Buyer Backs Out of Bankruptcy and Drives into Financial Success by Outsourcing IT

Outsourcing Excellence Award – Best ITO – Vanguard Car Rental and Perot Systems

ANC Corporation had hit a red light: it had to declare Chapter 11 bankruptcy. The light changed to green when Cerberus Capital Management purchased its assets out of bankruptcy, creating a new company with new management and outsourcing its IT and related business processes to Perot Systems.

The IT supplier helped the company, which rents cars globally, generate significant cost savings by slashing its IT budget in half. Those savings helped Vanguard get back on the road after emerging from bankruptcy. Today it is driving in high gear.

“ANC had five years of failure. When the new management team came in, we went from coming out of bankruptcy to making money–all in just two years,” says Tyler Best, Vanguard’s Vice President and CIO. “It’s like going from hell to heaven.”

The Situation Before Outsourcing

Back in 2001 the company’s cars were running fine. But its IT department needed a tune-up. The IT department wanted to do things one way. The business units had other ideas. Perot Systems, National Car Rental’s infrastructure outsourcer since 1999, disagreed with both. This created a three-way tug-of-war.

“There was no single point of accountability. There was finger-pointing everywhere,” recalls Best.

In addition, under ANC, the rental car company’s senior management changed four times in three years. “No one could make a decision on the company’s strategic direction. The path would change every six months when the new CIO or CEO arrived,” Best notes.

Then ANC Corporation, the parent company to National Car Rental and Alamo Rent-a-Car, filed Chapter 11 bankruptcy in 2002. Cerberus Capital Management, an equity firm, came in with a new management team, wrote a check, and created a new company, Vanguard Car Rental.

Vanguard’s Two Business Challenges

Writing a new chapter by emerging from Chapter 11 was the first order of business. “Perot Systems had to help us make a financial impact, so we could come out of bankruptcy as soon as possible,” Best explains.

The company had another challenge: Before the bankruptcy, Alamo and National were two distinct companies that merged in 1997. Each had its own IT to handle back-office issues and reservations. After the merger, both companies ran their IT on Alamo’s system. Then a new senior IT person came in and switched everyone to National’s system. “It appears to have been five years of chaos,” says Best.

“No one could ever agree on which would be the worldwide system,” the Vanguard exec continues.

Best, a member of the new Vanguard team, says his first priority was to create a common back office with a single reservation system. “This had to be transparent to our customers. We had to have a car waiting when a customer arrived. It didn’t matter if it came from Alamo or National,” he explains. In addition, merging the two systems would “capture the synergies of sharing a fleet.”

Neither party underestimated the gravity of the technical challenge of making a change of this magnitude. “They couldn’t do this in five years. We committed to having a new, integrated system delivered in nine months,” says Eugene Pizinger, Client Executive for Perot Systems.

Pizinger says this was “tough” because there were so many different systems in play. There was a back-office system, rental-reservation systems, and a fleet-management system, which all had to become one. What’s more, “no one has multiple brands on one system,” he adds.

Selecting a Supplier

“Because of the ANC bankruptcy, we didn’t have a lot of time to float an RFP or have a lengthy due-diligence process,” recalls Best. “We needed someone who could make an impact immediately.” Vanguard, which ranks in the top five car rental companies worldwide, shined its headlights on Perot Systems because the firm already handled some of the IT operations. “Bringing in someone from the outside didn’t make sense because of our business challenges,” Best says.

The venture capitalists also liked Perot Systems because the supplier had 15 years experience in the automotive industry.

Best says the new management only faced one decision: should they outsource the entire IT function or just discrete processes? The leadership chose to outsource its IT processes, data centers, and infrastructure to Perot Systems. The scope of work also includes the applications for business processes, like finance and accounting.

In July 2003 the two parties signed a 10-year agreement. Currently there are eight people on the Vanguard payroll to help the CIO and the 300 Perot Systems associates assigned to the account.

The Transition Period

Best realized that he had to change the way things worked to allow Perot Systems to meet the tough challenges on its trip plan. The phone started ringing immediately. Those closest to the new entity were worried Best’s Draconian measures were a mistake. Best was certain he had done the right thing. “We were paying Perot Systems to do work they really weren’t able to do,” says Best. “It was like telling someone to get you a glass of water but not giving them the glass.”

On day one, Best called an all-hands-on-deck meeting, which included the Perot Systems employees. He first showed a video clip of Budweiser’s Leon commercial. It featured a football player who lost the game by fumbling the ball. But he blames his teammates. He says, “There’s no ‘I’ in team, but there’s no ‘we,’ either.” Best redacted the video, explaining he expected everyone to work as a team. “Everyone laughed. But I made it clear we were not going to behave like that,” he says.

Next up was a Reebok commercial. It featured a linebacker the owner hired to slap anyone who wasn’t playing on the team. The linebacker ran around the office physically attacking people who weren’t communicating. Best says the commercial clearly told the staff the company didn’t have the time to employ anyone who wasn’t working for the betterment of the team.

To underscore the message, Best informed all Vanguard employees they could not refer to the outsourcer’s employees as “Perot Systems people.” The politically correct term was “Vanguard IT people.” Best says, “I wanted to make it clear from the CEO to the frontline employees that we were Vanguard IT.”

At the early meetings, Vanguard execs would say, “Perot Systems says the delivery time is going to be 10 days.” Best immediately interrupted and said, “Who? It didn’t take long before they caught on,” he reports.

Then he ordered Vanguard Car Rental business cards for all Perot Systems staffers. The bottom of the card reads, “In partnership with Perot Systems.” Pizinger says this “showed the executives above us that we were serious about making this relationship work.”

The strategy did work. Today the IT department is a collaborative team that not only works well together but enjoys competing in sports activities on the same team. Additionally, they make it a daily practice to lunch together in an effort to increase information without having to hold a meeting.

For the first 18 months, the IT executives of both buyer and supplier traveled to the company’s sites. “It was like being on Survivor,” Best says with a laugh. But the close quarters actually drew the two parties closer. “We were able to build on each other’s strengths and weaknesses. We knew when we had to implement,” he adds.

Governance

Best says “our relationship is totally based on our service level agreements (SLAs). He says he “doesn’t care” if Perot Systems has three or 300 people on his account as long as they meet his clearly defined metrics.

This relationship is “all risk and reward,” Best notes. If Perot Systems doesn’t cure a problem in the prescribed time, Vanguard receives a discount. The two parties established a stair-stepping table that charts the financial impact of non-delivery. The same thing applies on the reward side. “We reward them when they go above and beyond the metrics,” he reports.

He adds that it is very difficult “because our service levels are so high.” Yet Perot Systems routinely answers routine phone calls in less than three hours. The SLA is four.

Relationships are an important part of the relationship. In the beginning, Best invited the CEO to the monthly IT group meeting. “I made sure our CEO had as much face time with our Perot Systems associates as he did with any Vanguard employee,” says Best.

The two parties handle disputes through good communication. “We close the doors. Pizinger and I beat the hell out of each other and then go to lunch. Nobody would know we just had a vigorous discussion. I told him we don’t have to always agree, but it has to look like we are on the same page,” Best says. To date, no dispute has gone beyond the account executive level.

Why This Relationship Works

Best says Pizinger has an office in the IT executive suite. “He is part and parcel to our strategy, integration, and knowledge. There are no secrets,” says the Vanguard exec.

Perot Systems’ intimate knowledge of Vanguard’s business plays a crucial role in the relationship’s success. “The tangible benefit is I don’t have to explain why I’m arriving at a particular decision. Everyone knows where we’re at, where we’re going, and which path we are going to take,” says Best. Adds Pizinger, “We know what their corporate goals are.”

In the beginning, Best says the two partners made decisions together. Over time, he began letting Pizinger make decisions for him. “In twelve months he made decisions that were clearly in the best interests of the company,” he says.

Best appreciates the fact his supplier does not “nickel-and-dime him.” He says he’s outsourced to every tier-one supplier in the last 20 years. “This is the first time I haven’t been charged for changes on a weekly basis–something that needs to be done that’s an additional service that’s not part of the base,” he says.

In return, Vanguard wants to help drive Perot Systems’ success. Currently the supplier is its exclusive supplier. The contract states that Vanguard has to meet a minimum spending level before it can put a project out to bid. If that happens, Perot Systems has the right to match the price of the final bidder.

Business Benefits

Travelers who just deplaned are ready to rent their car and get there. Vanguard knows these travelers hate waiting in line. It had to change its rental process so travelers can rent their cars in two minutes.

Today technology has helped the rental company achieve that strategic business goal. “We’ve improved our ability to have our vehicles to our customers on time because we can leverage our fleet across both brands,” reports Best. Currently on-time delivery is 99.6 percent.

Best says Vanguard had significant cost savings outsourcing to Perot Systems. “We cut our IT spend in half,” he reports.

The car rental company saved money by cutting its Oracle and Microsoft annual renewals as well. The savings were not the result of cutting seats; instead, “Perot Systems helped us negotiated the contracts better,” Best reports. In addition, the combined efforts of management and Perot Systems were able to slash the company’s maintenance agreements. Before outsourcing, it had 310 different agreements with 30 hardware suppliers. Today that number is three.

In addition, Vanguard now has full IT redundancy. “There are no single points of failure across the system,” he says.

Perot Systems’ Top 10 Keys to a Successful Outsourcing Relationship

Outsourcing can provide many benefits to buyers as well as the outsource providers. Most of these benefits are not realized if the client and the outsource provider do not have a healthy relationship. Like any relationship, it takes hard work by both the buyer and the outsource provider to build and sustain a successful relationship. If a good/solid relationship exists, the parties can achieve the goals and objectives of both organizations and the relationship can continue to grow.

Here are some of the keys to a successful outsourcing relationship:

1. Build a “trust” relationship, not a “contract” relationship .
2. Build a “relationship matrix” to align all buyer/provider roles and responsibilities.
3. Have open and honest communications at all levels of buyer and provider organizations.
4. Get executive support from both buyer and provider.
5. Insist on proactive problem-resolution–having a “sense of urgency” from both the buyer and the provider.
6. Create a solid project-management office with effective process/procedures.
7. Utilize provider knowledge/expertise of the buyer’s industry.
8. Employ a professional staff with a customer focus.
9. Use a flexible provider operations/support model –“rapid change.”
10. Respect both organizations’ strengths and weaknesses.