Tighten Up Your Partnership: The Costco/US Tech Approach

Don Burdick, Sr. VP of Information Services for Costco, can count off the difficulties of outsourcing: You face knowledge transfer issues. You face maintenance issues. And the model is generally geared to bringing in people to do a specific task, which is counter, he believes, to building truly successful long-term value.

He calls the vendor selection process a "beauty contest." "I'm going to bring five of you in and…the low price wins." The problem with that approach is that it doesn't engender loyalty. "So why would I ever expect that [the service provider] would give me one ounce extra?"

If it's not outsourcing, what do you call the relationship that the US' largest wholesale club operator has with US Technology, which has operations in both the US and India?

Mr. Burdick prefers the term, "partnering" It's the same kind of relationship he has with the consulting services at IBM, Microsoft and Cisco. "We bring them in when we have business issues, and they help design a solution with us."

This is an article about how that relationship evolved and what a healthy partnership can look like from the inside.

–> TIP #1: Look at the service provider as another tool in your toolkit — and get your people thinking that way too — not to be used for every project but for the ones where it makes sense.

Since his boss is sensitive to the issue of offshoring, the company decided to test out the partnership with US Tech by keeping it to a single digit of Mr. Burdick's budget. After a year, they reviewed the relationship and grew it; but it's still single-digit. And Mr. Burdick doesn't expect it to grow beyond that.

The work with US Tech isn't planned by project. As a development team needs help, it turns to US Tech, as "just another tool in the tool belt." For example, maybe the team needs to turn a three-digit field into five digits, across 6,000 programs and 6 million lines of code. After that, the code needs to be tested. That's monotonous work that the team may decide to hand off to US Tech. Mr. Burdick retains veto power on those decisions.

Once it's suggested, US Tech is brought in, studies the project requirements and provides an estimate. Mr. Burdick says it has made his teams better at speccing the jobs and making sure the provider understands what needs to be done and what can be done in India. (Of over 20,000 hours worked, there was a difference of just 391 hours between project estimation and actual time required.)

One criterion Costco uses in picking the projects where US Tech will participate is if it involves a ratio where one person can be onshore for every three people offshore, since US Tech's business model is driven by more people being offshore. Mr. Burdick calls the onshore presence a "pass-through." That means most of the work being done for Costco requires situations that don't demand a lot of interaction with the client.

–> TIP #2: Use a service provider to alleviate the pressure of hiring when the right candidates aren't readily available.

At the time of the interview, Mr. Burdick said he had 60 openings in the information systems division (about three-quarters of them programmer positions). He hasn't laid anybody off that he's now trying to replace. His problem is finding the "right quality of talent." Costco's corporate geographic proximity to Redmond means, he said, "We're up there butting heads with Microsoft for .NET people." Plus, he said, "There are a lot of people who think they know .NET, but when you get them in, they're not that talented and they're not that experienced." He paraphrases author Jim Collins: "If you can't find a superstar, keep looking, because you are better off to leave it open and keep fighting to find the right one." The US Tech agreement enables him to balance those high standards against the work that needs doing.

Costco has a rigorous training program to develop internal people — but that accounts for between 12 and 15 positions a year. Mr. Burdick is also active in the marketplace, constantly on the lookout for highly experienced people.

He wants the people he hires to be really curious. One hire came into the interview on crutches. When Mr. Burdick asked him what happened, he said he was working on a car and tripped over a tire. When he asked what the candidate was doing, he said he was overhauling the engine. That sold him. He wants people who have "dirty fingernails," (though not necessarily literally).

–> TIP #3: Look for big and little ways to make the provider staff part of your staff.

All people working on Costco work for US Tech — onshore and offshore — are from India. The onshore people are brought over from India for a year at a time. The ones who come "onshore" have been selected by US Tech.

Once that person returns to India, Mr. Burdick said, his staff is more likely to say, "Well, now that Gopi's back in India, we could do this project back there." That drives more work to being done offshore, at the instigation of the internal IT teams.

During that year they're in the US, the US Tech people are treated like another employee. They attend orientation, go to team meetings, appear on organization charts and get email sent to the internal team. That cohesion continues once they're back in India, but instead of in-person, the team meetings are done through monthly conference calls.

Note that Costco retains veto power over who it works with at US Tech, but US Tech decides who will be put on a given project.

–> TIP #4. Develop a provider staff training program as structured as the one you put your internal people through. And make sure informal "training" happens too.

Orientation for permanent Costco employees is a three- or five-day stint working in a store. Mr. Burdick recounts his own experience. "We would start at four in the morning. You start out by stocking in the morning and you move to the front end and you have to be cheery all the time. When I got off, I would have to go home and take a nap. I was just physically worn out." Those applicants who can't handle that part of the job or who have objections to it don't necessarily get offers.

The US Tech folks don't go through that form of orientation. But they take tours and work in specific store positions when they're involved in certain kinds of projects to expand their domain knowledge.

They also go through a lot of cultural training before they come to the US. That includes learning how to dress for work and how to respond to hallway questions like, "How are you doing?" (One hint: Don't expect the person asking to really stick around and listen to your response.)

The training continues in the states, in social settings, like spending holidays at the homes of co-workers.

–> TIP #5: Don't shy from using a business case to sell outsourcing (and offshoring) to staff.

Mr. Burdick's staff was suspicious when US Tech was brought in. But management tried to explain hiring the company was about getting more work done, not replacing people.

Mr. Burdick communicated that by showing internal people the list of projects the company needed, explaining the value of each, and asking them how the group could get more done. They could increase their hours. They could focus on learning new parts of the business to try to find simpler solutions. They could buy packaged solutions. They could put more people on programming. All of these are continually tried.

But it was the strategic partnering that made a difference in the $100 million backlog. For example, his group used to handle all aspects of hardware installations. Now he has a contractor with people who are in the specific geographic area where the installations take place who set up the equipment. His folks show up right at the end to do the installation of software. He admits that he probably pays more to do it that way, but he has raised the quality of work being done by his own staff and accomplished it with fewer people.

That said, Costco's IT expenses are overall still about a quarter less than other top-tier retailers.

And he believes morale is higher since adding US Tech's services to the mix, because the Costco employees are no longer mired in low value-add or maintenance work. They can focus on new technologies and new programs. Some of the teams were faster at accepting US Tech as a solution than others; now all of them work with the provider when the need arises.

–> TIP #6: When selecting a provider, make sure there's a cultural fit.

Mr. Burdick also had to sell the company's choice in providers to the internal people, which came down to "cultural fit." As he said, "They value a lot of the things that we do." That includes a work ethic and focus on getting projects delivered on time and on budget.

It also includes how the provider treats its people. For example, Costco has fair wage clauses in every one of its construction agreements, which its general contractor signs and that all of the subcontractors must sign too. Costco estimates that that clause costs a "substantial amount" for every project it does. But the company's ethics mandated that it require contractors to treat their employees as fairly as Costco treats its employees.

He doesn't mean to suggest that US Tech is paying its offshore Indian workers US rates. But it does mean he expects it to act as an "exemplary employer." To ensure fairness in a place where salary survey data is harder to come by and people don't like to share bad news, Costco people go over annually to meet with US Tech people and spend time with them. On his last visit, Mr. Burdick said, he had dinner with a new hire, somebody who had just earned her Master's in engineering. They discussed her decision to go with US Tech and why she thought it was the right company for her, and how thrilled she was to be on the Costco account.

He also works with US Tech to keep the same people on his account. Although they move from project to project, he said there's a core group of about 60 or 70 people always doing Costco work. It may rise to 100 or go back to 60, with about 20 or so onshore at any given time.

–> TIP #7. Ask how you can be a great customer.

Mr. Burdick's final advice to CIOs about how to get greater value out of the relationship with service providers is to ask how you can be a great customer. "That leads you to understanding what [the service provider's] economics are. If they're working on a project, they know what the value of that project is to the company. They have access to the documentation that we use internally to get the project approved — the timelines and everything else. Once I start thinking about being a good customer and a good partner, that leads me to trust and transparency in the long-term relationship."

At the same time the two companies hold regular business reviews to share joint goals.

Useful Links:

Costco
http://www.costco.com

US Technology
http://www.ustri.com

A PowerPoint presentation made by Don Burdick at a Gartner outsourcing event (94 kilobytes)
/docs/free/Costco_Don%20Burdick_Gartner_presentation.ppt