Motivations for an “On Demand” Computing Deal.
American Express Company is the world’s largest issuer of credit cards and provides financial services. Why did American Express Company decide in February 2002 to sign a $4 billion seven-year deal with IBM, the world’s largest information technology company, that the two companies hailed as “on demand” computing? The announcement says little about the structure of the deal, but is clear as to intentions.
American Express Company’s Cost Savings.
American Express calculated that this deal will save them “hundreds” of millions of dollars.
American Express Company’s Internet Initiative.
After 2001, Chairman and CEO Kenneth Chenault began pushing American Express to Web-enable its operations as much as possible. In a Web conference with investors on February 6, 2002, he noted that, “given the compelling economics of online servicing across all our businesses, several initiatives last year focused on shifting customer transactions to the Internet.” He asserted that self-service Web-enabled applications allowed the company to handle 78% of their customer transactions – from payments to disputes — via the Internet, with over 5.5 million U.S. cardmembers enrolled in this program, generating over 83 million logins in 2001, resulting in unit cost reductions of up to 60% for certain transactions, reduced rates of credit problems of credit card fraud (by up to 96% at certain merchants and overall by over 25% in 2001) and of customer disputes (by up to 50%). Other administrative chores have been permanently shifted to the Internet, such as employee and financial advisor processes.
American Express Company’s Restructuring Initiatives.
Due to a sharp decline in travel and in demand for financial services after September 11, 2001, the company accelerated its then current focus on cost cutting and restructuring. In 4Q2001, the company eliminated 5,500 to 6,500 travel-related jobs and took a restructuring charge of $240 to $280 million. In a news release on December 12, 2001, the company note that “reengineering initiatives being implemented or considered by the company include cost management, structural and strategic measures such as vendor, process, facilities and operations consolidation, outsourcing, relocating certain functions to lower cost overseas locations, moving internal and external functions to the internet to save costs, the scale-back of corporate lending in certain regions, and planned staff reductions relating to certain of such reengineering actions.”
Prior and Ongoing Business Relationships.
Announced in February 2002, MarketMile, an e-procurement service provider founded by American Express Company entered into an “e-business on demand” “alliance” with IBM to deliver to American Express’ customers the “benefits of e-procurement” and management of “indirect expense spending via the Internet. This service will be based on IBM’s “Leveraged Procurement Service,” IBM’s program for Web-enablement of a customer’s proprietary applications and supply-chain integration of the customer’s supplier network and customers. In March 2002, IBM and American Express announced an agreement to jointly develop a Web-based expense reporting and reconciliation software tool for reporting travel and miscellaneous business expenses and reconciling corporate purchases, to be marketed by American Express and hosted by IBM.
Interlocking Boards of Directors.
Good friends make good business, it seems. IBM’s Chairman Louis Gerstner from 1993 to March 2002 was formerly Chairman and CEO of American Express Travel Related Services from 1985 to 1989. American Express Company’s Chairman and CEO Kenneth Chenault is a member of IBM’s Board of Directors. This unusual bilateral interlock spanning 15 years of common business experience shows how aligned the interests of the companies have become. Could anyone say that this was the reason why IBM got the deal? (Or was it because of superior acumen, customer service and solid technology?)
IBM’s Investment in Changing Technology.
The selection process for a transaction of this size involves more than board-room and golf-outing relationships. IBM’s position as a manufacturer of computers gives it unique leverage in pricing. IBM’s “Project eLiza,” to deliver self-managing systems technology (including configuration, optimization, fixing and self-protection) across the company’s entire e-server product portfolio by 2007, offers customers the comfort of being with a market leader in hardware that supports e-business.
IBM Global Services: Are they the only game in town?
The promise of “on demand” computing requires a services provider to provide a “total smorgasbord” of services, even for third-party equipment, third-party software and third-party telecommunications. Who else could meet this challenge? Is this a challenge that makes sense for other services providers? Could a meaningful outsourcing contract be drafted that would overcome the inherent limitations of a narrow-scope services provider? Do equipment manufacturers (such as IBM, HP, Compaq and Dell) offer better terms than pure services companies? Or could a narrow-scope services provider compete effectively by becoming a better manager of third-party services than IBM? This deal opens these issues.
American Express will pay IBM Global Services about $4 billion over seven years to host its Web site, network servers, data storage, and help-desk support. According to IBM, this contract is IBM Global Services’ largest for utility-based service delivery. Payments are adds are based on actual usage of IT services rather than a flat fee. American Express projects “hundreds of millions of dollars” in IT savings during the life of the contract.
As part of the agreement, American Express will also move about 2,000 employees worldwide to IBM Global Services. The employees will continue to work out of American Express’ data centers in Phoenix and Minneapolis, as well as locations in England and Australia. In March, IBM will begin taking over American Express’ transaction-processing operations.
Utility Computing /On-Demand Computing.
While the concept of on-demand access to IT resources has been in the market for a few years, few large companies such as American Express have committed to it. Essentially, the services provider takes over responsibility for making all purchases, managing the technology and delivering technology as a service “on demand,” when and where needed, in scalable volumes. As a legal contract, however, the degree to which any service can be “on demand” involves prior agreement on the customer’s current and future technology plans, as well as any financial risks that the customer must shoulder to deal with changing customer needs, changes in technology and changing market conditions. The customer still remains responsible for IT strategy, planning and ensuring that it gets what it contracted for.
Offsourcing Your Employees: Transferring Engineers to the Existing Service Providers for Better Integration
Just when your manufacturing company management thought your engineering employees were ready to deliver key technologies for launching new products, you discover that they need access to even more resources than you can afford. So what do you do? You “offsource” your employees.
Offsourcing (a term we invented) refers to the restructuring of a supply chain where one company relies on its supplier for functions that were previously performed in-house. What makes “offsourcing” so powerful is that the supply chain is tightened by the improved functioning of the employees in the new environment.
Offsourcing vs. Outsourcing.
Offsourcing differs from outsourcing because the service provider/supplier already has a supplier-customer relationship with the customer, and the transaction merely shifts a business function up the supply chain for increased efficiencies and economies of scale. Indeed, effectively designed, the “customer” can ensure that its capital investment in its employees can be applied to resolve problems, and create value, for the customer.
Offsourcing vs. Assembly Insourcing.
Offsourcing takes the “buy vs. build” decision to a new level.
High-end cell phones perform many functions that require careful integration of different technologies. Increasingly, such sophisticated phones are being used as computers, Internet access devices, pagers, software operating systems and e-mail devices.
In February 2002, Alcatel S.A announced its decision to transfer its cellphone hardware engineers to STMicroelectronics NV, one of its semiconductor suppliers. Such offsourcing allows Alcatel to concentrate on software, styling and customer interaction.
Benefits of Offsourcing.
By concentrating the right minds in the right environment, offsourcing is believed to cut cellphone makers’ research and development costs. It also frees the customer Alcatel to be closer to its customers, focusing on aligning the new product features with the customers’ emerging needs and desires. Also, it allows the cellphone maker to buy more finished components and to assemble them into a proprietary product.
Risks of Offsourcing.
In making the decision to “offsource” a department, the company should carefully study the competitive impact. If its hardware engineers are difficult to replace, then the transfer could make them available to service Alcatel’s competitors. This risk can be managed with effective planning techniques.
OUTSOURCING LAW & BUSINESS JOURNAL (™) : Strategies and rules for adding value and improving legal and regulation compliance through business process management techniques in strategic alliances, joint ventures, shared services and cost-effective, durable and flexible sourcing of services. www.outsourcing-law.com. Visit our blog at http://blog.outsourcing-law.com for commentary on current events.
Insights by Bierce & Kenerson, P.C., Editors. www.biercekenerson.com
Vol. 9, No. 5 (May, 2009)
1. Contingency Planning for your Supply Chain: Business Continuity in a Pandemic.
1. Contingency Planning for your Supply Chain: Business Continuity in a Pandemic. The risk of a pandemic has become a realistic possibility, following the SARS outbreak in China a few years ago and the “swine flu” outbreak in Mexico in 2009. Business contingency planning should include not only the possibility of a pandemic but also the impact of a pandemic upon the supply chain including business operations performed by independent contractors (such as outsourcers and suppliers) and affiliates (captives and joint ventures). In a pandemic, 40% of the population (both workforce and customer universe) could be idled. Now is the time to develop contingency plans and obtain updated contingency plans from those in your extended supply chain.For the full article, click here.
Cloud Computing, n. (1) multi-nodal virtualization of servers across a network; (2) numbers crunched in heaven; (3) IT services provided by supernatural forces.
Pandemic, n. (1) viral inspiration for Software as a Service, Cloud Computing, Work at Home Agents, telecommuting and virtualization of the global enterprise and its supply chain; (2) human resource roulette.
June 3, 2009, Global Sourcing Council (GSC)’s Conference on Global Sourcing After the Meltdown: In Search of Sustainability, New York, New York. Sustainability has become more then politically correct slogan in global PR campaign. Sustainability-driven leaders harness the market potential for green products and services, especially in the times of global crisis.
The 2009 Sustainability in Global Sourcing Summit will examine how corporate sustainability creates stockholder value through the supply chain, especially in the area of global social responsibility. This event will serve as a forum for thought leaders from the business, academic and political arenas to:
- Challenge the pre-recession assumptions of global growth based on short-term results driven by the quarterly reporting system Propose a framework of aligning economic growth with sustainable social development
- Redefine the role of global sourcing after the global crisis
This conference can earn you 11 CLE (Continuing Legal Education) credits. For more information, click here.
June 7-9, 2009, IQPC’s 3rd Annual Shared Services Exchange, Miami, Florida. This is an invitation-only gathering for VP and C-Level senior executives made up of highly crafted, executive level conference sessions, interactive “Brain Weave” discussions, engaging networking opportunities and strategic one-on-one advisory meetings between solution providers and delegates. With a distinguished speaking faculty from Coca-Cola, CIGNA, American Electric Power, AOL and Safeway, amongst others, the seats at the 2009 Exchange are limited and filling up quickly. We have limited complimentary invitations available for qualified delegates for a limited time. Please give us your reference ‘Outsourcing-Law’ when inquiring. There are solution provider opportunities also available for companies who want to be represented. You can request your invitation at email@example.com or call us at 1866-296-4580. Visit our website.
July 27-29, 2009, IQPC’s 7 th Annual Procure-to-Pay Summit, Boston, Massachussetts. Leveraging current opportunities around corporate spend management whilst minimizing the impact on A/P, the 7th Procure-to-Pay Summit is expanding on its previous success and featuring new additions to the program, including: in-depth coverage of various AP optimization approaches: centralization, outsourcing and automation; new emphasis on strategic sourcing and global procurement; new techniques and tools for maximizing supplier relationships in procurement and efficiently expediting supplier payments in AP. For more information, please click here.
September 22-23, 2009, American Conference Institute’s 7th Annual Advanced Forum on E-Discovery and Document Management, Philadelphia, Pennsylvania. Be a part of the leading cross-industry e-discovery and information management forum for corporate counsel, litigators, and technology professionals. At a time when most companies are striving to reduce costs and trim staff, the burdens of e-discovery can be crippling. What’s more, court-imposed sanctions for e-discovery failures could very well place you on the losing side of bet-the-company litigation. Given the complexity, variety, and evolving nature of information management and communication technologies, it comes as no surprise that corporate and outside counsel often find themselves at a loss as to how to manage the e-discovery process. However, neither opposing counsel nor the courts are going to have any sympathy for those who stumble over e-discovery hurdles. Thus, it is imperative that you take the lead in ensuring that your company is well-positioned to manage the demands of e-discovery. For more information, please click here.
September 28-October 2, 2009, IQPC and SSON 13th Annual Shared Services & Outsourcing Summit, Chicago, Illinois. Join us at the 13th Annual Shared Services & Outsourcing Summit this fall, the can’t-miss event for all professionals involved with shared services and outsourcing, at every stage of adoption. This customizable program provides the key strategies that you can bring back to your organization, with areas of focus in:
- Planning & Launching Shared Services Finance Transformation Measurement & Process Excellence HR Transformation
- Smart Contracting for Mature BPO Deals
Our Shared Services series attendees agree – the content from just one event vastly accelerates experiential learning and provides the necessary networking opportunities to benchmark against peers. Visit the website for more information, including webcasts, podcasts, articles and other resources.
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