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When Entergy Services, Inc. outsourced its IT services to SAIC in 1999, the intent was to gain agility in responding to changing market conditions in the deregulating utility industry. By outsourcing, the company would have the ability to right-size its IT resources up or down as its Texas, Arkansas, and Louisiana markets (over half of its customer base at the time) were opened to new competitors. With its decision to outsource, the utility company also gained visibility into its business units' IT costs, which facilitates demand management and accountability as well as allocation of costs consistent with regulatory requirements.

SAIC was selected as the outsourcing provider with the capability to successfully transition Entergy to a competitive marketplace and leverage technology to improve customer service. Ray Johnson, Entergy's CIO, says they needed an outsourcing provider that "would be flexible and responsive with respect to contractual terms and incentives, business alignment, and the willingness and ability to address our emerging business needs." Contract flexibility was the real factor in selecting SAIC over the other providers bidding on the Request for Proposal. He adds: "We didn't want outsourcing to put us in a contractual agreement that later on might not match the business environment in our industry."

They successfully moved 350 former Entergy employees and 100 contractors to SAIC's payroll, and the outsourcer also agreed to provide direction to 160 Entergy-retained employees whose services and costs are part of SAIC's contractual incentives. Their transition of employees and responsibility for IT services took place at Y2k midnight; but, working together, the companies encountered no challenges.

Interestingly, some of Entergy's outsourcing planning assumptions around the basic shape of the company going forward did not pan out, as the competitive marketplace moved at a much slower pace in some jurisdictions than anticipated. So the strategy of outsourcing to mitigate risks in having to staff up or down as business conditions changed proved its value in agility. Nevertheless, although they didn't know it at the outset, the need for a flexible relationship would take another spin two years into the relationship.

Changing the Tide

After accomplishing their first-year goals and ensuring service levels were being met, Entergy and SAIC began discussing additional initiatives. The utility company wanted to do something "fundamentally different" with its IT - something beyond reducing costs. Realizing those goals had not been a part of the contract, Entergy recognized that the relationship's potential for producing more value would ebb.

In 2001, jointly funding an objective opinion of their relationship's future, they retained Gartner and The Concourse Group for an 18-month relationship health check. "That assessment was eye-opening," recalls Johnson. "The bad news was that our contract was not well structured for the relationship to deliver the new transformational objectives we had. But the good news is that the contract just needed tweaking that didn't require bringing in lawyers to haggle over terms."

And as a result of those discussions, they implemented changes to enhance their relationship. They also spent time defining transformational objectives and ensuring solid underlying service level agreements (SLAs) are in place to support future new business goals. "This is an ongoing process," the CIO reports. "We constantly re-assess the SLAs to make sure they're still aligned with our evolving business needs. In some cases, we've ratcheted those SLAs up a bit."

The revamped contract also now gives the provider an opportunity to earn a "Quality Performance Incentive" - with the caveat that the opportunity is lost if SLAs are not met.

Although SAIC had managed to take some costs out of the Entergy operations, the utility firm wanted to look for more opportunity there. At the end of 2002, Entergy challenged SAIC to come forward with some provisions that might help in getting ahead of the curve on some future cost challenges Entergy anticipated. "We told them that, if they would show us how they might be able to do that, we would consider an extension before the contract ran out," states Johnson. The win-win maneuver worked; after several months of discussion and kicking some ideas around, Entergy extended the operational part of the contract forward by two years.

Laudable Outcomes

Together, Entergy and SAIC have accomplished several goals beyond agility for staffing and resources during periods of variable demand. IT staff churn has been reduced to below 10 percent, and cumulative IT cost savings amount to approximately 20 percent over the life of the deal. In addition, Entergy now has access to skills it previously lacked for enterprise applications integration, PeopleSoft, eBusiness enablement and architecture, software engineering process improvement, integrated services management, security and penetration testing, technology consulting, and nuclear plant support.

Most notable is the steady rise in customer satisfaction levels during the past four years of this outsourcing relationship, as reflected in surveys conducted by Gartner. Out of 181 clients in Gartner's database, Entergy now ranks number one in terms of end-user customer satisfaction.

Reflecting on their refreshed relationship, Johnson says: "My general sense from what I read and hear about a lot of outsourcing deals is that two or three years into them, they are characterized by: 'This is not working, and we need to completely restructure or get out of the deal.' There are a lot of fundamental failures in outsourcing deals. But in our relationship with SAIC, the focus is always on: 'How can we make this better?'"

View on Relationship Building:

• "We have a relationship that isn't getting managed by the formal contract provisions. We have mutually agreed to operate outside the letter of the contract numerous times. We sit at the table and talk together and ask, 'What do we need to do to get this done, even though the contract might say something else?' We resolve issues together."
• "Although we routinely face challenges and sometimes differ on best approaches and outcomes, we are able to consistently partner together, based on shared commitments and principles."
• "The relationship works for two key reasons: (1) We have both committed ourselves to a set of contractual governance/relationship management practices and principles for which we are both incentivized; (2) the individuals who lead the relationship on both sides are personally committed to openness, honesty and continuous improvement."

Publish Date: June 2004

Copyright © 2004 - Everest Partners, L.P.

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