS didn’t initially understand that the IT needs of a telecom company were different from customers in other industry verticals.
“We had different senses of urgency around problem resolution and problem management,” Babin says. “We had some issues deciding which systems were a number one priority and making sure EDS had the same level of urgency that we had on certain outages.”
Those problems are now in the past, though, and Babin is happy with how the two companies are working together. Call-Net has reaped some unexpected benefits from the relationship, he says, such as leveraging EDS’s purchasing power and using EDS’ best practices around projects on the help desk.
“Those are some of the intangibles that weren’t built into the business case, but they saved us time and money” Babin says.
A big part of the successful relationship has been shared risk and reward that was built into the contract.
“We’ve both benefited from the windfalls and we’ve both paid for the problems that crop up,” he says.