Since returning to Canada in April 2001, Ed Kilroy, president of IBM Canada Ltd., has joined an old-timers hockey league in Newmarket, Ont. Last season his team finished second, but Kilroy, who plays right wing, says he doesn’t know how many goals he scored. “”We don’t keep track of that,”” says Kilroy,
43, with self-deprecating humour. “”Two guys on my line are over 50.””
Kilroy may not keep track of how many goals he scores on the ice. But off the ice this North Bay, Ont. native, who began his career at IBM as a sales trainee in 1982, keeps a careful tally of how many major outsourcing deals he has clinched since taking over the helm at Markham, Ont.-based IBM Canada. To date four multi-year contracts worth a combined value of $3.6 billion have been signed with Air Canada, National Bank of Canada, Manulife Financial and Sun Life Financial. There is also the $900-million dollar deal with Scotiabank that was signed just days before Kilroy officially started his new job.
Either way you look at it, IBM Canada is clearly on a roll, with five major outsourcing deals with a combined value of $4.5 billion to its credit in the last 18 months. It is an enviable record that confirms the company’s position as the No. 1 provider of IT outsourcing services in this country. To be fair, two of the deals — Air Canada and National Bank — are renewals but they represent an enormous vote of confidence in IBM Canada’s ability to run the IT operations of major corporations effectively.
“”The results speak for themselves,”” says Jason Bremner, senior analyst of outsourcing services with Toronto-based IDC Canada. “”When a major corporation outsources its IT infrastructure it is outsourcing a huge amount of responsibility. It has to be sure that the company it is giving its business to has the breadth and scale to handle the job.””
IBM Canada may be riding the crest of the outsourcing wave, but it is not alone in nailing down important outsourcing contracts. Its two main competitors — CGI Group Inc. and EDS Canada — have also signed important outsourcing deals in the last year. IDC Canada estimates IT outsourcing will generate revenue of $6.2 billion in 2002, a 13 per cent increase over $5.5 billion in 2001. And between 2001 and 2006, IT outsourcing in this country will grow at an annual compounded rate of 12 per cent. That compares to a 9.3 per cent compounded rate of growth for the $17.6-billion IT services industry as a whole, which includes consulting, training and support in addition to outsourcing.
“”Outsourcing is back,”” says Henry Dortmans, president of Ajax, Ont.-based consultancy Angus Dortmans Associates. “”In the mid-1990s it sort of dropped out of sight, but in the last two years it has been coming back stronger than ever.””
Dortmans says a key reason for the resurgence in the outsourcing of IT operations is the fact that layoffs brought about by the dot-com bust and the global meltdown in equity markets have forced companies to realize the internal service levels they were once getting are no longer available. “”The thinking is: If we can’t do it ourselves, we may as well outsource it,”” says Dortmans.
Ironically, IBM Canada is able to cash in on this important business trend because in the early 1990s U.S.-based parent IBM Corp. was being tossed around on a sea of perilous market forces that threatened to break it up. The situation finally came to head when IBM reported a loss of US$8.1 billion in 1993. It was clear the old strategy of relying on hardware sales to drive earnings was no longer working, and if IBM was going to survive, it would have to reinvent itself.
Fortunately when things were at their worst, the strategic brains at IBM had something of an epiphany. They realized that as important as technology was, integrating that technology into the lifeblood of a business would become even more important in the future. As a result, IBM Global Services — today the world’s largest consultancy, systems integrator and provider of outsourcing services — was born.
To understand just how important this transformation has been for IBM, consider that in 1991 the company generated less than US$6 billion from non-maintenance services.
Ten years later, IBM Global Services had become the biggest division in the company, ahead of hardware, accounting for more than 40 per cent of total revenue, or US$86 billion.
At IBM Canada, for example, 12,000 of the company’s 18,500 employees work for IBM Global Services and generate more than 50 per cent of total revenue. “”As companies focus on their core capabilities, many decide their infrastructure is not something they want to own,”” says Kilroy, whose company is presently managing about 50 outsourcing contracts.
He estimates companies can reduce their annual technology spending by between eight and 12 per cent by outsourcing. But since its main competitors can make a similar claim, why is IBM Canada the market leader? “”Our biggest strength is the ability to understand customer requirements, and translate them into solutions,”” says Kilroy.
IBM Canada demonstrates that ability by doing two important things right. Firstly, because outsourcing usually involves the transfer of IT staff, IBM Canada makes sure the employees it acquires through outsourcing contracts are happy in their new jobs. And secondly, IBM Canada can offer clients new technology that goes beyond the day-to-day operation of their systems while providing access to additional expertise and sharing the risk.
“”In the last three or four years companies are just as interested in our internal HR policies as they are in the savings and efficiencies they can expect from outsourcing,”” says Kilroy. He adds that thanks to his company’s commitment to training and certification, virtually everyone offered a new position at IBM Canada accepts it, and hardly anyone leaves.
“”You want people comfortable with their new employer if for no other reason than if they are not happy, systems are not happy,”” says John Mather, executive vice-president and CIO of Toronto-based Manulife Financial.
Under the 10-year deal Mather signed with IBM Canada in April 2002 for an estimated $850 million, 400 Manulife employees are being transferred to IBM Global Services.
“”The deal has exceeded our original expectations,”” says Mather. “”Ed Kilroy brought a sense of urgency and energy to the IBM process. That’s very refreshing to see in a senior position, and it helped push the deal over the line.””
On the innovation front, IBM Canada is taking advantage of its global network of technology labs to introduce its clients to new ways of doing business. A case in point is the wireless check-in device piloted earlier this year by Air Canada, which signed a seven-year outsourcing deal with IBM Global Services worth an estimated $1.4 billion in July 2001.
The device enables roaming agents with wearable computers connected to the main reservation system to speed the check-in process by printing boarding passes for passengers while they are standing in line.
Kilroy says IBM Canada’s dedication to people and new thinking will keep the company ahead of its competition, and well clear of the abyss it faced in the early 1990s. “”One of the reasons IBM got into trouble was because it was not listening to its customers,”” says Kilroy. “”Today if one of my outsourcing clients is experiencing a downturn, I’m willing to sit down with him to renegotiate the terms of our contract because this is not just about business. It’s about our relationship.””
A decade ago that kind of talk was heresy at IBM. Today it’s the guiding light to the company’s future.
