Outsourcing - Feathering Each Other's Nests

Most Visionary
2001 Editor's Choice Award
EDS Australia and Commonwealth Bank

Birds of a feather flock together aptly describes the beginnings of the outsourcing relationship between Commonwealth Bank of Australia and its supplier-partner, EDS Australia. Both organizations are huge, both are global, both are renowned for the top-notch services they provide for their customers, and both fly on the wings of innovation when it comes to business ventures.

Commonwealth is Australia's largest domestic financial services organization (largest domestic bank, largest funds manager, largest online stockbroker, and among the largest insurance companies). It has more than 10 million customers, more than 110,000 location points, 3000 ATMs, 120,000 point-of-sale terminals, Internet banking, online telephone banking; and its Web site handles more than 10% of the total trades on the Australian stock exchange on any given day.

1,400 Commonwealth employees transferred to EDS when the October 1997 contract was signed. It is believed to be the largest IT outsourcing arrangement in the financial services industry in the world. Commonwealth recognized that the only way it could keep up with the best global players was to have an outsourcing partner that is internationally recognized for its technological expertise. The ten-year, $5 billion (Australian) deal calls for EDS to run all of Commonwealth's IT operations, maintenance and development. Additionally, their contract was expanded in June 2000, as EDS was selected to manage the integration of most of the technology services resulting from Australia's largest ($9 billion) corporate merger, when Commonwealth merged with Colonial Limited. It's worth another $700 million (U.S.) over the next seven years.

The original outsourcing goals for competitive advantage included reduction of costs by 20% by year three of their agreement and improving service levels by at least 10%. Russell Scrimshaw, Head of Technology, Operations and Property for Commonwealth Bank, says they have already surpassed both of those goals. "Our bank business units' customer satisfaction levels have also continued to rise since outsourcing to EDS," says Scrimshaw, "and we have managed to undertake some major projects that we would otherwise not have involved ourselves in." Every month they measure around 400 different service levels and measure EDS performance against those every day.

Several tactical maneuvers account for their success, not the least of which is the way they structured the deal in the first place.

Nest Egg

Scrimshaw says Commonwealth was looking for a relationship where it would be able to go into business ventures together with the supplier. He explains what they did: "In the outsourcing transaction, we also bought 35% of EDS Australia. At that point, EDS had not done that anywhere in the world. They are also doing that in New Zealand now, and they recently sold 5% to companies outsourcing there." Generally, in such a cross-ownership structure, a buyer's advantage is that it benefits through lower costs and also through the rise in the supplier's stock price. A supplier achieves increased revenue and a rise in its market credibility through dealing with a buyer of this size and prestige.

EDS carries full orders and security responsibilities as if they were part of the bank. Five of Commonwealth's people are members on EDS' board. They share business secrets that they tell no one else, and they look for ways to help influence each other's business. Scrimshaw recalls Christmas two years ago. "Our network was reaching its maximum capability, and we knew the Christmas volumes were going to go through the roof. EDS pulled out all stops to ensure that the right amount of technology and capability was brought to bear so that we could get through that high volume peak period."

"They are very much within the fabric of our business," he says. The supplier saw an opportunity for Commonwealth to extract more value from its bank fees without having to fundamentally change the way business was being done. "It was a large project but is proving very successful. It wasn't an IT idea. It was a business idea."

Nests of Gold

Part of their outsourcing agreement ensures that Commonwealth will have access to a certain amount of consulting resources of A. T. Kearney. "That has enabled us to go to rocks and look for gold nuggets that we didn't know were there," Scrimshaw explains. "We are using Kearney's worldwide skills to look for things we call 'value discovery' in areas where maybe we didn't before see a business opportunity or where we suspected one but needed more work done on it." This strategy has been very successful, and several of the projects have "generated bottom line results into the tens of millions of dollars."

One of those opportunities has resulted in outsourcing banking to the largest supermarket chain in Australia. "We formed a very solid relationship with that chain and EDS really did a fantastic job of building the banking systems and application systems that run in that chain. About 600 of their outlets provide different levels of banking service that back into our core systems," says Scrimshaw. "Because of the way our partnership has developed, we are able to be very frank with each other as to what would be required to go into a particular business."

He adds that "There have been a number of examples where EDS has stepped up to the mark to help us win additional business, and there are a number of cases where we have gone into the batting box to help them win business as well. That's a critical part of making our relationship work well. It's a relationship to get better results."

Lessons from the Outsourcing Primer:

A cross-ownership structure may benefit the relationship's approach to business growth and increasing revenue.

If your competitors are global players, you choice of supplier should be one whose expertise is recognized worldwide.

Culturally, it works best if a very large buyer organization outsources to a very large supplier.

Publish Date: February 2001

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Commonwealth is Australia's largest domestic financial services organization (largest domestic bank, largest funds manager, largest online stockbroker, and among the largest insurance companies). It has more than 10 million customers, more than 110,000 location points, 3000 ATMs, 120,000 point-of-sale terminals, Internet banking, online telephone banking; and its Web site handles more than 10% of the total trades on the Australian stock exchange on any given day. 1,400 Commonwealth employees transferred to EDS when the October 1997 contract was signed. It is believed to be the largest IT outsourcing arrangement in the financial services industry in the world. Commonwealth recognized that the only way it could keep up with the best global players was to have an outsourcing partner that is internationally recognized for its technological expertise. The ten-year, $5 billion (Australian) deal calls for EDS to run all of Commonwealth's IT operations, maintenance and development. Additionally, their contract was expanded in June 2000, as EDS was selected to manage the integration of most of the technology services resulting from Australia's largest ($9 billion) corporate merger, when Commonwealth merged with Colonial Limited. It's worth another $700 million (U.S.) over the next seven years. The original outsourcing goals for competitive advantage included reduction of costs by 20% by year three of their agreement and improving service levels by at least 10%. Russell Scrimshaw, Head of Technology, Operations and Property for Commonwealth Bank, says they have already surpassed both of those goals. "Our bank business units' customer satisfaction levels have also continued to rise since outsourcing to EDS," says Scrimshaw, "and we have managed to undertake some major projects that we would otherwise not have involved ourselves in." Every month they measure around 400 different service levels and measure EDS performance against those every day. Several tactical maneuvers account for their success, not the least of which is the way they structured the deal in the first place. Nest Egg Scrimshaw says Commonwealth was looking for a relationship where it would be able to go into business ventures together with the supplier. He explains what they did: "In the outsourcing transaction, we also bought 35% of EDS Australia. At that point, EDS had not done that anywhere in the world. They are also doing that in New Zealand now, and they recently sold 5% to companies outsourcing there." Generally, in such a cross-ownership structure, a buyer's advantage is that it benefits through lower costs and also through the rise in the supplier's stock price. A supplier achieves increased revenue and a rise in its market credibility through dealing with a buyer of this size and prestige. EDS carries full orders and security responsibilities as if they were part of the bank. Five of Commonwealth's people are members on EDS' board. They share business secrets that they tell no one else, and they look for ways to help influence each other's business. Scrimshaw recalls Christmas two years ago. "Our network was reaching its maximum capability, and we knew the Christmas volumes were going to go through the roof. EDS pulled out all stops to ensure that the right amount of technology and capability was brought to bear so that we could get through that high volume peak period." "They are very much within the fabric of our business," he says. The supplier saw an opportunity for Commonwealth to extract more value from its bank fees without having to fundamentally change the way business was being done. "It was a large project but is proving very successful. It wasn't an IT idea. It was a business idea." Nests of Gold Part of their outsourcing agreement ensures that Commonwealth will have access to a certain amount of consulting resources of A. T. Kearney. "That has enabled us to go to rocks and look for gold nuggets that we didn't know were there," Scrimshaw explains. "We are using Kearney's worldwide skills to look for things we call 'value discovery' in areas where maybe we didn't before see a business opportunity or where we suspected one but needed more work done on it." This strategy has been very successful, and several of the projects have "generated bottom line results into the tens of millions of dollars." One of those opportunities has resulted in outsourcing banking to the largest supermarket chain in Australia. "We formed a very solid relationship with that chain and EDS really did a fantastic job of building the banking systems and application systems that run in that chain. About 600 of their outlets provide different levels of banking service that back into our core systems," says Scrimshaw. "Because of the way our partnership has developed, we are able to be very frank with each other as to what would be required to go into a particular business." He adds that "There have been a number of examples where EDS has stepped up to the mark to help us win additional business, and there are a number of cases where we have gone into the batting box to help them win business as well. That's a critical part of making our relationship work well. It's a relationship to get better results." Lessons from the Outsourcing Primer: A cross-ownership structure may benefit the relationship's approach to business growth and increasing revenue. If your competitors are global players, you choice of supplier should be one whose expertise is recognized worldwide. Culturally, it works best if a very large buyer organization outsources to a very large supplier. Publish Date: February 2001 For more information... Printer friendly... 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Most Visionary 2001 Editor's Choice AwardEDS Australia and Commonwealth Bank

Nest Egg

Nests of Gold

Lessons from the Outsourcing Primer:

Most Visionary
2001 Editor's Choice Award
EDS Australia and Commonwealth Bank