The Simple Life
1 September 2006 Ingmar Jonsson
Some organisations find that true value comes from keeping outsourcing arrangements clear, simple and competitive. Jim Banks hears from TeliaSonera CIO Ingmar Jonsson how his approach keeps vendors on their toes.
Sometimes it is too easy to follow trends. The herd may not lead you in the right direction, and for a crucial strategy such as outsourcing, this could end in disaster. So believes leading Nordic Baltic telecommunications company TeliaSonera, which has targeted expansion on its strong regional presence, including in Russia, Eurasia and Turkey.
To take on this challenge, the company embarked on a project of corporate transformation to deliver a simpler, more focused business model by 2010.
Outsourcing non-core activities has been an important part of the transformation so far.
However, TeliaSonera has taken a considered approach, which created a strategy very different from many other large business entities.
LONG-TERM NOT THE ONLY WAY
The firm has eschewed the trend towards transformational business process outsourcing (BPO) that is gripping other large organisations, and does not subscribe to the belief that close partnerships with service providers over long-term contracts are the only way to get a competitive edge from outsourced services.
By contrast, TeliaSonera's has used a simpler, more flexible model, based on shorter contracts with its external service providers.
"Our major outsourcing deals are on the IT side, covering maintenance, systems development and the operation of the mainframe," observes Ingmar Jonsson, CIO of corporate networks and technology for TeliaSonera. "Controlling those was not efficient with our volumes and we were able to move to a server environment. We have also outsourced network implementation and service."
Since the joining of Swedish Telia with Finnish Sonera in 2003, the merged company has significantly reduced its internal headcount, and improved many of the processes that support its business but were not considered core competencies.
"On the network side, for instance, there was no market in Sweden that was big enough," explains Jonsson, "so we built up capability over three years and then grouped these resources into companies we could outsource and that could be competitive in the market, so we got the maximum possible efficiency."
THE BENEFITS OF FLEXIBILITY
Shorter contracts offer some advantages over more involved relationships with service providers – at least for IT and transactional process outsourcing. Not least of these is the ability it gives clients to change service provider if they perceive that goals have not been met or better performance might be achieved somewhere else.
"Our basic belief is that you don't need long outsourcing contracts," says Jonsson. "Three years is the maximum for us. After all, the world changes so fast. The simple mechanism of competition works very well."
Some providers of outsourced services often push for seven- or even ten-year contracts, even for the simpler, commoditised processes. Such long deals may provide some benefits – tying in with a dedicated and capable partner can perhaps lead to additional efficiencies being realised – but they also have drawbacks.
"If you lock in with someone, they can buy your business with upfront promises, after which things change," says Jonsson. "You just get a growing number of change requests to the agreement, so it must be clear what is dependent on the client's internal decisions."
If service providers do not have the guarantee of future business and the security of a long-term contract, it may put more pressure on them to perform to their maximum. "Short-term contracts keep service providers focused," notes Jonsson. "They must deliver value. Typically, US providers feel that seven years or more is the only way. We say no, but they won't listen."
FREEDOM TO ADAPT
It was the need for flexibility that drove TeliaSonera to adopt its own approach. One of the company's goals is simplicity, which is important to many businesses, especially when expanding their global reach.
"We are in control," says Jonsson. "You are lucky if you strike a deal that has the right market price five years from now. You need value for the client and for the vendor, but this needs to be balanced."
"You can use benchmarking, but it is difficult and it complicates life. It adds cost and can be damaging to relationships. We go for simple, clean-cut things. Of course service providers want long-term deals and more control, which gives them an easy life, but we want them to work hard for us."
Earlier this year, TeliaSonera cut its number of outsourcing partners almost in half, leaving 14 providers still engaged. It no longer works with IBM or HP, for instance, but has added IT services company Dati Exigen, based in Latvia.
THE VOICE OF EXPERIENCE
The success of TeliaSonera's initial deals has encouraged it to go further. For instance, its outsourced entity for network support was formerly an internal company, the buyer of which therefore inherited contracts, to which were added purchase volume commitments to give the venture some stability.
Nevertheless, the agreement was clear that future volumes would not be committed. The handover was sensibly and sensitively managed over time, but the short-term contract ensured a competitive environment. It is still up to the service provider to add value in order to capture further business. "For us, it is important to find someone who can care for our employees," remarks Jonsson.
"We have strict conditions on this, and we need a credible partner who takes responsibility for those people and who can also develop services beyond what we can do ourselves. You must know where you are to outsource.
Don't outsource a problem. Fix it first, then get someone else to get the efficiencies that you can't. Use competition, which gives the provider the chance to do well and grow with you, but gives you the flexibility to change provider."
Though it may be bucking a trend, TeliaSonera's strategy contains a lesson in how to keep the balance of power in an outsourcing agreement evenly balanced, providing efficiency for the client and keeping service providers focused on adding value.