Shortly after Dick LeFave arrived at Nextel Communications Inc. in February 1999 as the company’s new senior vice-president and CIO, he concluded that Nextel could vastly improve its IT operations and its sagging bottom line (it had posted a US$1.8 billion loss in 1998) if it outsourced a good portion of its IT.
“The need here was to build a company that if (Nextel CEO) Tim Donahue wanted to press a button tomorrow and say, ‘Hey, LeFave, we’re going to grow this thing two or three times,’ I didn’t want to be standing in front of him saying, ‘We can’t scale.'”
LeFave had negotiated and led outsourcing arrangements for two of his previous employers, Southern New England Telephone and The Boston Co., a subsidiary of American Express Co. So he knew what he was getting into when, between 2000 and 2002, he signed long-term, big-money contracts with Amdocs to run Nextel’s billing system (nine years, approximately US$1 billion), with Electronic Data Systems Corp. to take over desktop and help desk support, network management and data centre operations (five years, $234 million) and with IBM Corp. to manage Nextel’s call centre (eight years, $1 billion). He kept project management, application development and testing in-house.
What LeFave knew was that once he signed those contracts, his role would change, his department would change, and the lives of the 700 people working under him would change.
LeFave had no illusions. He knew shrinking the 285 Nextel workers in the IT operations department down to 20 wouldn’t be pleasant. And he knew that he wasn’t suddenly going to be free to spend more time fishing for flounder off the coast of Connecticut where his family vacationed. He knew his beeper would still go off every time a server went down, although it would no longer be his job to bring it back up again.
LeFave knew all this because he’d been through it before.
But maybe you haven’t.
Right now, many CIOs are considering outsourcing significant chunks of their IT to cut costs, improve performance or obtain the scale their companies need to grow. Indeed, organizations around the world spent US$180 billion on IT outsourcing in 2003, according to Meta Group, which predicts that this market will grow 10 per cent within the next two years.
But despite the accrual of experience these numbers would suggest, the decision to outsource remains a difficult one. It has become a political issue, particularly when American jobs are sent overseas. It alters the relationships between managers and employees, and between business and technology executives.
To help CIOs make their outsourcing decisions — and to prepare them for the consequences — CIO spoke with Nextel’s LeFave, one of LeFave’s vice-presidents, one of his senior managers and a former Nextel employee who was transferred to EDS when the deal was signed.
It turns out that they were prepared for some things, but not for others.
Outsourcing changes everything
The people. LeFave doesn’t characterize himself as a touchy-feely guy. And standing more than six-feet tall, the portly, poker-faced former U.S. Army captain doesn’t look like one either. But to ensure that his staffers didn’t freak out over the outsourcing deal with EDS and begin abandoning ship, he had to exercise his sensitive side. LeFave needed as many Nextel people as possible to agree to move to EDS in order to make the deal work. If too many workers leave in the midst or aftermath of an outsourcing deal, the company and the outsourcer both suffer a damaging knowledge drain.
From the get-go, LeFave believed that honesty was his best policy. As the contract with EDS took shape during the fall of 2001, communicating the progress of the deal to his staff and addressing their concerns became one of his top priorities. To that end, LeFave offered his staff regular updates via e-mail and in meetings. He explained why he thought outsourcing would open doors for them, and outlined the reasons why the company was interested in pursuing it. He welcomed everyone from first-year desktop support personnel to senior-level directors into his office when they came looking for career advice.
And in those private meetings he did his best to explain the benefits he thought they’d see from the EDS deal. He asked them, if you’re going to be in data centre operations, don’t you want to work for a company whose reason for being is data centre work? He told them they’d have more opportunities for training, professional development and advancement if they went to work for EDS.
One of the main reasons he chose EDS, he told them, was because it connected workers in transition with EDS employees who’d come to the company the same way in order to discuss the pros and cons of the transition. And EDS, LeFave felt, wasn’t going to bring people on board just to dump them later.
In fact, the majority of the 290 people who moved from his IT department over to EDS remained on the Nextel account after a full year.
The culture. In addition to dealing squarely with HR issues, outsourcing has forced LeFave to become more culturally savvy. One of his outsourcing partners, Amdocs, has a significant portion of its operations based in Israel. For the relationship to work, LeFave had to learn what makes Israelis tick, and then he had to share that understanding with his direct reports and staffers.
He’s come to appreciate — through quarterly trips to Israel and by pulling all-nighters with Amdocs employees during Nextel’s extensive billing conversion four years ago — that what drives them is pride in their discipline and grit. That pride, which developed in a society in which everyone serves in the army, can be misconstrued by Americans as arrogance, especially when contrasted with Americans’ casual workstyle.
As an armed forces veteran, LeFave could relate. He counsels those staffers who work with Amdocs to be extremely definitive about the work they want Amdocs to do because Israelis, LeFave has found, are militarily precise about following orders. They won’t interpret.
The job. With about 60 per cent of Nextel’s IT outsourced, LeFave no longer snaps into crisis mode whenever a server goes down. His beeper goes off, but EDS handles it. He gets daily reports on IT performance and regular reports on how his outsourcer is meeting service-level agreements. Once a month, during an executive steering committee meeting, he reviews each of his outsourcing agreements.
Because LeFave is no longer consumed by such tactical issues as malfunctioning servers, he says he spends his time “running IT like a business,” which means identifying ways to drive as much cost as possible out of the IT infrastructure, managing IT investments, and meeting with business executives to understand their needs so that he can develop applications to support their goals.
Tom Kelly, Nextel’s COO and LeFave’s boss, sees the change in LeFave’s role as operational, not strategic. “Dick today manages Amdocs and EDS to provide the services we need as opposed to managing lots of different departments that did a lot of individual things,” he says. That said, Kelly doesn’t evaluate LeFave’s performance any differently. “All the basic metrics I’ve used in the past to test both quality and cost are the same ones we use now and (the same ones) I expect Dick to deliver. It’s just that he does so in a different way,” he says.
“At the end of the day,” says LeFave, “if I can ratchet out money and provide an organization that’s more effective and more capable and more scalable, that’s a home run for me.”
More the businessman, less the technologist
Outsourcing doesn’t necessarily minimize responsibilities or eliminate roles. No one understands that better than Jerry Brace, Nextel’s vice-president of customer billing services, whose department and role have grown since Nextel expanded its outsourcing relationship with Amdocs in 2000. At the time, Nextel contracted with Amdocs to lead the conversion of Nextel’s decrepit billing system into an integrated platform called Ensemble and to provide day-to-day technical support in addition to producing bills. “Amdocs is really the arms and legs of the billing function,” says Brace.
When Brace joined Nextel four-and-a-half years ago as its senior director of IT billing, he led a group of 20 technical workers. They wrote the code that supported the billing system and did the troubleshooting when the system went down. They took orders from Nextel’s business units. For example, when marketing announced changes in cellular rates, Brace’s group implemented those rate changes in billing. Today, he says, Amdocs makes the changes, and he and his staff make sure Amdocs does so according to the service levels set out in the outsourcing agreement. He also now manages a 330-person organization consisting of several functions, including provisioning, messaging, returned mail and data management.
Because with Ensemble Nextel got a much more integrated customer care and billing platform, and because Amdocs took over the nuts and bolts of support and maintenance, Brace and his team can now focus on big-picture issues such as improving customer service. And because the new platform is integrated, they’ve had to become more sensitive to how changes will affect other business functions.
For example, changes to wireless rates usually generate calls from people who are surprised or who want to switch to a different plan as a result. So Brace now works with the marketing, finance, equipment pricing, collections and customer care groups to develop strategies for minimizing the negative consequences of rate changes.
“In the past, we would simply be heads-down, making a change based on a single request,” says Brace. Now, potential problems are worked out ahead of time.
Since so many of the services Brace’s group provides to both internal and external customers are enabled by third parties, Brace needs to ensure that those suppliers are meeting his customers’ needs. To that end, he recently organized a two-day convocation of all the providers delivering services to Nextel’s cash and collections group.
The goal of the meeting was to communicate what cash and collections wanted and to identify how suppliers could better address its pain points, such as having to rejigger its operations every time its interactive voice response unit (which takes and routes calls from customers) goes down and has to deal with the subsequent backlog of work.
Even though many of Brace’s old responsibilities have been outsourced, his salary is higher today than it was before the outsourcing deals. He says he finds his current role more satisfying than his old one because it allows him to be more the businessman and less the technologist, and because his people now understand the larger role they play inside Nextel.
“Everyone knows that at the end of the day, the work they’re doing isn’t about that one table change but about the 10 people that one table change affects,” he says. “There’s more gratification in knowing that we’re meeting customer needs.”
From managing people to managing paper
When Catherine Oliver-Weems, senior manager in IT operations for outsource vendor management, describes how her role as Nextel’s help desk and network operations manager changed post-EDS, she says she’s “looking at the same coin from a different angle.” In other words, she still oversees those two functions, but the way she operates is considerably different.
Prior to the outsourcing agreement Nextel signed with EDS in January 2002, Oliver-Weems managed as many as 70 people across the help desk and network operations centre. It was the six-year Nextel veteran’s job to make sure that the help desk was properly staffed and met its obligations to the business. She coached and motivated her team. She had direct oversight.
Today, she has only three direct reports. Most of the people who used to work for her moved over to EDS. Instead of directly overseeing functions and the people who carry them out, she manages a relationship with a vendor. She makes sure EDS is meeting the service levels it committed to by studying the letter of the contract and comparing it to reports that measure actual service levels.
Peter Campbell, Nextel’s senior director of IT operations and Oliver-Weems’s boss, says the change from managing people to managing paper has been significant. “A lot of my folks used to be the people everyone went to when there was trouble,” he says. “They’d jump in and get involved on the floor.” That doesn’t happen as often these days. Campbell adds that his direct reports in IT operations have more of a business focus today because they’re so attuned to service levels and the costs of providing IT services to the company.
Oliver-Weems also serves as liaison between her end users and EDS. For example, last fall Nextel was preparing to comply with new FCC regulations that require wireless companies to let customers switch carriers without having to change their phone numbers and to move the number associated with a wireline phone to a mobile phone.
Oliver-Weems connected Nextel employees with those EDS employees helping provide Nextel with the systems and connectivity it needed to support the FCC ruling. She made sure that EDS understood the goals and scope of the portability project, and that it had the documentation it needed to properly configure the systems.
Oliver-Weems says all that was a challenging adjustment. The hardest part was letting go of the team she had built, her “little chickadees,” as she puts it.
“I had to do a certain amount of stepping back to let the birds fly to their new nest,” she says in a slight Southern drawl. She also had to get used to the fact that she was no longer in charge of the people who fixed the network when it broke and could no longer go directly to them when a system went down. She says that after the agreement with EDS went into play and an outage occurred, she had to stop herself from running around the office looking for the coordinator who took care of such mission-critical problems.
“It wasn’t that I couldn’t directly go to those folks and speak to them or give them direction, but I had to remember that it was best to speak with (EDS) management and let them manage their staff rather than my continuing to go to the staff myself,” she says. “It’s my job to manage EDS and to make sure they do the job. It’s not my job to do the job itself.
“For the most part,” she continues, “I’ve managed to transition. I needed to step back and let them do their job. That’s more of a statement about myself than it is about EDS.”
THE OUTSOURCED EMPLOYEE
Suddenly, you’re the vendor
Sheelagh Sacks, manager of service delivery for data centres, worked for Nextel for eight years before she was transferred to EDS in February 2002. Although her paycheque now comes from EDS, she still lives and breathes Nextel. She sits at the same desk she sat at as Nextel’s director of data centre operations, and she works with many of the same people who worked for her when they were all Nextel employees. Even her base salary has stayed the same.
All those things have helped ease her transition. But still, it hasn’t been easy.
In her new role, Sacks has a wider range of responsibilities. At Nextel, she focused on managing the 28 individuals in data centre operations and alerted the rest of the company when things went wrong. Today, she oversees the 25 EDS employees who build the hardware, install the operating systems, load the databases and manage crises, as well as the client-support representatives who coordinate projects that deliver new systems to Nextel. While most of the individuals in these functions don’t report directly to her, Sacks is responsible for making sure they deliver their services according to the contract.
And while she still works with Nextel employees such as Catherine Oliver-Weems, her relationship with them has changed.
“The people who were your buddies yesterday are still your buddies, but you have a different sort of relationship with them because now you’re the vendor,” she says. You don’t suddenly become a pariah, she says, but you’re no longer privy to corporate information that Nextel considers privileged. You’re no longer on the inside; you’re on the outside. And after devoting almost a decade to Nextel, that’s hard.
Working for EDS, a company with 138,000 employees as opposed to Nextel’s 17,000, Sacks says she feels like the proverbial small fish in the big pond. But she can see that there are opportunities in that big pond that would not have been available to her at Nextel. For one, when she needs to add an extra person to support an implementation or handle an outage, she has a huge pool of candidates from which to draw. By contrast, when she needed extra resources at Nextel, she often had to hire externally, which was much more time-consuming.
She says the other advantage to working for an IT services company is that when she encounters a new problem, “I have a wealth of knowledge to draw upon here that I really didn’t have at Nextel. If I’m trying to figure out how best to deliver a service for Nextel, I can draw on a network of people supporting other accounts at EDS.”
Sacks, who values stability in her life, doesn’t work on any account other than Nextel’s. And she believes that as long as Nextel is content with the work she’s doing, that’s the way it will be. “I don’t think EDS jerks people around from one account to another unless that’s what you want or unless something goes badly with the relationship,” she says.
The IT outsourcing decision seems to have worked well for Nextel. IT costs as a percentage of revenue have dropped from 8 per cent to 4.5 per cent. The billing conversion and outsourcing of support for the billing function to Amdocs has led to a reduction in bad debt. And the company has improved its customer service ranking by J.D. Power and Associates by six points during 2003 due to improved administration of bills and a more efficient call centre operation.
While much of CIO LeFave’s operations group — the function most closely associated with the CIO — has been outsourced, he doesn’t feel any diminution of his status within the company.
“It’s not about size,” LeFave says. “It’s about value.”