No matter an outsourcing contract's size, governance is an inside job

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No matter an outsourcing contract's size, governance is an inside job

Linda Tucci, Senior News Writer

When Linda Jojo joined Energy Future Holdings Corp. as CIO in 2008, the Dallas-based electric utility was four years into a 10-year outsourcing contract with global IT service provider Capgemini. The massive, $3.5 billion deal included many back-office functions and 100% of IT operations. "Even the CIO had moved off," along with 2,600 other employees, she said. On the balance sheet, the deal was a great success. The Monday after the outsourcing contract went into effect, the troubled utility's costs decreased by 11% and its stock price soared. For the 9,000 employees working with technology, however, the gains were not so obvious.

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"There was not a thought about how to govern the IT contract. There was no concept in the deal about how to improve IT service to the business," Jojo told an audience of IT leaders at the recent Forrester IT Forum in Las Vegas.

Jojo's mandate was to build a new IT organization from scratch. In 2007, Energy Future Holdings, then known as TXU, had been sold for $45 billion -- at that time it was the largest leveraged buyout in history -- and its new owners decided that the outsourcing contract should be terminated. The challenge facing Jojo was how to structure an IT organization that not only provided reliable, high-quality IT services at a reasonable cost, but also functioned as a strategic partner to a business that was undergoing rapid change. "The good news was that it was a nice time to be hiring," she said.

Hiring IT employees for the future

In fact, one of the CIO's biggest challenges is deciding whom to hire and which IT skills should be nurtured internally, according to Marc Cecere, a principal analyst at Forrester Research Inc. who spoke about the IT organization of tomorrow at the IT Forum. With the rise of tech-savvy employees who increasingly self-provision the technology they need to do their jobs, IT departments will focus on consulting and guiding technology decisions rather than on controlling IT, he said. Internal IT departments will need plenty of solutions and data integration architects; a strong sourcing discipline that infuses all technology purchases, including those made by the business; and project managers who can oversee numerous projects rather than running one from start to finish.

Outsourcing Contracts 2.0: Never outsource accountability

Jojo's first decision didn't require much crystal-ball-gazing: IT had to take responsibility for IT. A total of four IT employees had been left on-premises in the Capgemini deal, and there was no one internally who felt accountable for IT operations. "When anything went wrong, it was always Capgemini's fault," she said. The outsourcing contract missed the mark on another level as well: The deal predated the proliferation of smart meters, the real-time usage-data-gathering technology that has changed the electric utility industry fundamentally. With 3 million of these intellectual-property devices, Energy Future Holdings soon would be collecting 3,000 times more data than in the past; but IT lacked a strategy for turning this data into valuable information.

"This contract never contemplated anything like this -- a whole different, IT-centric energy world," Jojo said.

There was not a thought about how to govern the IT contract. There was no concept in the deal about how to improve IT service to the business.

Linda Jojo, CIO, Energy Future Holdings Corp.

Where to start? Jojo began by defining the scope of the services IT would provide to the business, relying on such frameworks as ITIL and COBIT to come up with some half-dozen categories, she said. She and her team hashed out which services should be centralized and which could be decentralized. In general, "the closer we got to the business units, the more decentralized it was," she said.

The company still needed a sourcing strategy. The business had experienced the pitfalls of a single-vendor outsourcing contract -- at least, one that was not governed well. Jojo knew she wanted multisourcing, but IT needed to determine what to keep in-house and what to outsource. The IT department decided that with the exception of governance, project management, architecture and strategy, everything else would "default to outsourced, and people had to fight to get it back in," she said.

One of Jojo's hard-and-fast rules under the new arrangement is that IT never blames an outsourcing partner in a business meeting: "We hired them. We're responsible," she said. Another factor in making the outsourcing contracts work was insisting on a "wing-to-wing service-level agreement," or end-to-end SLA, that all vendors are measured on in addition to the individual set of SLAs related to their respective contracts. She ended up with five partners, including Capgemini "now doing a terrific job on legacy" systems.

Thomas Young, partner and managing director for CIO Services-Infrastructure at Stamford, Conn.-based sourcing advisory firm TPI Inc., said that end-to-end SLAs, a rarity in his experience, require sophisticated governance. "It is the holy grail of outsourcing contracts," he said, and requires that CIOs be able to do root-cause analysis and "fairly adjudicate when problems arise." He advises CIOs to hold off on exacting penalties initially, so that vendors understand the aim of the end-to-end SLA is to optimize a process, not single out anyone for blame.

Making an outsourcing contract work: It's all about governance

Managing a complex, multisourced environment is a "big challenge," Jojo told the audience of IT leaders. "It's all about governance," she said. To that end, she does the following:

  • Holds formal monthly reviews with business partners and outsourcing partners, whether there "is a problem or not."
  • Periodically reviews her service providers' SLAs with the business units, "so we have a rich conversation when we go back to the providers."
  • Meets monthly with each of the business units on strategy.

The decision about what to outsource and what is insourced is reviewed annually. "The biggest place we made a change has been in application support," Jojo said, noting that 25 roles related to the call center, SAP and some key electricity-control systems have been brought in-house in the last six months.

Outsourcing contracts drive business value

Today Energy Future Holdings' internal IT team numbers about 300 employees, including 50 people "we found hiding in the business," Jojo said. Her five outsourcing partners employ another 1,200 to 1,500 people.

Rebuilding IT has had its bumps, Jojo said, including a horrific data center crash a couple of years ago that was caused in part by the facility being closed to view from 2004 to 2008, and specifically by an electrical component that had not been tested in 12 years. The company now runs a private cloud, which shared services provisioned to the business units. During most of 2010, "we were just trying to outrun a lot of risk."

The good news is that in the process of improving IT services through well-governed outsourcing contracts and a beefed up internal IT team, IT is "moving up the chain in the organization" and now has "that proverbial seat at the table to drive some really important changes," Jojo said. This includes weighing in on where to build new nuclear power plants, how to bring more wind generation to the company's portfolio and using data analytics to improve profitability. "We weren't doing any of that in 2008," she said.