Success in an outsourcing relationship must be built on the right foundation, and that happens only when the buyer clearly and objectively describes to the supplier exactly what it wants to buy. That’s what Xcel Energy did when it entered into its successful outsourcing relationship with IBM Global Services.
Xcel Energy is the result of a merger in August 2000 between New Centuries Energies and Northern States Power. It’s a gas and electric utility company with almost 12,000 employees and now serves customers in 12 states of the US. They re-did the contract to include Xcel beginning in October 2000, but the original contract started in 1995 (with Public Service Company of Colorado, which merged with Southwestern Public Service in 1997 to form New Century Energies).
Dick Kelly, President of Enterprises, which covers strategy, mergers and acquisitions and non-regulated businesses for Xcel, was also formerly the CFO of New Century. He remembers that they decided to “stick to things we do well — which is generate electricity and gas — and let someone who knows how to run computers do that function.” Another objective was to control the company’s outlay for computer costs.
IBM runs the data centers, disaster recovery services, network, help desk, PC and WAN support, and application development and maintenance. “They run almost the entire data processing operation and do everything for us except what we classify as ‘strategy,'” says Kelly. But that’s not all Xcel wanted from its outsourcer.
Strategic Steps
There are only two or three suppliers that they considered turning something as big as this over to, Kelly claims. They went into the relationship looking for several things. The first was price; Xcel wanted between a 15%-20% reduction of costs from where it was before outsourcing its computer operations. “They have exceeded that,” he says. “But we were also looking for strategic help from IBM, not necessarily how to run the IT Department, but how to run our business. We didn’t want just a vendor. IBM is in a lot of other places and businesses, and we wanted them to say to us, for example, ‘Customer XYZ does its billing (or whatever) this way. Why don’t you try it?'”
New Century had a prior relationship with IBM and knew the supplier could deliver on strategy. IBM had a very large facility in Boulder Colorado, just outside of Denver, where New Century was headquartered. Kelly says, “We worked with them on some power solutions for them. Then they worked with us on some computer solutions for us.”
At the executive level, the two companies meet once every two or three weeks. “And they come by and talk to our CEO once a month to give updates on what’s happening in the world of eBusiness and those kinds of things,” Kelly says. This is a billion-dollar deal, but the real value is their strategic partnership.
“They have agreed in this new contract that they will keep informing us, and have conferences and those kinds of things, and look for opportunities for win-win situations for both of us,” Kelly says. “IBM is to look for opportunities where we can both invest real dollars in projects and share the upside together when we do have a success. That is clearly a breakthrough for us. They are to bring us ideas — and money with it — and we’ll develop them together.”
Stepping Away From Struggles
Even though the executives and strategy dreamers at both companies were very pleased with the arrangement they had negotiated, not everyone was happy. Kelly admits Xcel’s employees who were to become IBM employees didn’t want to. Retirement benefits are a big thing to utility workers, and their retirement benefits were going to be substantially less for transferring to IBM. “And working with IBM scared a lot of them in the beginning,” he says. “So we had a lot to overcome.” Now well into the outsourcing relationship, the employees who loved the technical side of their work are happy to be with IBM. “Many of them have succeeded and gotten promoted at IBM, and some are in management positions and doing very well,” says Kelly.
He describes another impediment to a smooth transition that they encountered: “Going with somebody like IBM, the expectations within our organization were extremely high. People thought that all of a sudden all of our computer problems would go away. But that doesn’t happen.”
So they’ve struggled off and on with problems, but Kelly says IBM has always tried very hard to be responsive and meet Xcel’s needs. That included changes in the IBM staff working on the account. Xcel first needed someone who was very technical and could “run a tight ship;” then they needed someone who was customer friendly to take them to a different level. Now they have a very strategic-oriented person. “They’ve been trying to move when we move and change when we change through various cycles,” Kelly says.
In July 1999, the contract with IBM was extended to 2010. The new contract provides for better alignment of services, improved flexibility and an innovative account structure. “I’m really proud of what we’ve done,” says Kelly. “These things are kind of scary on the front end, but they work out wonderful if you let a professional outsourcer do it.” IBM is now positioned to be a key player in determining the destiny of Xcel Energy in a fast-changing, deregulating industry. Kelly adds, “IBM deserves a lot of credit, but we’ve gotten exactly what we wanted.”
Lessons from the Outsourcing Primer:
- Despite the amount of revenue to the supplier and the amount of decreased costs to the buyer, the real value in an outsourcing relationship comes when both parties work together to find win-win opportunities.
- Transitioning employees from the buyer’s company to the supplier’s company is often fraught with problems in the beginning and needs to be handled very carefully.
- As the buyer’s need changes, the skills and personal characteristics in the supplier’s account manager may also need to change accordingly.