Cecilia Claudio knows the value of a good outsourcing partner. Over the course of her 30-year career in information technology, Ms. Claudio has worked with all sorts of vendors, consulting firms and industry players, and she has learned time and again the importance of the customer-vendor relationship. Indeed, sometimes the ultimate success or failure of an outsourcing arrangement can stem from the personal bonds between the members of your IT team and the team from your service provider.
Ms. Claudio, who recently took a position as CIO with Mercury Interactive Corp. and serves on the board of RampRate, recommends three checkpoints for a winning partnership, advice gleaned from the good relationships she's helped forge as well as the bad partnerships she's suffered through and learned from.
1. Ms. Claudio advises that you make sure to write up a solid contract that covers all your bases, one that won't leave you high and dry when Murphy's Law kicks into gear. This ensures a solid footing for professional relationships.
2. You should make sure your value system — what you care about and how you operate — is in line with your vendor's value system. Although it might be hard to detect a vendor's value system through staid business meetings and conference calls, it's a good goal to set.
3. You and your team should get to know the people you'll be working with — on a professional as well as personal level. Ms. Claudio said good working relationships may not matter if everything works without a hitch, but when things start going awry a solid relationship can go a long way in oiling the gears and getting things back on tract.
Such lessons can be hard to come by. Indeed, a few years ago when Ms. Claudio took over the IT operations of Anthem Inc.'s Blue Cross/Blue Shield plan — one of the largest in North America — she quickly learned the importance of a sound IT outsourcing relationship.
"I walked into the middle of a very contentious relationship," she said.
Ms. Claudio said Anthem and its IT outsourcing vendor (which she declined to name) were two years into a five-year deal when she was hired on. Things had gone downhill quickly during those two years. Ms. Claudio explained that Anthem's business had unexpectedly and dramatically increased during that time, which meant its IT needs were much greater than they were when it initially forged the outsourcing agreement. Ms. Claudio said the contract did not include provisions for a change in volumes, one way or the other.
"They had not written that into the contract," she said.
Anthem's IT outsourcing contract was based on a specific number of CPU cycles — essentially on the raw processing work — it needed at the time of the contract. But now Anthem needed much more processing power than it had originally expected, a situation that had not been accounted for in Anthem's IT contract. The result? Anthem's IT service provider was providing the company with the extra processing power but was charging Anthem a premium for it — charges that Anthem and Ms. Claudio thought were far beyond reasonable.
"The vendor was just unilaterally raising the price. They can pretty much on their own decide what they want to charge," she said. "They were significantly overcharging. The vendor was pretty much taking [Anthem] to the cleaners."
Tensions flared on both sides — to an untenable degree. Ms. Claudio said that the situation was so bad that when she arrived on the scene, the two companies were not even on speaking terms. Calls were going unreturned and emails were ignored. And Anthem was looking at three more years of a five-year contract.
Ms. Claudio managed to find a way out. She said she pored over the small print in the original contract and discovered a clause to "cancel for convenience." Ms. Claudio asked Anthem's legal department if it meant the company could cancel its IT outsourcing pact and the word came back: Yes.
"So that's what we did," she said.
On learning Anthem's plans, the company's IT service provider then offered to renegotiate in order to offer the company more favorable terms. If the two companies had had a good working relationship it might have worked, but Ms. Claudio said the partnership was too damaged to continue — even under more favorable terms. Anthem wanted out.
Now it was up to Ms. Claudio to learn from the situation and create a friendlier outsourcing environment. Here's how she did it.
TIP #1. Get outside help when you're ready to fix things.
Ms. Claudio contacted outsourcing consultancy Everest Group to help Anthem evaluate its alternatives and find a more suitable vendor. Everest ran Anthem's IT needs through its evaluation process and recommended three candidates, including the company's previous IT service provider.
Ms. Claudio said the company's previous vendor was a large, internationally recognized outsourcing vendor, and despite its less-than-stellar track record, in the end it did meet Anthem's requirements. Anthem sent out requests for proposals to the three candidates, and then began its evaluation process.
TIP #2. During the shortlist RFP process, get to know the candidate companies' technical prowess, processes and facilities and specialties.
To appraise the vendors, Ms. Claudio first scrutinized each vendor's technical capabilities and processes. She said she and her team took the candidates through a detailed set of interviews and facility visits. The visits were intended to evaluate the candidates' disaster recovery functions to make sure they would measure up to Anthem's requirements.
TIP #3. Then go beyond that in your checks.
Ms. Claudio said Anthem also did its due diligence with reference checks and financial reviews.
TIP #4. Next, do a personality compatibility check.
Once satisfied with the results, Ms. Claudio then turned to the relationship portion of the equation. She said Anthem's executives sat down for face-to-face meetings with the vendors' executives. The meetings were a chance for Ms. Claudio and her team to get to know their vendor counterparts on a personal level — a chance to see if they connected. The meetings included executives all the way up to CEO, and were generally informal affairs that gave everyone a chance to hang out and get to know each other — over drinks, games of golf and other activities. These meetings were key, Ms. Claudio said, in making sure to ensure that Anthem's executives could count on the vendor as a partner rather than just a business acquaintance.
TIP #5. Once you've settled on the vendor choice, spend sufficient time on writing the contract.
It took Ms. Claudio and Anthem three months to settle on a new vendor. Ms. Claudio didn't name the new vendor, although she did say that it was not Anthem's previous IT outsourcing supplier. She said that company's bid for Anthem's business was not nearly as attractive as it should have been.
Once that was done, Ms. Claudio set about writing up a new contract, which took about two months. This time, in composing the contract, Ms. Claudio made sure to include provisions on what happens when Anthem's business increases or declines. Under the new contract, the payment rate was based on the number of transactions processed as well as the size of the mainframe computer and was fully flexible.
Ms. Claudio said the contract also included financial penalties for nonconformance to the terms and conditions of the contract, such as service level agreements. The contract outlined specifics like response times, mean times between failures, outage responsiveness and other details. Ms. Claudio said the trick is to include in the contract all the "excruciating details" about what can go wrong and what the financial penalties are.
And this time, things went better. Ms. Claudio said the penalties included in the contract created a sense of urgency and defined the metrics used for the collection of financial penalties. She said Anthem never had to invoke the penalties during her tenure with the company.
TIP #6. But don't rely on the contract as the final word in your outsourcing relationship.
All the documents, contracts and business meetings can sometimes get in the way of the most basic part of an IT outsourcing deal — the relationship between you and your vendor. Sometimes that relationship isn't terribly important, but if something comes up to stump your normal day-to-day outsourcing activities, a good working rapport goes a long way toward getting things back on track.
So when you're in the middle of evaluating RFPs and requests for information, crossing the Ts and dotting the Is, take some time to sit down to dinner, a golf game or some drinks and actually get to know the people on the other end of the phone.
Cecilia Claudio's biography can be found here:
Anthem Insurance Companies