October 20, 2007

Operations Management Lesson 5 Exercise

INTRODUCTION

IBM’s Strategic Outsourcing (SO) business unit provides clients with the management of application and information technology (IT) systems, by strategically partnering to manage and operate their client’s applications and IT systems, generally under a mutually beneficial agreement. The outsourcing agreement may include the transfer of IT employees and IT assets to IBM. IBM provides service level assurances to ensure quality of service is attained and measured (IBM Services A-Z, 2007).

Within the SO business unit, IBM then decides which delivery capabilities it should invest in developing, managing and operating internally and those areas it will de-integrate and seek a strategic partner (these are strategic partners as SO agreements and investments are typically five to ten years in length). This is reflected in a recent quote from IBM’s world-wide General Manager for ITDelivery (the service delivery organisation who provides the core services to SO clients) :-

“We make strategic judgments about which operations we want to excel at and which ones are best suited to our partners. We base those decisions on client needs, economics and expertise.” (Bob Zapfel, General Manager, ITDelivery, October 2007)

Once such example of IBM partnering to deliver SO services, is IBM’s decision to enter into contract discussions with AT&T (global network services provider) in October 2007 and below are some of the advantages and disadvantages that may have been considered in this strategic decision:-

ADVANTAGES

  • Leverage Partner Capital Investment - The capital investment required to develop a global network services business is very high ($bn), so this service delivery asset needs to be at the very core of a company’s client value proposition to consider this investment. A few global organisations such as AT&T have made this investment as part of their strategic capability. IBM is able to achieve its strategic advantage by offering clients the full end to end IT proposition, by partnering with organisations where it does not to have an in-house capability. Partnering enables IBM to leverage AT&T’s investment and avoid the significant risk associated with such an investment.
  • Maximise Opportunity Cost - The investment capital that could have been spent on developing a global network can now be channelled into ventures with potentially higher investment returns, lower risk and more aligned to the company’s strategic direction and creating competitive advantage in these areas.
  • Increase Speed to Market (see figure 5.1) – By utilising the core competencies of AT&T as a leading network services provider, IBM can remain at the forefront of technology as they strive to maintain competitive advantage over its competitors. This enables IBM to bring its partner capabilities to its clients quicker than IBM would have been able to achieve on its own.

AT&T Magic Quad

Figure 5.1

  • Leverage Intellectual Property (see figure 5.2) – IBM can leverage the intellectual property, knowledge, best practices, experience and tools of AT&T to compliment its own capabilities and offer a full IT service capability. This consolidation of capabilities under one umbrella provides IBM with a strategic advantage for clients to have a one stop shop for all their IT service needs.
AT&T Innovation

Figure 5.2

  • Increase Business FlexibilityIBM is able to reduce its straight line revenue growth constraints, which would be present if it delivered its own network capabilities (where revenue growth would be more tied to the physical infrastructure and number of resources in-house). By partnering, IBM is able to become a provider of value rather than assets. With a lower fixed cost base for these services and higher variable costs, shifting IBM’s cost basis to a ‘pay for what you use model’, this enables more financial and therefore business flexibility to channel its capital to evolving growth areas.

DISADVANTAGES

  • Increased Dependency on Corporate Relationships The most significant cause of business partnership failure is a breakdown in the relationship of the companies involved, usually because of poor communication. IBM will now be dependent upon the delivery of the AT&T service to its customers. The organisations relationship can be an enabler for higher growth, but also introduces new risks. The organisations trust, culture and approaches to commercial negotiations are all important factors in the management of the corporate relationship than they are a in-house model. In an all in-house model a single individual e.g. the Managing Director resides over both internal service providers to make decisions where conflicts occur.
  • Lower Control and InfluenceBy partnering with AT&T, IBM’s natural control and influence is reduced, with large exit implications for both organisations. In the event that AT&T have conflicting needs between IBM and other partners, IBM may receive lower priority as although it’s one of the worlds largest organisations it does not mean that IBM will be one of its largest client in the medium to long-term. IBM also has fewer alternatives in reducing its costs in the event that this business area becomes inefficient.
  • New Risk ExposuresRisk exposures of the AT&T organisation, could now result in IBM also becoming exposed to these risks. A malicious attack on AT&T’s network security for example could impact the services IBM provides to its clients. In addition an IBM competitor acquiring AT&T would create much uncertainty and discomfort for the partnerships future.
  • Reduction in In-House KnowledgeBy relying on your partner to deliver services into your organisation, then you reduce the need for subject matter experts in your own organisation. This can be very dangerous, as you need to demonstrate to clients that you are adding value and if you are relying at the hands of your partners then it is difficult for your own resources to consider alternative considerations when the in-depth knowledge is not within your own company.
  • Risk of Conflicting ObjectivesIt is difficult to incentivize a partner to reduce their costs when their corporate responsibilities will be to grow revenue and profit for their shareholders.

This agreement is an example of the continued strategic actions being taken by IBM as we strengthen our globally integrated enterprise business model. We create and capture value for our clients through an open and collaborative working model, underpinned by a competitive cost structure. In this model, delivery excellence and innovation is fostered through diversity and alliances are a function of complementary expertise.

BIBLIOGRAPHY & REFERENCES

  • Bob Zapfel, October 2007. Understanding our Newest Agreement with AT&T (PE and DPE call final.ppt). IBM Global Services Presentation, IBM Confidential, Document Owner Bob Zapfel.

  • IBM Services A-Z, 2007. “IT Services > Outsourcing/Hosting > Infrastructure Outsourcing and Hosting” IBM Company Website, http://www-935.ibm.com/services/us/index.wss/itservice/so/a1000414, accessed July 2007.
  • Slack, N., Chambers, S., Johnston, R., Betts, A. (2006) Operations and Process Management, London: FT Prentice Hall
  • Walley, P. (2007) The Warwick MBA: Operations Management, Coventry: University of Warwick


- 2 comments by 2 or more people Not publicly viewable

  1. Hi Chris,

    very good entry… covered the strategy, advantages and disadvantages.

    Only two minor points:
    - the ”§ ” stuff again and
    - can you link the strategy statement back to the five performance objectives, somehow?

    Mathias

    27 Oct 2007, 13:25

  2. Richard Wheeler

    Chris,

    Again, I was confused by your earlier title-only entry. Hence the delay in my comment.

    Unless I seriously misunderstand you, in the opening paragraph of your Introduction it sounds as though it is IBM’s clients that make the strategic decisions to outsource – not IBM. If this is the case, it’s describing the de-integration strategy of IBM’s clients – not IBM’s de-integration strategy!

    Please make sure (a) that the situation you are describing really is correct in the context of the question set, and (b) that you make clear how IBM drives the de-integrations strategy.

    28 Oct 2007, 20:57


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