White Water Outsourcing: How Outsourcing Helped to Save Williams

Part of the IDC Outsourcing Forum Midwest Report

The Williams Companies is a Fortune 200 energy company that currently distributes 12% of all the natural gas consumed in the United States and is a major employer in Tulsa, Oklahoma. Marcia MacLeod, Vice President of Business Process Outsourcing, and Karen Caldwell, Director for Energy & Utilities at IBM, explained how the company pulled a Houdini in the early 2000s, using outsourcing to survive a near-death experience in which its stock dropped from $48 to less than one dollar. This case reflected outsourcing’s potential in dramatic turnaround situations while confronting some outmoded stereotypes about its impact on local employment.

Williams was founded in 1908 and has a rich history of entrepreneurship. Over the years the company had maintained a focus on energy while diversifying into construction and agriculture. In the 1990s, the company caught the Internet wave by pioneering the practice of stringing fiber along pipelines and its stock soared. In 2002, however, the company was caught in a crossfire: as were most energy companies, Williams was caught in the Enron downdraft, and the stock took a beating. Even worse, the telecoms industry meltdown compounded the situation, and the company’s stock bottomed out at $0.78. MacLeod emphasized that very few large companies survive a prolonged, severe loss of market confidence, and her story explained why.

Saving the Company

2002-2003 was a defining year in company history. Management realized that they had to act quickly and decisively, and there wasn’t any room for missteps. In reviewing the company, they realized that their rapid growth during boom times in Internet infrastructure and energy had left them with an inefficient infrastructure. They had extensive duplication of business processes, and they had to get smaller quickly and “in the classiest possible way.” They had 24,000 employees that supported natural gas, construction and even turkey farm operations. They decided against bankruptcy and created the “Framing the Future” initiative to reinvent the company by exiting ancillary businesses, focusing on natural gas and drastically changing their business process infrastructure.

Williams was a major employer in Oklahoma, had a very paternalistic culture and extensive goodwill. Management believed that they couldn’t restructure the company by themselves, given their experience base, short time window and lack of margin for error. Their analysis clearly pointed to using BPO (business process outsourcing) to realign the company with the market. They issued four RFIs to Accenture, ACS, HP and IBM, got three returned and selected IBM for a bundled BPO deal that encompassed F&A (finance & accounting), HR (human resources) and IT. The 7.5 year, $320 million deal included extensive business transformation.

Challenges and Critical Success Factors

Obviously, this was a bet-the-company proposition. Williams selected IBM due to its ability to bundle and to orchestrate business transformation in all areas. IBM also committed to hiring as many Williams employees as possible, they had a global delivery model and they possessed solid Six Sigma expertise. A cornerstone of succeeding with a massive collaboration like this is to clearly define roles and collaborative relationships at every level. In the bundled deal, IBM was chiefly responsible for systems (systems, technology, transactions, infrastructure) and administration (operations, administration, execution, clerical) while Williams handled governance (strategy, governance, policy, decisions). There was shared accountability for the consultative (expertise, development, reengineering, innovation) roles.

The deal kicked off in June 2004. To mitigate risk, the partners designed contract terms that provided flexibility and oversight with standard industry contract terms. They committed to ongoing benchmarking, full audit rights, current procedure manuals and approval rights for hardware. SLAs (service level agreements) set financial penalties and critical/key service levels.

There were (and are still) numerous hurdles to overcome. Williams’ culture was imbued with a strong engineering/control element, and people were accustomed to creating their own processes with little centralized oversight. The corporate culture and structure had been decentralized for years, which had enabled significant experimentation and innovation, but “Framing the Future” called for extensive process standardization. In addition, although it wasn’t an extensive part of the deal, Williams pursued offshoring in Costa Rica, Canada and India, and getting unions’ buy-in was a process that they had to work through.

Everyone talks about knowledge transfer, but it can be illusive. Williams’ culture had been people-oriented, not process-oriented, so going to people for knowledge was the norm. The vision for “Framing the Future” included a process orientation and extensive knowledge sharing. IBM helped with documenting processes, but it remains a challenge to this day and always will be. In addition, due to budgetary constraints, there could be no significant spending on IT during the first two years, so the partners had to be creative and resourceful.

As of September 2006, Williams and IBM are two years into the 7.5 year term, and Williams’ stock is at $25, the company has 3,700 employees and it is positioned for growth. Most of the transformation projects have been completed, and they are very focused on adopting common processes. They have made some adjustments to scope that had no impact on total contract value, and the business upturn has driven the renegotiation of several elements. IBM and its partners have hired thousands of employees, so Williams’ employee downsizing has not been the disaster to the local economy that would have ensued had the company gone out of business. Now the challenge is to maintain the momentum for change now that the company isn’t in as much danger. They risk losing motivation and not completing the process evolution.

Governance Best Practices

Governance is critical in all partnerships but even more so in a deal with this size and scope because traditional hierarchy and management tools are inadequate in complex cross-organization boundary situations. MacLeod and Caldwell attributed a significant part of their success thus far to the governance strategy they created, and they shared some best practices. MacLeod made the excellent point that different types of outsourcing relationships require distinctive approaches to governance. Four relationship types were:

Outsourcing Relationship Types
Transactional	Enhanced	Collaborative	Partnership
Commodity services Price-oriented Interchangeable products/services			Highly customized Value integrated solution
Examples
Payroll; billing; employee data management; contact center; data center; help desk	Reduced SG&A (sales, general & admin); improved processes; Sarbanes-Oxley compliance	Oracle implementation; HR self-service; core application se	Energy-based solutions for competitive advantage

Williams decided that they needed a relationship in the collaborative area because their goal was organizational transformation of (mostly) administrative processes. MacLeod stressed the importance of selecting a relationship type before issuing RFIs. In addition, stakeholders must agree on the overall intent of the deal because it drives the relationship type, guiding principles and process/structure/staffing/funding and continuous improvement. A key concept to grasp is that governance can easily grow in scope, and it’s critical to limit its scope and to define how the governance team interfaces between the outsourcing partner and client executive management.

In general, governance team’s role is that of an enforcer of the client executive management’s strategy and policy. They provide consistent direction for the provider, which is very important in large deals like this because miscommunication can lead to uncoordinated actions that can be expensive to correct. That means they focus on performance management, financial management, contract management and change management. Related to these things, they are the primary interface with the provider. However, they do not set policy and strategy. Nor do they get involved with internal operational issues.

Lessons Learned

• BPO is far more complex than the client imagines; MacLeod highly recommended using an outsourcing advisory firm and a law firm with extensive experience.
• Agree on scope as quickly as possible but keep it flexible. Divide processes so that the competencies of the client and the provider are leveraged. All else equal, it’s most difficult when processes are shared and intermingled; complete hand-offs have advantages.
• The client should give the provider direction as to what should be done but not how to do it. The provider should be an expert in the how. Do not structure governance and retained teams as “safety nets.” Mingling internal and provider resources leads to complexity and invites problems. If you don’t have confidence in the provider, deal with that head on.
• Transfer entire teams and supervisors to the provider, but make sure to move them off-site as soon as feasible. It’s important that employees who stay and those who transfer understand their changed roles. If everyone is kept on-site, tensions can increase.
• Make staff changes quickly, and don’t skimp on change management. The people part of the change will always be the most difficult part of the transformation.
• In Williams situation, time was precious and the margin for error very thin. From an internal perspective, they kept decision making efficient and quick among project teams, the governance team and client executive management by decentralizing decision making as much as possible.
• The sooner that everyone understands that it’s in everyone’s best interest to bring up problems quickly, the better off you’ll be. Each partner needs to hold itself and its partner accountable for intent as well as action. Act promptly if milestones or deliverable quality is not up to par, especially during transition.
• Plan to have some longevity on each team because they can share the rationale of past decisions and provide perspective—and help subsequent team members to avoid making mistakes.
• The client has to realize that they are ultimately responsible for getting results.

Analysis and Conclusions

• This case clearly shows that outsourcing has potential in turnaround situations, but the lessons learned here are widely applicable.
• I agree with MacLeod that Williams could not have turned around the company by itself in this situation given the conditions. IBM, like all top providers, has vast experience and process discipline that helped Williams significantly. An undervalued part of outsourcing is the knowledge gained by transfer of a function or process to the provider: to succeed, the company has to learn what it does and why, and the provider’s experience and methodologies force both parties to “know what they know.”
• Williams didn’t have to struggle to create a burning platform and case for change, which enabled the partners to galvanize employees and bring about transformation quickly. This is an advantage in all “white water” situations.
• Regarding governance, outsourcing forces buyer and provider to make explicit what the organization is to be and how it will work. This situation confronted Williams to recognize what they had and to define what they needed. Cross-boundary situations and virtual teams demand to have explicitly defined roles and rules of engagement, but they can’t be too rigid. Collaboration is a fundamentally different kind of relationship, as both parties are independent of each other. Most companies are used to relying on personnel management tools like reviews, but these can’t be used with external people; also, the hierarchies to which most companies are accustomed are ineffective with external partners.