In 2003, when fast-moving consumer goods giant Proctor & Gamble signed an outsourcing deal with HP, it was one of the biggest deals of its kind – in more ways than one.
The contract covered P&G’s IT infrastructure including datacentre operations, desktop and end-user support, network management and some applications development and maintenance support for P&G’s global operations in 160 countries and was worth $3bn.
The contract was also some 1,200 pages long and, when brought to P&G’s CIO Filippo Passerini and HP’s then CEO Carly Fiorina to be signed, it was delivered on a cart.
“We had to stand up to sign it because it was taller than us seated,” Passerini told silicon.com.
Although the size of the document – some two and a half feet tall – means it could theoretically ensure that every requirement, every deliverable and every service level agreement is set in stone, conversely a megadeal of such magnitude can’t help but be a leap of faith for both buyer and supplier. After all, in a contract so large, making sure the vendor or customer is living up to every single element of their side of the bargain is all but impossible.
“If you have to go back to the contract… you never find what you need there, no matter how detailed it is, and when you get into contractual discussions, the marriage is already compromised,” Passerini said.
“It forces an alignment before you get into the deal and at that point there is no confusion. There is a lot of mutual understanding and things will go better,” he continued.
The way to ensure such mutual understanding lies in the cultural fit, according to Passerini.
“When I say cultural fit, I don’t mean we get along together well and we like each other – that is important – but on top of that there is the alignment, there is the vision. Together there is the win-win intent and there is a strong process in support of that,” he said.
“HP, when we did the deal with them , were a distant fourth and with our deal they got instantaneous credibility in the market – they acquired capabilities, computer centres – so they became an important player immediately and that paid dividends. They were important to us and we were – and we are – important to them,” Passerini added.
P&G is one of the…
…companies most associated with outsourcing megadeals – its HP contract remains one of the largest ever signed. But for some in the outsourcing industry, such megadeals are becoming things of the past – indicative of an earlier style of outsourcing that is being replaced by a more modular approach. By breaking down larger contracts into smaller deals, enterprises can open up the possibility of using smaller suppliers, and altering systems when business change demands it.
HP is not the only substantial megadeal that P&G has signed either – it also has Jones Lang LaSalle looking after its facilities management, and IBM for its human resources BPO. Both agreements were originally struck in 2003 and were worth several hundred million dollars.
In both these deals too, Passerini contends that their size and scope continues to pay off for P&G – with such large contracts, both buyer and supplier know their future is tied together for better or worse.
“What makes the [P&G] model strategically is the interdependence between us and these companies… the interdependence is different by supplier but is the common denominator and common theme across all the outsourcing deals,” Passerini said.
“The way I put it is we need to grow the pie together. It’s not about squeezing one more dollar for you or for us, who negotiates better, we are smarter or you are smarter, we win, you lose – it’s about win-win… The model we’ve created, which is effective, it’s a very rigorous model. When we decide one of the partners could be a strategic ally, we invite in the CEO, we spend time with CEO, we have quarterly meetings, we meet with the CEO a couple of times a year, we have joint business plans, we have scorecards, we review everything, we track everything,” he added.
According to the CIO, the megadeal also brings flexibility to P&G.
“The way people think about outsourcing normally is cost – cost reduction – and it is pretty obvious… normally that leads to a win-lose in some areas, but this is [the] simplest way to think about it and I would consider that step one.
“Step two which some people get to is improving service levels – people think ‘well, you know outsourcing better, they do it for a living, it is not our core business to run operations, to run some of the work processes – an outsourcer might be better at doing that’.
“The third level which is strategic – the first two are more tactical – the third level is one of flexibility and innovation so this [means] companies can bring in a lot of innovative ideas to the extent that they become strategic partners and importantly can give a lot of flexibility.”
Flexibility that came in useful when…
…P&G bought Gillette in 2005. With technology synergies worth $1.2bn between the two companies, the race was on to get the pair integrated as soon as possible – every extra day the project took would equate to $4m lost.
The integration was completed in 15 months: “Normally acquisitions of this nature would take three, four, five years and this was possible because of [the] model, that was possible because of our strategic partners,” who were able to add significant resources to the project on the fly, said Passerini.
In addition to speeding the Gillette integration, the IT function has also been responsible for cutting $800m from P&G’s running costs in recent years – reducing spend by a third – which Passerini puts down to a combination of outsourcing, operating more efficiently and opening shared service centres in lower cost areas.
“It’s much more effective for our business than ever before but admittedly more challenging to manage because it’s easier to manage when you have a captive organisation, when you manage by performance reviews, salary increases for merit. Frankly it’s an easier ride,” he said.
The company has recognised that managing a highly outsourced environment brings its own challenges and trains staff in how to deal with what the CIO calls “this networked world”.
But where does all this leave the CIO – just another manager among many?
“I believe personally [the] CIO’s role has never been as strategic – as influential, in a way – as it is now or how it could be in the next three, four, five years because an IT professional is positioned outstandingly to make an impact on the business,” he said.
“There’s a lot of hype around running a business because it’s become pretty fashionable to say IT is running as a business, and normally people are simply talking service levels and all the rest. Here we try to run as a business in offering our services to other operating business units at a price, at a cost as P&G offers products to our consumers.
“We try as much as possible not to force, not mandate anything: we want to be so good in the quality of what we do in the capabilities we build in the price that the business units will want to use our services and will want to buy our services for the price because they see so much value.”