Strategic Sourcery

Du Pont & Co. surprised the information-technology world last year with the announcement that it had decided to outsource its award-winning IT operations. But the real stunner was the nature of the deal the Wilmington, Del.-based chemical giant struck, splitting up a pie worth $4 billion over 10 years between Andersen Consulting LLC and Computer Sciences Corp. (CSC), two firms that normally compete for outsourcing business. In the three-way IT alliance, Du Pont retains control as lead integrator. The main reason the $43 billion firm elected to go outside for computer hardware, software, and networks, as well as the associated staff and consulting help, is the degree of change it faces. Last year Du Pont absorbed $6 billion worth of acquisitions while divesting another $2 billion worth of businesses. The activity reflects an ever-changing business model aimed at doubling shareholder value by 2002. Management decided the companys IS operation couldnt provide the speed and flexibility required to deal with the rapid growth and contraction of various business units, while simultaneously fixing Year-2000 problems and converting older mainframe systems to the new SAP client/server-based platform. The dual-vendor outsourcing arrangement, if successful, could become a model for contracting IT services. Du Ponts approach could be useful for companies that want to increase the speed and flexibility of IT response, as well as build competitive advantage through strategic deployment of technology. "In a nutshell, this IT project is all about growth of Du Ponts businesses," says Bob Ridout, vice president and CIO. "We recognize that our business model will be going through some very radical change, and we need to be better positioned to respond to change and to manage and lead that change. We need a lot of flexibility, a variable resource available when and where the businesses need it, to enable that strategy. "Before, we were a one-size-fits-all operation," he continues. "We needed to go to the methods that each one of our 20 strategic business units [SBUs] requires. Though we dont expect 20 sizes, we expect a lot of variability and differentiation--that really adds value. We didnt have the investment, training, or specialized skills that we were able to obtain through the alliance." The compete/cooperate relationship of the two vendors makes the Du Pont alliance unusual. "We wanted the best of the best," says Ridout. "Both suppliers have areas where they are the sole or primary provider, but for some of the new work, especially involving SAP AG software, we want them to compete. But once the contract is let to one or the other, they hold hands and cooperate. To make this all work we need a very strong alliance function at Du Pont, because we manage all of that." The alliance also will address the impending Y2K problem and work to convert legacy systems to SAP, activities difficult to accomplish with a fixed staff, while at the same time providing timely service to the Du Pont businesses. Du Pont customers also stand to benefit from the alliance, especially in areas of electronic commerce and supply-chain integration, with certain customers getting access to the alliance technology and skill base, not only when connecting with Du Pont, but also in reengineering their own business processes. The scope of Du Ponts strategic-sourcing arrangement is total, providing IT services for all companies in the Du Pont group, encompassing subsidiaries, joint ventures, and its $21 billion Conoco Inc. petroleum subsidiary. Andersen Consulting (whose contract is worth $550 million) will do much of the applications work, focusing particularly on supply chain, industry-specific applications, manufacturing applications, and new project solutions. CSC (a $3.5 billion contract) will handle infrastructure, data centers, and telecommunications. Also, CSC will focus on legacy applications, generic plant applications, and leveraged/shared applications in financial and human-resource areas. Both will pursue new system and project opportunities. Of Du Ponts IT staff of about 4,200 employees, 400 moved to Andersen Consulting, and 2,600 to CSC. In addition, CSC acquired much of Du Ponts IT infrastructure, including 13 data centers, 65,000 desktop computers, and all of Du Ponts networks for $52 million. Du Pont maintains a staff of about 1,150 IT professionals, mostly in R&D, process control, and regional areas. Additionally, a Du Pont team of 70 people globally provides leadership, integration, and alliance management; IT stewardship including architecture, standards, direction setting, and worldwide procurement; people development; and management of other suppliers of IT products and services. "While the Du Pont transaction has been dwarfed in terms of revenue by the recent BellSouth transaction [an $8.2 billion, 10-year deal split between Electronic Data Systems Corp. and Andersen Consulting], it still remains probably the most complex one ever done," says John Busher, managing director of Technology Partners Inc., Houston, the sourcing consulting firm engaged by Du Pont to assist with the project. "Its global in nature and includes all of the functional areas, meaning infrastructure, applications, desktop, and telecommunications. Du Pont operates in about 94 countries, and there are bits of IT in every one of those." Key to the smooth transition of employees from Du Pont to alliance partners has been a genuine interest in the morale of the people involved, characterized by good communication on benefits and HR policies, and an orderly transition of the people themselves. For instance, to relieve the stress and strain of redoing all the benefits forms and paperwork associated with changing companies, "We had paperwork parties with popcorn, music in the background, and experts there to help answer questions," says Kevin Campbell, global partner for business process management at Andersen Consulting in Boston. Though Andersen began providing services in June, the employees were not moved to their new facility until December. "It reduced anxiety, variables, and things that could go wrong," Campbell says. CSC, which also will move staff to a new building, "kept all the basic organizational structure, leadership teams, and reporting procedures in place for three to four months before introducing gradual change," says Mike Beebe, senior vice president of CSCs chemical, oil, and gas unit, El Segundo, Calif. The result: 98% of employees offered the opportunity moved to CSC and Andersen and there were no layoffs. Making it all work is one of the priority roles of Du Pont as leader and integrator of the alliance. The challenge is to take all the agreements formalized in the contracts and translate those into day-to-day activities. Key has been a shared alliance-management process for collectively developing an overall process architecture. For areas where the three companies collaborate, Du Pont is establishing a model of common shared work processes including financial, performance, and customer-satisfaction management. "From that top-level process model, we are breaking it into individual procedures that identify the roles of the various parties . . . ," says Beebe. He explains that the model helps deal with questions such as:

How do we determine the needs of the users and ensure we are delivering our services for those needs?
How do we establish measurements?
What will the reports look like?
Who do we report to?
How do we address exceptions?
How do we take corrective actions?

Harnessing the power of the two vendors in their compete/cooperate relationship has been a challenge, but by all accounts, Du Pont has been a master. "Du Pont has laid out a model of how we are to operate together," says Andersens Campbell. "We both have not only conceptual, but also contractual language that says we will work together. We call it our love each other paragraph." In more tactical, day-to-day, operational and legacy activities the two companies typically work on shared teams. "For instance, today in the Y2K world we are not competing--it just has to get done," says Campbell. "There is more work than either one of us can do, so we are just trying to figure out jointly who does what and who can get the answer the quickest." For new systems, both CSC and Andersen team with Du Pont businesses to jointly define requirements. Both are then free to submit competitive proposals for solutions. Areas of competition include new system implementations, particularly in SAP, where a combination of consulting skills, business knowledge, and software-engineering expertise is required. Andersen and CSC are also contributing to a new model of support services, where key functions leveraged across Du Pont businesses--financial, human resources, engineering, etc.--are consolidated in yet another SBU. "We are going to realign a lot of our support services to be more in line with what we have done with information technology, more as a service-company concept, operating like a business unit," says Ridout. "It gets our services more demand-driven, variable, externally benchmarked, and competitive. The two partners have brought a lot of insight into how that should occur. In terms of value, they are providing answers to questions we havent even asked yet." The alliance also offers the opportunity for all parties to benefit from new products, applications, or services that result from alliance activities. For instance, CSC has created a new vertical business--chemical, oil, and gas--as a result of the expertise it acquired. Andersen, on the other hand, is developing a data-management solution around environmental health and safety, an area that drains 8% of chemical-company revenues, according to Campbell.

Practice Makes Perfect

Lessons learned by Du Pont can help ease the pain of other companies embarking on an outsourcing journey. Frank Conway, director of Du Pont & Co.s global IT alliance with Andersen Consulting and Computer Sciences Corp., offers these best practices for companies pursuing alternate IT sourcing initiatives:

"You get a better view of what you need and you are better positioned if you get your act together first. So before you look at sourcing arrangements, focus on cost improvements achieved through consolidations and elimination of redundancies. You need to know what you have or you are going to end up paying more than you anticipate. Having a good inventory is very important."

"Communications is essential, not only to the employees impacted but to the executive management of the company. Everybody needs to understand what you are doing and why you are doing it. You cant communicate enough."

"Assign a fully dedicated team of your very best people to the project because this is your future. Theyll work real hard, but they will have a lot of gratification."

"Continuity of experience throughout the whole transaction and process is important. For all firms, there are a relevant handful of people who have been through it all. You cannot negotiate every little detail and get it into the contract, so you have to rely on the intent of the deal."

"Maintaining good relationships with the vendor partners is imperative for successful service delivery. It is very easy to degenerate into an adversarial relationship, because negotiations are tough . . . . So we had others conduct the negotiation of the specific contract so they could be the bad guy and then go away. That was a key strategy."

To help select its alliance partners, Du Pont engaged the services of Technology Partners Inc., Houston, sourcing consultants. The firm helped establish baseline costs, compiled the detailed information necessary about internal operations to communicate the scope of the transaction to potential vendors, developed the request for proposal, and even aided with contract negotiations. "People undertaking any kind of major transaction would be foolish to do so without external consultation from people who do this kind of thing for a living," says Conway. Du Pont also engaged Milbank, Tweed, Hadley & McCloy, New York, a law firm experienced in preparing contract documents supporting such a large-scale transaction.