Sun Microsystems: Finding Flexibility at a Big Company

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By Dian Schaffhauser

Sun Microsystems has had plenty of experience in partnerships. Not only does this $11 billion dollar company contract with other firms for its manufacturing, but it relies on a huge community of partners to sell and support its servers, workstations, software and storage products.

But it was only a year ago that Sun decided to look into outsourcing more of its own IT needs. The internal IT organization, SunIT, spends about half its budget on the operational infrastructure -- data centers, networks, desktops. The other half is spent on applications and their maintenance -- the business systems that fit on top of the infrastructures and serve Sun’s business units.

On the infrastructure side Sun already contracts with EDS to run its data centers and AT&T Solutions to keep its network up. But on the application development and maintenance side little had been tried.

In early 2004 the Silicon Valley-based corporation decided that in order to bring down its IT costs and establish a more flexible cost and staffing model, it would consider nearshoring or offshoring. And no dipping the toe at this operation. Rather than do it in lots of small steps, the company set an aggressive schedule to outsource all of the non-core work in that space in one huge effort.

Eleven months after the initial strategic analysis was begun, Sun signed a five-year contract with CSC for $360 million to handle application development and support for operations in the US, Europe and Asia Pacific.

Ann Wondolowski, the VP of Information Technology at Sun, headed the application organization’s outsourcing project. This case study shares the lessons her team has picked up in its journey through the analysis, RFI, RFP, service provider selection and transition phases of the project.

--> TIP #1: Look both inside and outside your organization for help on outsourcing, but don’t just hand over the work.

Assign some of your best and brightest to the sourcing team, and free them up from their “day jobs” to do the work. Also, leverage experience -- either internal to your company from other outsourcing deals or from an external source.

In Sun’s case that meant getting advice on the basics of outsourcing from its manufacturing and HR organizations, which had already done initiatives of their own.

Ms. Wondolowski stepped out of her day job in one of the large applications delivery organizations and started working on the outsourcing project full-time once the RFP was issued. From her side of the business, the senior CIO and his staff participated. The rest of the team consisted of people from the IT group, because, as she said, “We knew the best about the activities.”

Business unit managers were brought in to review “high level criteria,” a standard Sun model for all evaluations. That evaluation included asking a handful of key questions such as, “Is there a specific intellectual property protection that can only be afforded if this is done by a Sun employee?” Or “is there a unique and paying customer that [mandates] that Sun be industry best -- not just industry good?”

Also, at a couple of points in the process, the new team did “sanity checks” with some of Sun’s business partners.

They also used sourcing advisory firm TPI to help define provider selection criteria and internal and external legal counsel because of the size of the deal.

Once the team got to the point of solidifying what functions might be worth outsourcing, CEO Scott McNeely and COO Jonathan Schwartz and their staffs were brought into the communication loop.

--> TIP #2: Be highly selective about what you outsource and what you retain. Understand your “core competencies” and sourcing strategy.

The team mapped all of the work done by the applications organization and analyzed those activities from a “value add to the customer.” The goal was to figure out what was “mission critical” and what was core -- what had to be done “by a Sun badge person.” An example would be an ERP application. An ERP application may be mission critical -- because the application has to be up and running. But it may not be “core.” “The skills needed to do that mission critical thing can be just as easily sourced externally and we don’t give up any sort of market industry advantage by sourcing those externally,” Ms. Wondolowski said.

A counterpoint to that might be a business system that isn’t really mission critical, but that’s “business critical.” Maybe it doesn’t have to be up 24 hours a day, seven days a week, but it’s strategic. In Sun’s case, it might “be an application or IT service that truly gives Sun a unique advantage,” she explained. For example, “Given who we are, we run our IT shop on our own products, so a lot of what our IT organization does is give feedback back into the product group to improve our products. So the management of what we call ‘Sun on Sun’ -- running our IT on our own products -- we felt was a core activity. That protects intellectual property and improves, ultimately, our end customer experience.”

This phase of the effort was difficult, Ms. Wondolowski recalls. “It’s obviously hard for us in IT to admit that we are not core to the company, right? Especially for a company like Sun, which sells to IT people. The service people might say, ‘What the heck is Sun doing outsourcing IT when they are trying to come sell their products to me as an IT person?’” As the process progressed, the team became more comfortable with that, recognizing that partnering with an IT service provider would actually help to expand the IT organization.

The final list of functions to be outsourced included most the “execution” activities involved in applications development and support.

All along, they connected criteria to objectives and documented the analysis so that they could be reminded about what had led them to a particular decision.

Her advice: Try to get beyond the attitude, “Well, this is really important to the company, so how could we outsource it?” It’ll open up your eyes to the possibilities of what the newly created “virtual IT organization” might be able to achieve.

--> TIP #3: Use the RFI process to get a sense of the state of the industry and the “art of the possible.” Then use that to fine-tune the RFP.

Sun eventually invited 15 companies to participate in the request for information (RFI) process. It knocked out direct competitors, which included IBM. It also put a heavy emphasis on key Sun partners. Among that first round of contenders were companies from India and Canada. All were at least medium to larger sized, because of the scale of the initiative.

But aside from that, said Ms. Wondolowski, the team cast a “wide net” to “see the state of the world and the art of the possible.” The goal: to get a diverse group of vendors to participate. She said Sun considered itself behind in exploiting application outsourcing by at least a year or 18 months ago. Now, she expects in six months that it will be “significantly ahead.”

The RFI was issued in April 2004. The team spent three months getting responses and doing an analysis and fine-tuning the RFP, which was issued in June 2004. Seven companies participated in the RFP round.

--> TIP #4: The RFP doesn’t have to be set in stone. Use it to further delineate providers that can transform your business in unexplored or unspecified ways.

The request for proposal, which ran into the hundreds of pages (because it had “ample appendix attachments” like security policies), included a lot of details around the financial baseline and what it took Sun to run the applications business. What it didn’t do was “totally box in on the scope.” Nor was it a guarantee that Sun would outsource at all. At this stage, the team was still exploring options.

The RFI process had whittled the group of vendors down to seven that Sun considered capable of doing the work. But the next concern was, “Did that translate into the skills flexibility and capability and quality as well as cost flexibility and cost reduction” that Sun was seeking?

When Ms. Wondolowski debriefed the vendors after the process was over, some of them called the RFP stage “sort of schizophrenic.”

On one hand, Sun wanted to be fairly structured and provide a lot of data, because “we didn’t want to be dipping our toe into the water for three years but make a decision one way or another.” On the other hand, the team also realized it was still learning about what the vendors could do and how deals like this one could be structured. As Ms. Wondolowski put it, “We tried to offer kind of a balance of structure and [say], ‘Here is what you should be bidding on -- but be creative too.’”

The variable, flexible nature of the deal was important to Sun. The company wanted to be able to crank up or back on services and it wanted something to fall back on in case the business changed. But it also wanted to hear from the vendors on what were the things they needed to get out of the deal to make it a win-win.

Plus the team wanted to go beyond just the outsourcing and examine potential joint marketing kinds of partnerships. Sun mostly sells products through partners. Now it’s expanding into utility and grid computing by delivering services through partners. So the team explored how it could leverage the outsourcing deal to expand its footprint through the service provider’s sales and marketing organizations.

--> TIP #5: Be prepared to share proprietary data with your finalists during the RFP process. It’s the only way to get accurate responses. This is part of the financial baselining that needs to go on.

If cost reduction is one of your priorities in considering outsourcing, how do you know if you’re going to save money if you don’t know what the services to be outsourced cost you today? Sun’s team projected over three to five years what it thought it would spend. This exercise didn’t factor in growth, nor did it assume the same level of service. It did encompass projections on salary inflation, productivity improvements, and possible reductions due to application consolidations -- as well as other initiatives the team thought they’d do anyway.

Then it shared that information with the vendors. This advice came from TPI, said Ms. Wondolowski. They went in with the assumption that the service provider needed to make money too. To set pricing at the right level, the providers needed to understand as much about the business and its plans as possible. “Some companies kind of mistakenly think, ‘I’m going to hide that from them because that gives the vendor too much information,’” said Ms. Wondolowski. The truth is that it makes the bidding process more intelligent. Plus, it may divulge opportunities that you weren’t aware of, such as out-of-the-norm spending in some area.

--> TIP #6: When you work for a multi-national company, employee communications can be really tricky. Know what’s allowed for every site before you communicate to any site.

Ms. Wondolowski said her team started communicating with affected employees when they began their core/non-core analysis. They shared what they were doing at a high level, but “didn’t go over the detailed absolute, ‘Here are the 10 activities we think are likely to be outsourced and here are the 15 that aren’t.’”

When the RFI was issued, that was shared with employees. Communications were kept honest: “‘We have not made a decision to outsource but we are exploring.’”

When the RFP was issued, again, upfront information was provided: “‘Obviously, this means that we are more likely to do this than we were three months ago, because we are issuing an RFP, but we still haven’t made a decision...’”

It was when the team got down to the final vendors that Ms. Wondolowski said she would have liked to have shared more, but couldn’t because of legal ramifications, particularly those in the EMEA (Europe, Middle East and Africa regions) countries. She said they found the European work councils and labor laws such as the Transfer of Undertaking (Protection of Employment) Regulations -- as well as certain US SEC disclosure regulations around contracts -- especially frustrating, since they proved to be obstacles in having the openness with staff that the team would have preferred.

Eventually, the outsourcing engagement affected the jobs of about two thirds of the staff from the applications side of SunIT, many of whom were hired by CSC. Many of those are expected to move to other CSC accounts once the Sun work being done in the US is offshored.

Others, said Ms. Wondolowski, will have “the classic job of training their replacement and either getting a different job inside of Sun or perhaps leaving Sun at the end of 2005.”

A handful of people, all of whom are Indian nationals working in the US on visas, have decided to return to India to work for CSC.

--> TIP #7: Due diligence needs to include phone conversations with provider clients as reference checks and site visits at finalists’ operation centers.

As part of the RFP process, the Sun team checked customer references by phone, performed site visits and did two-way due diligence, in which Sun and the individual providers got together on site at Sun and shared financial and other proprietary information.

Ms. Wondolowski said she took a group of five people over to India and visited the final vendors at their offshore locations. (None of the Canadian service providers made it to the finalist list.) The visits gave the team the ability to compare the physical locations (which turned out not to be that different). Everybody they saw left them with positive impressions, but the visits also helped the team to prioritize the providers by “presence.”

The on-sites also let them meet face to face with people who were going to be the leaders of the offshore teams over there. This turned out to be useful in terms of seeing the different approaches used by each provider and the personalities, skills and styles of the senior leaders at the offshore development centers.

They also visited with some of the individual performers who were working for other clients at the time, but who would be assigned to the Sun deal.

Among the topics of conversations were questions about the hiring, retention and development of people. “Everybody had good approaches, but some were better. They were competing for some of the same people; so we looked for unique qualifications that we felt ended up filtering companies out,” said Ms. Wondolowski.

Discussions also drilled down on teamwork approaches and collaboration practices with the client’s onshore location.

--> TIP #8: Make the transition plan part of the RFP.

Each vendor in the final round was asked to provide a transition plan. The responses ranged from six months to 12 to 14 months. Sun had to ask itself how much risk it was willing to bear. The faster the transition, the greater the risk, since the team wasn’t sure how quickly the new people could be trained. On the other hand, the slower the transition, the greater the chances Sun would lose current employees who needed to stick around to train the new people.

Sun settled on a fairly aggressive nine- to 10-month transition period. (In our research, most companies doing this size of outsourcing deal go through it in 12 to 18 months.) That middle ground period, the team figured, would help keep employee retention high and mitigate some of the risk of going too quickly.

The RFP was issued in June. The first round of responses was in and reviewed by September. Two service providers were knocked off the list at that point, prior to the due diligence effort. The final vendor selection was done in the November/December 2004 timeframe.

The contract was signed at the beginning of February 2005. Three months later, on May 1, 2005, CSC commenced delivering services.

During those three months between contract signing and beginning of the transition, CSC interviewed and hired a significant number of employees from SunIT. Those people will form the onsite, onshore team at Sun. CSC also brought other people into the environment and started hiring at their offshore locations.

The two teams -- client and provider -- started planning the knowledge transfer, which is broken into six phases.

These phases are actually duplicates of each other. As Ms. Wondolowski explained, “We have taken all of the projects, and support for existing applications, and broken [them] into six relatively equal chunks. Each of the six phases lasts about three months and is where we’ll be training the offshore people on how to do the work that is currently done onshore.” The six phases overlap: phase 1, May through July; phase 2, June through August; phase 3, July through September and so on.

Full offshoring of the functions will be accomplished by the end of 2005.

What will remain with SunIT’s application organization when the transition is done will be: setting the strategy and direction; defining the functional, technical architecture for how all the business systems fit together; and figuring out how Sun products are incorporated into the mix.

CSC will provide the processes around application delivery support and providing execution.

--> TIP #9: Include time in the transition schedule to get your people up to speed on their new jobs.

Whereas staff one or two levels below the CIO used to spend most of their time on the application side worrying about managing and delivering projects, now they’ll be becoming “engagement managers.” This idea is modeled after Sun’s sales organization, which, in fact, which will be providing some of the training that the field organization does for account reps who work with external customers.

The idea is that the new engagement managers will be going into the business units and helping them figure out how to solve business problems -- becoming experts on Sun’s businesses as well as what SunIT can do for the business. This is a big change says Ms. Wondolowski, for people who were “managing large numbers of direct people and getting into the details of projects execution.”

--> TIP #10: Put together an on-going liaison team that includes internal and service provider people.

Sun is keeping “very senior technical people” as “Sun badge people” in IT. But the team will also have CSC people on it. The advantage is that the CSC people will help Sun to understand what it’s like to run Sun products and to deliver Sun’s internal IT, not only by doing it for Sun but by tapping the service provider’s consulting and outsourcing businesses supporting other clients. “We increase our ability to get feedback from people using Sun products by an order of magnitude and leverage this partnership with CSC as Sun evolves its products,” Ms. Wondolowski said. Sun expects that feedback to help improve its market position.

The hope is that eventually Sun will also be able to leverage some of CSC’s expertise from its consulting business on how to go in and gain more of an advisor relationship with customers and get work done through other partners vs. actually doing it themselves.

No, those hopes aren’t “wired” into the contract. “It’s more of an assumption,” she said.

Timeline for Sun Application Development and Maintenance Outsourcing Project

January-March 2004	Analysis of IT competences; define sourcing strategy
March-April 2004	Survey industry/service providers
April 2004	Issue RFI
June 2004	Narrow down vendors; issue RFP
August 2004	Initial RFP responses in; detailed reviews with vendors
September-October 2004	Sun and vendor due diligence meetings
November 2004	Final vendor pricing and solutions proposed
December 2004	Final vendor selection
February 2005	Contract signed; transition started
May 2005	Cutover; CSC started providing services
January 2006	Target for completion of transformation (moving some work offshore; implementing new processes)

Sun’s Checklist for Service Provider Selection

• Understand your “core competencies” and sourcing strategy.

• Analyze and document financial base case (projected cost of retaining the work in house).
• Prioritize outsourcing objectives.
• Define possible scope of outsourcing (but be open to changing this during early discussions with vendors).
• Do your homework -- understand the service providers, the trends in outsourcing, what companies like yours are doing.
• Leverage experience -- either internal to your company from other outsourcing deals, or from an external source.
• Assign some of your best and brightest to the sourcing team and free them up from their “day jobs” to do the work.

Useful Links:

Sun Microsystems
http://www.sun.com

CSC
http://www.csc.com

TPI
http://www.tpi.net/

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