The Foundations of Innovation
5 May 2011 Haider Rashid
The pressing desire to couple cost reduction with cutting-edge innovation is not easy to satisfy. This challenge is only exacerbated when the company in question is a global player with a reputation for developing creative, high-tech solutions for its customers. Haider Rashid, of ABB, tells Jim Banks that a willingness to embrace IT outsourcing in all its forms is often at the heart of the solution to this problem.
Few organisations would deny that IT innovation is at the core of their ability to remain competitive, but for some organisations it takes on even greater significance. A global business that has a market proposition based on innovation, for instance, will need to invest a great deal of its resources in ensuring that its IT infrastructure and development programmes are as efficient as possible and at the cutting edge.
For some companies, IT is embedded in its culture at every level. Its impact is understood as well in the boardroom as it is in the IT department, and all business units consider IT as an essential component of their ability to contribute to the performance of the larger organisation. For these companies it is hard to get by without some degree of IT outsourcing. In many cases, outsourcing is a fundamental part of the IT strategy, as is the case with international company ABB, even though technology is so crucial to every part of its business.
"If our IT breaks down then ABB would stop functioning," says Haider Rashid, global chief information officer at ABB. "It is crucial for compliance sign-off, and IT is also involved in bringing things to market that will improve efficiency for our customers. IT is vital to our business advantage. For me, IT only works well if there is engagement throughout the organisation."
"We are lucky that our senior management engages with IT, and by that I mean not just the CEO but all of the top ten division heads at the highest decision-making level. I present the IT strategy and all major IT projects every month, although we don't call them IT projects. To us, they are business projects that use IT. The head of each division must approve the projects that affect that division."
Innovation and sustainability
ABB is a global leader in power and automation technologies that help improve the performance of utility and industrial customers while also lowering their environmental impact. Technology development is key to its business proposition, but the company's goal is to manage innovation in careful balance with sustainability and social objectives.
The importance of IT to ABB is evident in the fact that it represents a large proportion of the company's costs. IT spend, for example, is greater than the other cost centres of HR and corporate research put together. Part of Rashid's job is to ensure that IT is engrained in the company's DNA, not just at the level of strategic decision-making, but also right through the operational parts of the organisation.
"The demand-side of IT is embedded in every business unit. My department has to engage with the business at every level. It is part of ABB's culture across our five global business lines, 30 business divisions and our activities in over 100 countries," he remarks
ABB spends over $1bn a year on research and development, which ensures that it remains a progressive and innovative company. This investment is vital fuel for its growth and expansion into new markets; 30% of its business is now in emerging markets, and it has been pushing forward in sectors like e-mobility, wind and solar energy. It not only measures the carbon footprint of its own IT operations, but devises solutions to help customers reduce theirs. Internally, a growing proportion of its IT spend is focused on improving collaboration across the organisation, which is vital when the business is so spread out across the globe.
Cutting out cost and fuelling growth are the main goals of the IT strategy, however, and balancing these two seemingly contradictory drivers is where outsourcing comes into its own. The ability to reduce costs by handing over infrastructure and processes to external service providers is extremely valuable, but so is the potential to improve processes and foster innovation.
"We are simultaneously looking at rapid growth, but also cost control. That is what we do in IT. Our IT Operational Excellence programme looks to take 5-10% out of the IT budget every year, and that money is then reinvested in innovation. The aim is to provide value for money," says Rashid.
Fully engaged with outsourcing
Value for money means more than just cutting costs out of the business. Considering how important IT is to ABB, handing over elements of such a vital part of the business to external service providers cannot be done just to benefit from lower labour costs and economies of scale. Price is not the ultimate determinant, although cost reduction is a key goal.
What large, IT-heavy organisations like ABB need is quality of service and close relationships in order to collaborate with service providers around essential business goals. Quality and price together create value. "Our annual IT spend is $800m, and over 70% of that is spent with third party providers," explains Rashid. "A few years ago, when ABB had its near-death experience, we did a megadeal to outsource our IT infrastructure, which saw 1,700 people move out of our organisation. Through that process we saved $70-100m a year."
Since that deal, outsourcing has remained a vital component of ABB's IT strategy, but the drivers behind it have changed significantly. The aim is no longer to simply cut cost out of the business.
"Initially, we outsourced for cost reasons, but now it helps us to find the right way of doing things. IT is not our core business, so our outsourcing activities are likely to increase further in the future, but it will not be through the same kind of megadeal. We will hand out pieces to best-in-class service providers," says Rashid.
"We will look at things like cloud computing, where we will have to decide what will be in the public cloud, what will be in the private cloud and what will stay in-house. The majority of our IT infrastructure is outsourced and we also do selective application outsourcing."
As the drivers for IT outsourcing have changed, so have the considerations that come into play when the choice of service provider is made. ABB has, therefore, developed a more detailed and sophisticated approach to the choice of vendor, which reflects the twin goals of cost reduction and rapid growth. Like many others, the company has become more selective and understands that different services providers are suited to different kinds of outsourcing deal. There is no one-size-fits-all solution, especially when the needs of the client are varied and complex.
"If there is a specific application we need developed then we will go through the standard RFP and beauty parade process, but if we are looking for a long-term application outsourcing arrangement then price is less important. In that case, you are looking for a partner you feel you can work with collaboratively over many years," comments Rashid.
"Service providers are also becoming more selective. Once, every player in the market would chase our business, but now they invest in those relationships that they really think they can develop over the long term. There is an industry ecosystem forming. You know who the usual suspects are."
As attitudes towards IT outsourcing continue to mature, on both the client and vendor sides, there is likely to be a continuation in the trend of handing over more sensitive and sophisticated elements of IT to external service providers. This is certainly likely to happen in the case of ABB just as it will for many more international organisations seeking to fuel rapid growth.
"We have a strong track record of innovation in IT, including many projects that target operational excellence, top line growth and cost savings. Outsourcing will remain a major component in our IT strategy, as it has already brought us tremendous competitive advantage," notes Rashid.
The fact that a company like ABB, which has such a strong reliance on IT in its business model, calls so much on third party service providers should serve as a lesson to many other companies. As long as the goals are clear and there is a thorough and informed approach to the choice of vendor, IT outsourcing can make the difference between stagnation and growth.