stern stewart roundtable on eva and corporate outsourcing

JOURNAL OF APPLIED CORPORATE FINANCE8888

BANK OF AMERICA JOURNAL OF APPLIED CORPORATE FINANCE

DAVID GLASSMAN: Good morning,and welcome to this discussion ofcorporate outsourcing. I’m DaveGlassman, one of the founding part-ners of Stern Stewart & Co., and I willbe serving as moderator.

One of the major themes of thecorporate restructuring of the 1980s

was a return to focus. During thatperiod, U.S. capital markets, with somehelp from corporate raiders, pulledapart a large number of conglomer-ates—large, diversified companies thathad strayed too far from their corebusinesses to be efficient producers.And, although Drexel Burnham and

most of the ’80s raiders are now gone,much of the work they started wascarried on by others during the 1990susing a variety of different tools andapproaches.

One of the most visible forms ofcorporate restructuring in recent yearshas been the pronounced trend

STERN STEWART ROUNDTABLE ON

EVA ANDCORPORATE OUTSOURCING

MARCH 27, 2000 NEW YORK

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89VOLUME 13 NUMBER 1 SPRING 2000

toward outsourcing—basically, de-cisions to allow outside firms toperform functions that were previ-ously performed by people insidethe firm. About a year ago, IBMannounced an agreement with Dellto provide about $16 billion worth ofthe computer maker’s componentsover a four-year period. And thismorning’s New York Times carried anannouncement of another large IBMoutsourcing transaction—this timewith QWEST Communications.Hardly a month now seems to go bywithout the announcement of somemajor deal involving the outsourcingof IT, logistics, or manufacturing op-erations. And, in the past year, wehave even seen a handful of largedeals in Europe and Japan, wheredecisions to move people and cor-porate activities outside the corpo-ration have been most remarkablefor their absence.

The aim of this discussion will be toexplore questions like the following:Why is outsourcing happening now?What are the primary drivers of thisactivity, the main sources of the ex-pected benefits? Are such benefitsaccurately reflected in conventionalaccounting systems that produce acompany’s earnings per share? Or isthe full range of expected benefitsmore likely to be captured with lessconventional performance measureslike EVA, which reflect a company’sefficiency in managing the balancesheet as well as the income statement?

Along with the expected benefits,what are the most important costsassociated with outsourcing?Outsourcing typically means a re-duction in the number of corporateemployees—if only because manyend up being transferred to theoutsourcing provider—and so manycorporate executives can be countedon to block outsourcing initiatives topreserve the corporate legacy, orjust to protect their own jobs and

turf. But apart from overcoming suchobstacles, are there economic costsassociated with outsourcing that wouldtip the balance in favor of keeping theactivity inside the firm? And based onthis cost-benefit analysis, what kindsof activities should be outsourcedand what kinds should be performedin-house?

Then, after consideration of thebenefits and costs, we will turn toquestions of what I like to call organi-zational architecture: How shouldthe outsourcing deal be structured?Who is responsible for making whatkinds of decisions? What performancemeasures should be used to evaluatethe supplier’s performance in anoutsourcing arrangement? Should itbe just success in reducing costswhile complying with service levelagreements, or do we need to thinkabout more comprehensive mea-sures—again, like EVA—that mightencourage a greater sense of partner-ship between the two parties? Somehave argued that the complexity andvolume of detail in outsourcing con-tracts have the effect of discouragingcooperation by reducing each partner’sflexibility and raising the odds thatpotential conflicts will turn into realones. Could an EVA-type incentivesystem provide a partial alternative tosuch contracts by doing a better job ofaligning incentives between the twoparties? And, if that doesn’t work, whatabout creating a formal partnershipwith actual joint ownership? The re-cent increase in outsourcing joint ven-tures would seem to suggest that anadversarial, contract-driven relation-ship is in fact restricting the potential forjoint value creation.

So, this is a brief overview of whatwe want to cover this morning. Todiscuss these issues, we have threeaccomplished and very active practi-tioners in the outsourcing industry,and I will now briefly introduce eachof them in alphabetical order:

DENNIS McGUIRE is President ofTechnology Partners International, orTPI. Since its founding ten years ago,TPI has been helping companies evalu-ate, negotiate, and manage outsourcingtransactions. Denny tells me that TPIhas been involved in deals with a totalvalue amounting to almost $200 bil-lion, representing as much as 70% ofthe large deals around the world. Al-though most of these deals have in-volved the outsourcing of the corpo-rate IT function, TPI has also recentlymoved into various forms of BusinessProcess Outsourcing (BPO) andoutsourcing for e-business start-ups.PHIL THOMPSON was recently pro-moted to Vice President of BusinessTransformation and Chief InformationOfficer of IBM. Prior to that, he wasGeneral Manager of the DistributionSector of IBM Global Services. Thatgroup provides a broad variety ofinformation services to corporate cli-ents, ranging from top-level businesstransformation IT consulting and net-working to traditional systems integra-tion work. The Distribution Sector atIBM encompasses a broad range ofindustries, including retail, wholesale,apparel, tobacco, food processing, rail,airlines, and hospitality. IBM has morethan 200 clients spread over thesedifferent businesses, and these com-panies account for about $4 billion ofIBM’s annual revenues worldwide.GENE TYNDALL became Senior VicePresident of Ryder Global Logisticsand Transportation Solutions last Oc-tober after a 20-year career as head ofErnst & Young’s global supply chainconsulting practice. During his tenureat E & Y, Gene had a hand in develop-ing “virtual enterprise” business mod-els, including supply chains at Dell andCisco. His new job at Ryder is manag-ing its global customer solutions busi-ness. Ryder is global leader in Logisticsand Transportation, with over half itsrevenues of $4.8 billion in outsourcing,or contract logistics/transportation.


The Link between EVA andOutsourcing

GLASSMAN: So, with that as introduc-tion, let me start things off by brieflydescribing Stern Stewart and our in-terest in outsourcing. Our mission atStern Stewart is to help companiesworldwide to adopt shareholder value-based planning and internal corpo-rate governance systems. By internalgovernance systems, we mean howthe company addresses issues likesetting corporate goals, getting deci-sion-making in the hands of the rightpeople, devising measures of peri-odic operating performance that cor-relate with shareholder value, anddesigning effective incentive com-pensation plans. This may seem likea simple point, but we think that it’scritically important that a company’sreward and incentive systems arewell-aligned throughout the organi-zation with the corporate goals andthe performance evaluation system.

Another important considerationis how to define the individual profitcenters to balance two competingobjectives. One is accountability—you want people to be responsible forand rewarded based on the produc-tivity of the activity they oversee. Butyou also want cooperation amongprofit centers or business units. Apotential problem with profit centersis that, if they are not designed withcare, they will discourage valuablecooperation between business units.People will do what it takes to maketheir business units successful, but inthe process they sometimes do things,often without realizing it, that reducethe value of the overall organization.TYNDALL: It’s interesting you shouldraise that point, because Ryder re-cently reorganized into what we nowcall One Ryder. Prior to this, we hadtwo essentially independent busi-nesses: Ryder Transportation Services,which consisted of all the truck rent-

als and leases, and Ryder IntegratedLogistics, which was doing most ofthe outsourcing. So we’ve now mergedthese two business units into onecompany. One of the main reasonsfor that decision was topmanagement’s sense that, by operat-ing as two separate businesses, thecompany had failed to take advan-tage of potential synergies from anintegrated, global system of productsand services.GLASSMAN: And I would guessthat coordination problems can alsoar ise f rom poorly designedoutsourcing contracts. If there areno incentives for cooperation be-tween supplier and customer—nogain-sharing, if you will—a lot ofpotential value will be lost.

So, our principal focus at SternStewart is on issues of internal gover-nance. And, as you know, the basisfor our corporate governance systemis a measure of periodic operatingperformance called economic valueadded, or EVA. Stated as briefly aspossible, EVA is a company’s operat-ing income minus a charge for thecost of capital. We feel strongly that,in most circumstances, EVA providesthe most sensible basis for evaluatingand rewarding corporate line manag-ers as well as top management. It givespeople incentives not only to operateas efficiently as possible, but to makethe best use of corporate capital. And,in fact, EVA can be used to guide andmotivate managers and employees allthe way down to the shop floor. But, forpurposes of this discussion, the impor-tant thing to keep in mind is that EVAis more than just a financial measure-ment. We like to call it a managementsystem—and, when it works, it be-comes a corporate mindset—that aimsto create accountability and powerfulincentives for increasing efficiency andshareholder value.

Now, what does EVA have to dowith corporate outsourcing? The

outsourcing movement has comeacross our radar screen a number oftimes in the last decade or so. Equifax,the Atlanta-based provider of creditinformation services, was a client ofours in the early 1990s. One of the firstmajor outsourcing transactions in theearly 1990s involved the transfer oftheir IT function to IBM. And it may beno coincidence that, around the sametime, they were also implementingEVA with Stern Stewart. Outsourcingwas viewed by the top managementof Equifax as an important initiativefor increasing the productivity andshareholder value of the organiza-tion—and it was also a way of increas-ing EVA.

We’ve also seen a number of otherEVA companies turn their attention tooutsourcing, whether it be outsourcingof IT or logistics, or contracting out amanufacturing operation. And whenwe have asked our clients why they’vechosen to outsource, they typicallysay, “When we look at the EVA for thiskind of an initiative, it makes a lot ofsense. Outsourcing not only gives usa lower cost structure, but it alsoenables us to take capital off of ourbalance sheet.” So looking atoutsourcing through the lens of EVAreally makes it a compelling valueproposition, much more so than ifmanagement were viewing the com-pany using more traditional account-ing performance measures.

Three Ways that OutsourcingAdds Value

So, this has led us to look moreclosely at outsourcing as an overallvalue enhancement initiative. Andhaving thought about this for the pastyear or so, I’ve come to the conclu-sion that there are three principalsources, or categories, of benefitsfrom corporate outsourcing.

The first one that comes to mind isthat outsourcing allows, as I sug-


gested before, for a sharpening ofcorporate focus. The basic idea isthat, by moving non-strategic func-tions outside the organization,outsourcing encourages a companyto focus on and make the most of itsdistinctive capabilities, its core com-petencies. Perhaps the oldest theo-retical basis for this idea comes froma 1937 paper called “The Nature of theFirm,” which was written by Univer-sity of Chicago professor RonaldCoase. Like so many of his colleaguesat the U of C, Coase ended up winninga Nobel Prize.

The question the paper posedwas: Why do firms exist? Why arecompanies formed in the first place?And his explanation essentially saysthat it is a matter of minimizingwhat he calls “transactions costs”—the costs of coordinating all thepeople and activities and assets thatconstitute the business of a corpo-ration. Coase began with the propo-

sition that everything we see insidethe company could in theory beoutsourced; you could hire consult-ants to perform almost any corporatefunction. And, given all the “virtual”organizations that have sprung up inrecent years, Coase’s idea seems pro-phetic. But, as he goes on to argue,there are just certain kinds of activitiesthat are done more efficiently andcoordinated more effectively insidethe organization.

So, Coase’s theory of the firm sug-gests that, the higher are the costs ofcontracting for, coordinating, andmonitoring a given set of activities onan arm’s-length basis—that is, out-side the company—the larger is thescope of activities that are likely to beperformed inside the company. Thatis, when information and coordina-tion costs are high, we can expect tosee more and more diverse activitiesperformed inside the boundaries of asingle company. And this may have

been one reason for the formation ofso many conglomerates in the late1960s and ’70s.

But, thanks to advances in informa-tion technology, information has be-come much less costly to generateand to transmit—and not only insidethe firm, but across corporate bound-aries as well. And this means thatmany functions that were once per-formed almost exclusively inside com-panies can now be outsourced. Coasedidn’t use the term “outsourcing,” butit’s clear that’s what he was getting at.And thus, viewed at a high level, whatseems to be driving these transactionsare economic pressures forcing com-panies to focus on what they do best,on their distinctive or core capabili-ties. And, having determined whatthose capabilities are, companies thenhave the option of outsourcing func-tions that are no longer consideredcritical or “strategic.” This in turnenables them to devote more of their

We’ve seen a number of EVA companies turn their attention to outsourcing, whetherit be outsourcing of IT or logistics, or contracting out a manufacturing operation.When we have asked our clients why they’ve chosen to outsource, they typically say, “When we look atthe EVA for this kind of an initiative, it makes a lot of sense. Outsourcing not only gives us a lower coststructure, but it also enables us to take capital off of our balance sheet.” So, looking at outsourcing throughthe lens of EVA really makes it a compelling value proposition, much more so than if management wereviewing the company using more traditional accounting measures.

David Glassman


resources to leveraging their capabili-ties into a competitive advantage thatis sustainable in the marketplace.

So, the first major benefit ofoutsourcing is the pursuit of focus.The second important source of ben-efits is specialization by the vendor oroutsourcing provider.THOMPSON: We like the word “col-laborator”—“partner” is even better.TYNDALL: That’s right. Collaborationthrough partnerships creates the mostvalue.GLASSMAN: Okay. So, by partneringwith, say, Ryder on logistics or withIBM on information technology, com-panies are gaining access to the bestpractices in the marketplace. Sincethe provision of such non-strategicservices is the main business for theoutsourcing firms, they have far stron-ger incentives to be efficient and tostay on the cutting edge of technol-ogy. And, so by contracting servicesfrom an outsourcing provider, thecompany gets at least part of the gainsfrom greater efficiency.

Because of the greater specializa-tion by the outsourcing partner, com-panies that outsource are actually likelyto get better service from outside pro-viders than from their own employ-ees. And in fact many of these out-sider service providers are their formeremployees. The difference is that thecompany will now be viewed by themas a customer rather than just anotherinternal user of corporate services. Sospecialization by the provider, andthe change in incentives and account-ability that tend to come with special-ization, is a second important compo-nent of the value proposition.

A third important factor—and thisone has gotten less attention in theoutsourcing literature than the firsttwo—is the flexibility that a corporatepurchaser of services gets fromoutsourcing instead of owning andoperating a set of activities.Outsourcing effectively transfers both

people and capital investment to anoutside provider, thereby reducingthe firm’s fixed costs. The benefits ofthis kind of flexibility are likely to bemuch more important, the greater isthe uncertainty about both demandfor the firm’s products and, perhapseven more important, about the stateof technology that underlies the ser-vice being outsourced. For example,corporate IT typically involves a ma-jor investment of capital as well as aninvestment in people. And a suddenchange in technology can wipe outmuch of the value of that investmentalmost overnight. By outsourcing itsIT, a firm for which IT is not a corebusiness transfers the risk that its ownIT technology will become obsoleteto another firm that is much betterprepared to deal with that risk. And,as we all know, information technol-ogy is changing quite rapidly.

Of course, such changes are likelyto require renegotiating some aspectsof a contract with an outsourcingprovider. But it will almost certainlybe less costly for the outsourcingpartner, with its multiple clients, tobring in the different skillsets, thedifferent technology, the differentequipment, than forcing the firm towrite off that equipment and thenreassign its people or to hire newpeople in the marketplace when theyare likely to be scarce and expensive.

So, to sum up my argument, we atStern Stewart think there are majorbenefits from corporate outsourcing,and that’s why we have spent timetalking about it with some of ourclients. We think that the outsourcingvalue proposition is well expressedby EVA, and that outsourcing inte-grates well with the EVA mindset.And for that reason, we believe thatcorporate managers on an EVA com-pensation plan are also more likely tobe open-minded towards initiativeslike outsourcing that they may haveresisted in the past.

More on Corporate Motives

GLASSMAN: Denny, as President ofTPI, what do you think is driving allthe outsourcing activity today? Is therea lot more to it than just these threethings?McGUIRE: Well, these are clearly threevery important objectives. But I alsothink that the objectives of outsourcinghave changed somewhat over time.When we first started doing deals inthe late 1980s or early 1990s, reducingcosts was the number one consider-ation. If you recall what was happen-ing with our economy then, everyonewas looking for ways to save money.In some cases, the outsourcing dealswere little more than collateral for off-balance sheet loans.

When the U.S. economy picked up,companies began to get a much deeperappreciation of the benefits ofoutsourcing. Then focus and special-ization and flexibility became keyfactors in decisions to outsource. AndI think we’re now in a period wherewe’re going to see more and morejoint ventures and alliances, with moreambitious goals. But the objectiveswill vary from client to client. I like tosay that outsourcing is a tool, not anobjective. You’ve got to figure outwhat your objectives are and thencraft the outsourcing deal to accom-plish those aims.

David, you mentioned the Equifaxtransaction with IBM. Equifax wasone of our first big clients. The Chair-man of Equifax was a former IBMexecutive and so was the President. Inthat case, we came up with a seven-year set of projections comparingwhat it would cost them to do their ITinside versus outside—and the num-bers were very similar. But there wasone important exception: it was goingto require $100 million of capital tokeep their IT inside the firm.

Now I was thinking to myself, “Hereare a couple of gentlemen from IBM,


people who are comfortable withtechnology; they’re going to say, ‘Let’skeep it inside. Don’t outsource it.’”But, to my surprise, they almost im-mediately came to the decision tooutsource. They said, “We can buyanother company with that $100 mil-lion.” And that was the first time Ireally began to think about the cost ofcapital as a factor that could helpdrive our business. My background isnot in finance, and so for me it was anew way of looking at things.GLASSMAN: Gene, do you have any-thing to add to that?TYNDALL: Logistics is somewhat dif-ferent than IT. To a much greaterextent than IT, logistics outsourcinghas been and continues to be cost-driven, and so the value propositionfor logistics is focused mainly onoperating margins, on the differencebetween revenue and operating costs.But, thanks to the efforts of compa-nies like Stern Stewart, capital costsare also becoming part of the equa-tion. And the case for logisticsoutsourcing is certainly consistent withand enhanced by an EVA evaluationframework. My experience at Ryderhas been that those customers thatunderstand EVA are typically morereceptive to the value of outsourcing.Improving logistics requires capitalinvestment, and companies are in-creasingly aware that outsourcing addsvalue simply by taking capital off thebalance sheet.

So, I’m glad that Stern Stewart istaking an interest in the outsourcingbusiness. There are still a lot of prob-lems that need solutions in this busi-ness. And the more we can addressthem from a shareholder point ofview, and from an executive point ofview, the better.

But let me come back to my firstpoint, which is that costs started outas the number one concern in logis-tics—and, unfortunately, it continuesto be number one. We have not yet

succeeded in bringing to the C-levelexecutives of large organizations anawareness of what you can accom-plish in terms of growth and profit-ability through outsourcing. I’m a bigproponent, and have long been aproponent, of virtual enterprises. Asthe leader of Ernst & Young’s supplychain consulting practice, I helpedmany companies develop what isnow recognized as the Dell model.GLASSMAN: Dell immediately comesto mind when I think of companiesthat use outsourcing in a strategicway—and so does Cisco. Can you tellus a little more about the thinkingbehind their business models?TYNDALL: Cisco is now famous forsomething known as contract manu-facturing, which is of course a form ofoutsourcing. In fact, Cisco makes lessthan 50% of the products it sells. Theirpartner-suppliers actually make thecomponents and, in some cases, as-semble them as well. Even moreimpressive, Cisco takes over 80% ofits customer orders via the Web, andover 50% of its products are shippedwithout touching human hands. Sothis is clearly an e-business in today’smarketplace. And, as some of youmight have noticed, Cisco recentlyovertook Microsoft as the companywith the largest market cap in theworld.

Paul Fireman, the CEO of Reebok,used to take pride in saying that hiscompany had $300,000 in revenueper employee. Like Nike, Reebokcontracts out all its manufacturingand is basically just a marketing anddistribution company. But Ciscomakes $750,000 per employee in rev-enue, and no one else has come closeto that. Cisco’s even gone beyondwhat Dell has done, though Dell doesa great job. Dell has a model for cashconversion that results in negativeworking capital! This means that partof Dell’s growth is effectively financedby its own negative working capital,

which is a phenomenal thing. It’s awonderful illustration of the potentialvalue of supply chain innovation. Itbrings home the lesson that inventorymanagement can be the most impor-tant source of value for a companythat manufactures a product. Whenyou keep inventory down by workingwith your customers as well as withyour suppliers, you can grow thebusiness without using investor capi-tal. And, if you’re using an EVA model,you can appreciate the value of that.Dell’s earnings, because they requireso little capital to produce them, aresupercharged earnings, if you will—and that’s why Dell has such a highP/E multiple.

So, this brings me back to David’scomment that the basic idea behindoutsourcing is to do what you do best,to focus on your core competencies,if you will—and then find partner-ships to do the rest. Dell has partner-ships with its 60 key suppliers. Andthese are truly partnerships; it’s not amatter of leaning on the suppliers, aspeople have accused Wal-Mart ofdoing, and forcing them to stretch outtheir payables. These relationshipsinvolve real coordination, real shar-ing of information and exchanges oftechnology. By means of these part-nerships, you get other people to dowhat they do best and then you dowhat you do best. That’s the formulafor the virtual company.

It also occurs to me that the ulti-mate form of the virtual enterprise isthe successful dot-com. A dot-combasically performs one task, be itbranding or whatever, and then con-tracts out everything else throughpartnerships, with integrated pro-cesses and technologies.GLASSMAN: But, Gene, can this busi-ness model really be applied to large,established companies? One big ad-vantage that Dell and Cisco had isthat they were working with a cleanslate. Michael Dell never had direct


manufacturing operations, and Ciscoorganized its business early on tofunction the way you described it. Butwhat about old-economy compa-nies with a vertically integrated struc-ture? Isn’t the challenge significantlygreater for them? Take the case ofFord, which is a classic example of avertically integrated company, withHenry Ford buying rubber planta-tions in South America to make surehis tire plant had raw materials. I men-tion Ford, because Ford actually in-vited Michael Dell to advise them onthe Dell model. But, as I said, thechallenge of moving to outsourcing atFord has got to be greater by severalorders of magnitude.TYNDALL: That’s right. It has beensaid that God was able to createthe Earth in just seven days be-cause he was able to start fromscratch. He didn’t have to start bydismantling the whole supplychain and old processes.

GLASSMAN: Do you have any suc-cess stories where a once-integratedcompany was able to make a reallyrevolutionary change?TYNDALL: Well, we work with Ford,too. In fact, we are a major providerof logistics for them. And, although Iagree that dealing with such a large,integrated company is a real chal-lenge, progress is being made. Andit’s being made at General Motors andChrysler, too. They’ve all reducedtheir number of suppliers dramati-cally. I remember a Ford VP telling mea few years ago, “We’ve got 10,000suppliers.” Now they’re down to about1,000. So they have certainly reducedtheir supplier base. And they’ve con-solidated a lot of their outsourcingand logistics.McGUIRE: I think there are manycompanies that have made progress.But I also think that the process ofchange has been very slow. It’s hardto change your business model, to

reduce your dependence on retailerswho sell your products. Ford owns itsdistributors, and that whole distribu-tion chain represents about 35% oftheir costs of goods sold. It’s a bignumber. And so getting all of that tochange—especially with the Ameri-can political system’s habit of gettinginvolved in such matters—requirestime and brute force and effort.

Resistance to Outsourcing

GLASSMAN: We’ve discussed thepotential benefits of outsourcing.Phil, do you think every companyshould be doing some kind ofoutsourcing? Or are there good rea-sons not to do it?THOMPSON: Every customer has adifferent cost-benefit trade-off, andthe benefits are not going to exceedthe costs in all cases. Like you, Ibelieve that companies benefit byfiguring out what they are best at

Dell’s growth is effectively financed by its own negative working capital, which is aphenomenal thing. It’s a wonderful illustration of the potential value of supply chaininnovation. It brings home the lesson that inventory management can be the most important source of valuefor a company that manufactures a product. When you keep inventory down by working with your customersas well as with your suppliers, you can grow the business without using investor capital. And if you’re usingan EVA model, you can really appreciate the value of that. Dell’s earnings, because they require so little capitalto produce them, are supercharged earnings, if you will—and that’s why Dell has such a high P/E multiple.

Gene Tyndall


doing, and by specializing or focus-ing on their competitive advantages.And these decisions should be basedon analysis done by people at the topof the organization, perhaps usingsomething like the classical, top-downapproach developed by Michael Por-ter. Companies need to decide forthemselves whether they’re reallygood at some activity or whetherthey’re better off transferring it tosomebody else with a comparativeadvantage in doing it. And, as I said,this decision should really come fromthe top.GLASSMAN: But do companies typi-cally do that when they’re thinkingabout the outsourcing decision?THOMPSON: Sometimes, but not al-ways. In many cases, the manage-ment knows that their infrastructure’sold, they’re having service problems,and they’re not keeping pace withwhat’s going on in the outside world.And maybe they’re having difficultyhiring people in this environmentwhere competitors offer 50,000 sharesof dot-something stock.McGUIRE: That’s right. Dot-anything.TYNDALL: My feeling is that the big-gest current obstacle to outsourcingare the costs of negotiating contractsthat both parties can live with. Thereare simply too many problems aroundservice-level agreements. At least inthe area of logistics, outsourcing of-ten fails to provide flexibility becausewe create these agreements that arestructured around yesterday’s busi-ness. As soon as there’s a change,both parties to the contract tend to tryto manipulate the terms of the con-tract to shift costs onto the other party.GLASSMAN: So, the contract givesrise to all the kinds of “gaming” thata true partnership is supposed toeliminate.TYNDALL: That’s right. And to me thedesign of the contracts is the biggestchallenge we now face in buildingsuccessful outsourcing partnerships.

Another major problem with logis-tics outsourcing is that, until fairlyrecently, it’s been a back-room deal.The deals have typically been nego-tiated by traffic managers and ware-house guys, and it’s only been thepast couple of years that the C-levelshave begun to understand their im-portance. And that change has not yetbeen pervasive, but mainly just in theglobal companies.GLASSMAN: What you’re saying isthat the focus of this is not yet at a highenough level in the organization toreally think about it strategically ratherthan operationally?TYNDALL: Exactly. A part of it is justawareness and understanding. Logis-tics has always been difficult to un-derstand, and top management tendsto view it as an obscure, highly spe-cialized activity that somebody doesin the back room. But, with technol-ogy moving at its current rate, andwith the reality of Web ordering,people have now been forced tofocus on the fulfilment of orders.Executives are finding out there issomething called logistics out thereand it has to do with fulfiling ordersand customer satisfaction.

So, interest is growing, but it’s stillfar from being pervasive in the board-rooms. Top management still doesn’tunderstand enough about logisticsand the value of outsourcing to reallydo it right. They still tend to give thedecisions to the same level of middlemanagers they gave it to five or sixyears ago. That was the wrong an-swer then, and it’s the wrong an-swer now.McGUIRE: I agree totally. And Gene’spoint is fundamental. If you havesomeone managing the outsourcingdeal whose only consideration is hisexpense budget, then all that he man-ages are expenses. It’s very hard tohave a successful partnership whenall both parties care about is theexpense side. What we need to do is

to have people taking the whole viewof the relationship—what are the totalbenefits and costs arising from therelationship, not just the reduction inbudgeted costs, not just your littlepiece of the world.

So that’s why I’m kind of excitedabout applying the EVA concept tocorporate outsourcing. If you can useEVA to give people the whole pic-ture—and provide them with incen-tives to maximize the company-widebenefits of the relationship—then youcan accomplish the real potential ofoutsourcing.GLASSMAN: Phil, are you seeing thesame problems in the IT area?THOMPSON: Very much the samething. What I would add to Gene’sand Denny’s comments is that speedof execution and flexibility are prob-ably the most compelling things driv-ing today’s IT transactions. The com-panies buying these services want thedeals to get done quickly, and theywant enough flexibility in the agree-ment to be able to modify some termsin response to changes in conditions,or to correct a problem that ariseswith the deal itself.

The only way you can get bothspeed and this kind of flexibility isthrough simplicity—simplicity in thecontracts. The contracts need to becrafted around a basic set of prin-ciples that establish the main respon-sibilities of each party to the deal andaddress the major concerns of bothparties. The last thing that our corpo-rate customers looking to get into e-commerce want from us are the 600-page contracts that Gene mentioned—the kind that specify 500 possiblechanges in the event of 500 differentcontingencies. We are also findingthat, from a requirements definitionstandpoint, a lot of our clients are notreally interested in spending too muchtime analyzing the benefits ofoutsourcing—because this is just an-other barrier to speedy execution.


McGUIRE: We’ve all been beatingup on the 600-page contract as thesource of the industry’s problems.Unfortunately, for established com-panies, 600 pages may be requiredto define the services, service levels,the supplier’s proposed solution, HRtransition issues, third-party contractissues, tax issues, and so forth. All ofthese issues need to be thoughtthrough. It is much easier and muchless detrimental to the long-term re-lationship to work out these issuesbefore contract signing.

For e-business start-ups, though,life is much less complicated. Thereare likely to be minimal legacy envi-ronments, there are few if any peopleto be transitioned, few if any taxissues, and so forth. It is just mucheasier. In these situations, what youneed is a much smaller contract thatlays out the vision, objectives, work-ing relationships, intellectual prop-erty issues, pricing, service levels,and related issues.THOMPSON: My own experiencehas been that forming the contractlanguage and design around a spe-cific set of problems can help gainagreement more quickly, and maybeeven create a greater sense of partner-ship in the process. For instance, in adeal that we did with Ford in the lastyear, we agreed to set up a “timebox”—a set of deadlines—around theapplications development process thatallowed both parties to get about 80%of the desired functionality in a shorteroverall timeframe. And this step al-lowed us to reach an agreement onrequirements and functionality to bedelivered much faster than we couldhave arrived at any other way.

The first thing we normally do rightafter the contract is signed is to estab-lish what’s called a project manage-ment plan. This is a much abbreviatedversion of the agreement, and we getthe customer to sign off on that docu-ment. It basically states who’s going

to make what decisions, how they aregoing to be made, and how the pro-cess will be managed for getting thework done.

As a result of these kind of changes,we’re now delivering solutions in afour- to six-month cycle as opposedto the one- to two-year cycle. And thekey to speed lies in how you designthe development contract for deliver-ing solutions, and in how well thatcontract succeeds in aligning the in-centives on both sides of the agree-ment, the supplier and the customer.GLASSMAN: What other changes haveallowed you to reduce the cycle sodramatically?THOMPSON: Another importantchange we have made is to have anend-user customer dedicate peoplefull time to the team from IBM that’sdoing the development from begin-ning to end. This way there’s muchless churn on requirements. So we doour prototypes and solution-buildingtogether with the customer; and whenwe get to the end of the process, thereare no big surprises.

In the past, we would use a processthat I would characterize as “sequen-tial implementation,” where our cus-tomers would give us some require-ments and throw them over the wall—and then, after a considerable passageof time, we would throw them back toget their response. And it’s not hard toimagine that the possibility for error inthis older process was very large. So Ithink better design of the contractaround the problem you’re really try-ing to solve is fundamental to the newthings that are going to happen.GLASSMAN: Should all companies beoutsourcing at least some functions?The conventional wisdom is that youshould never outsource a strategicfunction, a core capability. Do any ofyou have a different way of thinkingabout this?TYNDALL: Some 65% to 70% of U.S.companies outsource something in

logistics, and that number has stayedpretty constant over time. We foundthis result in surveys we did at Ernst& Young with the University of Ten-nessee. But this begs the question:What about the 25% or 30%?

The way I like to talk about thelimits of outsourcing is this: I say toour customers, you can outsourceoperations, but you should neveroutsource management. Time andtime again, the problems with fullsupply chain outsourcing that werebrought to us when I was at E & Ycame from the fact that the outsourcingcompany’s senior management hadwalked away from all responsibilityfor the operation. They simply said,“It’s somebody else’s problem now.”

But, even in the case of outsourcing,it never becomes somebody else’sproblem. It’s a problem for both par-ties, and both parties need to helpfind the solutions. As Phil said earlier,the client has to stay engaged through-out the process.THOMPSON: I agree with your point.But where you say you can’t outsourcemanagement, I like to say that youshouldn’t outsource “strategic con-trol” of the activities in the outsourcingarrangement.TYNDALL: Yes, that’s exactly what Imean. You can’t outsource the re-sponsibility to manage. But manycompanies do just that: they try tooutsource the responsibility and theaccountability; they avoid coming togrips with problems within their ownorganization by failing to create well-defined roles and responsibilities ontheir side of the deal. They fail tocreate business plans and collabora-tive goals.McGUIRE: Not many people knowhow to manage a relationship thatcrosses corporate boundaries; it’s dif-ferent from managing in-house people.So that’s just going to be a hugechallenge going forward—learning howto manage these relationships.


A Taxonomy of OutsourcingDeals: Moving Up the Value Chain

GLASSMAN: Phil, can you tell us alittle more about the different kinds ofoutsourcing deals you’re seeing, andthe cost-benefit trade-off associatedwith them?THOMPSON: When I try to explainthis to potential customers, I like todraw two pictures. One is a two-dimensional graph with X and Ycoordinates. On the Y axis I show thecost of the outsourcing contract tocustomers and on the X axis is thesupplier value added or capabilityassociated with each level of cost. Atthe very left side of this graph is whatwe call a “commodity” outsourcingdeal. In these cases almost all of thediscussion is focused on reducingcosts for given levels of service. Then,as you move to the right, the nextpoint of demarcation is what I refer toas “utility” deals—those where cost

becomes less important, but it’s still amajor constraint on the process. Thenext level out is what I call the “part-ner” level. And farthest to the right isthe “enabler” area, where thecustomer’s really looking for you tobe absolutely pro-active in deliveringhigh-flying technology solutions ortremendous value added based onthe service provider’s core competen-cies and capabilities.

A good example of this last kind ofrelationship is the business arrange-ment IBM has with Safeway in Eu-rope. In that case, we worked withthem through our research organiza-tion to create a solution, using a PalmPilot wireless device, that allowspeople to order all of their groceriesonline. The device we helped themdesign ties right into their existinglogistic systems. So that when peopleorder groceries using this system,they are still given their old choicebetween picking them up or to hav-

ing them delivered to their door. Andthen their logistics system replenishesthe stock based on the informationprovided by our IT channel.

But my point here is that, unlessyou’re functioning at the enablerlevel, the outsourcing provider islikely to do just what the commod-ity-level contract arrangement saysto do. It’s by the contract, by thenumbers, and every deviation fromthe contract has a big potential costimpact. The commodity deals don’tgive the provider much prerogative,or much incentive, to make trade-offs—to make adjustments to the con-tract—in ways that make sense andadd value for both parties.GLASSMAN: It seems to me that theaim of these contractual agreementsshould be to align the incentives ofboth organizations as far as pos-sible—and preserving flexibility maybe critical to getting the incentivesaligned. Too often, the incentives

The first thing we normally do right after the contract is signedis to establish what’s called a project management plan. This is amuch abbreviated version of the agreement, and we get the customer to sign offon that document. It basically states who’s going to make what decisions, howthey are going to be made, and how the process will be managed for getting thework done.

As a result of these kind of changes, we’re now delivering solutions in a four-to six-month cycle as opposed to a one- to two-year cycle. The key to speed liesin how you design the development contract for delivering solutions, and inhow well that contract succeeds in aligning the incentives on both sides of theagreement, the supplier and the customer.

Phil Thompson


actually come into conflict becausedifferent people are being evaluatedaccording to different things. Andflexibility is not being created, but infact it’s being limited.THOMPSON: Which leads to majorcustomer dissatisfaction about a yearand a half into the deal, and thenyou’ve got to fix it.GLASSMAN: And it sounds like theoutcome in these cases is almostpredictable. People with experiencein this area can probably tell you, justby looking at a contract, “This one hasan expected life of 12 months, 18 atmost—and then you folks are goingto have big problems.”THOMPSON: That’s right. And, to tryand avoid some of these problems,the second graph I like to draw for mycustomers is a three-dimensionalcurve…GLASSMAN: I thought we agreed tokeep things simple, Phil.THOMPSON: It’s the only thing I canremember from a calculus class Itook 25 years ago. On this graph,you put cost on one axis, time onanother, and SLAs on the third. Whatthis graph allows you to show is that,for a fixed level of cost, you canchoose to make trade-offs betweendifferent service levels and how longit takes to achieve them. The higherthe service level, of course, the longerit’s going to take any supplier to getyou there. One problem with thisapproach is that customers tend tobe reluctant to disclose their costconstraint; that information tends tocome out in the eleventh hour, whichmakes it a lot harder for service pro-viders to participate fully in makingthese trade-offs.

But, anyway, my message is a fairlysimple one: if you want to get to aworld-class service level in six months,there’s a price for that. But, if you canextend your timeframe to a year anda half, the cost is a good deal lowerwhen spread through time. Each cus-

tomer must decide what trade-offmakes the most sense for them.McGUIRE: That’s right. And the cus-tomer also has to determine the valueof that next increment of service level,and whether it’s worth the cost to getthere. At some point, there are dimin-ishing returns and it costs too much toget that next level.THOMPSON: The classic case of cus-tomers failing to appreciate this trade-off is in the Web-hosting world. Somepeople will say to me, “I want avail-ability at the level of 99.99% or even99.999%. And I will reply, “Do youreally understand what you’re askingfor? We’re talking six sigma levels ofperformance. And getting to that levelis very expensive. It will cost youmore to go from 90% to those levelsthan it took you to get to 80% or 90%in the first place.McGUIRE: I certainly agree with Philthat there’s a continuum of businessrelationships starting from commod-ity-type services that moves up to-ward more customized relationships.The more commodity-like is the ser-vice, the more you’re just managingthe cost based on getting a certainnumber of units at a certain servicelevel. Strategic relationships and alli-ances require a different approach togovernance. But, let me take a mo-ment to defend the importance ofcontracts, since they seem to havebecome the scapegoat.

My basic point is that you need agood contract just to understand whatis expected of and by both parties tothe deal. But, clearly, as you move upinto gain-sharing arrangements andinto alliances and joint ventures, thefundamental intent is different. Insuch cases the parties are making alonger-term commitment to a rela-tionship that they expect to turn intoa real partnership, perhaps with thecapability to develop new services.Take the case of the Palm Pilots forsupermarkets. That would normally

be something that’s left out of anoutsourcing contract—because that’sclearly an R&D kind of project.

But let me talk about three differentflavors of IT outsourcing purchasersthat we’re seeing a lot of today. Oneis the old-line brick and mortar com-panies. The deals involving such com-panies run anywhere from $30 mil-lion to $1 billion a year. In these kindsof contracts, there’s a real need tochange the culture, to focus on corecompetencies and minimize the needfor capital. There tends to be hugeamounts of equipment, people, andfacilities that need to be used moreproductively. And then there are of-ten major tax consequences as well.So, outsourcing deals involving suchcompanies are like M&A transactions,except they’re twice as hard becauseyou also have the services contract.It’s especially difficult if there are a lotof existing third-party contracts thatneed to be transitioned.

The second kind of company in IToutsourcing today is the e-businessstart-up or, alternatively, a spin-off ofan existing brick and mortar com-pany. In these cases, you typicallyhave a great idea, but there’s nothingto support it. There’s no major pro-cesses; you don’t have the IT infra-structure, the accounting, or the HR.And so in those situations the newcompanies will outsource everythingexcept the good idea. For these kindsof firms, time to market, scalability,and reliability are the key concerns.To see why reliability is important,just consider the billion dollar lossesthat e-Bay and others have experi-enced when their sites go down.

The third flavor of company we’reseeing—and I think this is going to bea big one—is the e-business companythat’s already been in business for ayear or two. They have been able to gettop-quality people based upon stockoptions, but now that the stock priceshave peaked and fallen back to more


reasonable levels, the incentive effectis wearing off. At the same time, themarket is expecting the firms to deliveroperational excellence and profits.

So, the company is now in a some-what different situation. In the past, itwas focused almost entirely on timeto market, which is often very differ-ent from achieving cost-efficiency,and now there is going to be increas-ing pressure for profits. So you’regoing to see the big e-business com-panies who may have usedoutsourcing sparingly start to use it inmuch more depth. What this means,interestingly, is that these companiesneed many of the processes and pro-cedures of the brick and mortar com-panies—and they need to get themwith high degrees of reliability.

So, these are the three kinds ofcompanies now looking to outsource,and this may give you greater apprecia-tion of what has to be accomplished bymeans of these nasty contracts.

TYNDALL: Some customers are alsosaying that, while their immediateinterest is only in operational infra-structure, they also want a relation-ship that keeps open the possibility ofother initiatives. They might say, “Iwant to cut my fulfilment cycle timedown by 30%, but I also want you toexplore other possible changes in theprocess. So, the demarcation betweencommodity-type deals and partner-ships is not always as clearcut aswe’re suggesting. There is certainly apropensity to separate the commod-ity part of the deal to make sure thecustomer is achieving at least the costreductions it bargained for. But sucharrangements don’t necessarily pre-clude gain-sharing in other aspects.GLASSMAN: Are either of you seeinga trend where companies will startwith a commodity-type outsourcingarrangement and then, once they’veexperienced some success, move upthe value chain afterwards? Or are

companies instead taking on more inthe beginning?THOMPSON: I think more compa-nies are choosing to start higher upfrom the start. But that’s not the casein the e-business world. There mostpeople start with just a hosting ap-plication and then they come to therealization that other elements likemarketing or branding are very im-portant to take into considerationduring design of the end-to-endsolution.TYNDALL: I would think that the e-commerce is where you would needthe greatest amount of flexibility be-cause it’s a market that’s still develop-ing and people don’t know exactlywhat’s going to happen and how it’sgoing to develop. Their past focus onspeed has been driven by the desireto have a high market cap as soon aspossible so they can pay all thosetalented people. They’ve done thatquickly without having thought

The third kind of [outsourcing] company we’re seeing—and I think this is going to bea big one—is the e-business company that’s already been in business for a year ortwo. They have been able to get top-quality people based upon stock options, but now that the stock priceshave peaked and fallen back to more reasonable levels, the incentive effect is wearing off. At the same time,the market is expecting the firms to deliver operational excellence and profits.

So you’re going to see the big e-business companies who may have used outsourcing sparingly start to useit in much more depth. What this means, interestingly, is that these companies need many of the processesand procedures of the brick and mortar companies—and they need to get them with high degrees ofreliability.

Dennis McGuire


through the full picture of what theyneed to do.McGUIRE: It’s much easier for the e-business companies to get these dealsdone because they don’t have thelegacy concerns of the old-line com-panies. They don’t have existing per-sonnel, pension programs, and otherelements of a legacy environment.You can almost do a deal on thevolleyball court.

Accounting Barriers toOutsourcing

GLASSMAN: One of the big problemsthat companies are struggling with isthe accounting treatment of intan-gibles. Expenditures on brand build-ing are all expensed in the first year,and that’s true of R & D, too. And alarge portion of IT expenditures—notthe machines, but the training, main-tenance, and support that go withthem—are run through the P&L ratherthan being capitalized on the balancesheet. So, we find that for manycompanies there’s a performancemeasurement issue as to how to ac-count for those expenditures. Eventhough their IT capabilities enablethem to do a great many things thatincrease their chances of success, thefact that the accountants require com-panies to run those outlays throughtheir P&Ls could be causing them tounderinvest in IT.

For this reason, we suggest to ourclients that their IT expenditures in-stead be put on the balance sheet ascapital and amortized over time, atleast for internal uses such as perfor-mance evaluation and incentive comp.This is basically what our EVA systemdoes. So, conventional accountingmay be another cause of the resis-tance to outsourcing propositions—or at least to the value-added kinds.And, by encouraging managers toview IT expenditures as long-termassets rather than expenses, use of an

EVA framework might prevent peoplefrom being put off by the largeupfront costs for ERP or logistics-related systems.TYNDALL: You’re preaching to thechoir—and stop me if I go on too longon this one. The measurement of costand benefits in logistics is and contin-ues to be elusive. Companies justdon’t know how to measure it well.We run up against this time and timeagain. We go to a company that wantsto outsource logistics and, as in thecase of IT, we need a baseline costagainst which to evaluate the poten-tial gains from outsourcing. And it’srare that any company, even in theyear 2000, is able to measure itslogistics properly. It’s just been some-thing the accounting systems havenever done right.

Now, there is something calledactivity-based costing that has beendeveloped to handle manufacturingcases. But even that doesn’t helpmuch with logistics. For example, abig expenditure in logistics is forfreight. Well, when you purchasematerials, the freight cost is typicallyburied in the bill from the supplier.So, to analyze the costs, we’ve first gotto go through and break that chargeout of the invoice. And we spendliterally months developing thatbaseline cost with the company. Untilwe do that, we can’t really do a valueproposition. Establishing that baselineis essential.THOMPSON: But there’s a big prob-lem in getting the right numbers. The“fear factor” about losing jobs, etc.can lead to significant churn in thenumbers.GLASSMAN: My response to thesekinds of questions is to suggest thatthe performance measurement sys-tem needs to be tailored to thecompany’s overall strategy, to thecapabilities they’re looking to buildwith the expenditures they’re takingon. So let’s say that we’re talking

about an ERP system where peopleare saying, “Gee, we’re spendinggobs of money on this.” They wantto know how they should look at theinvestment. Too often the answer is,“Well, we think it’s ‘strategic’ and sowe just have to do it.” People signoff on $500 million expenditures with-out giving it the same scrutiny thatwould be given a $50 million invest-ment in a new plant.McGUIRE: Many of those ERP sys-tems have failed to deliver anythinglike the promised benefits. The mainreason for that is, if you don’t have abusiness plan that shows where youexpect to get your value, there’s atendency to include everything in theproject. Without a business plan, youdon’t know where to press to makethe hard changes. And, by the timeyou get to the end of the project, youhave this completely new system thatdoesn’t come close to achieving itsobjectives. The costs end up over-whelming the benefits. So, you’ve gotto have that well-thought-out busi-ness plan that really gets into thenumbers—one that gets people tomake commitments about the savingsand the capabilities they’re going todeliver.GLASSMAN: When you’re workingwith companies that are consideringoutsourcing arrangement, is that partof what you do? Work with them ona business plan? Didn’t you say youran the numbers out seven years forEquifax?McGUIRE: That’s right. And, as Genesaid, you’ve got to start by showingwhat will happen if you choose not tooutsource—because it’s only by cre-ating that baseline that you can dem-onstrate the benefits of outsourcing.That’s actually hard to do in the caseof IT because there are so manyexpenses that are budgeted at corpo-rate and in the user organizations.And, as Gene also said, it’s muchharder in the case of logistics to


develop that business plan becausemost companies aren’t organizedaround logical processes. They’reorganized around geographic regions,functions, or products. And so you’vegot a piece of logistics here and apiece of logistics there—and the chal-lenge is to develop a solution andthen get someone to say, “Okay, ifyou implement this solution, I’ll makesure that these kinds of costs goaway…or I’ll commit to this kind ofrevenue growth.” It’s a very difficultanalysis unless the company is al-ready organized around processes—and that doesn’t happen very often.GLASSMAN: That might be anotherreason why companies just don’t wantto do outsourcing. You go in and sayto them, “For companies to truly getthe benefits, you not only have toreorganize logistics or IT, you need toreorganize a lot of your other pro-cesses to accommodate the changesin logistics. For example, you mayhave to change your performancemeasurement and incentive compsystems to get the kind of behavioryou want. And when people begin tounderstand that, they ask themselves,“Do we really want to undertake thatkind of an effort; or do we want to justtake the commodity version and re-duce our costs a little?”TYNDALL: That’s right. And whenyou talk about the value-added kindof outsourcing, you’re really talkingabout transforming the managementprocess. The biggest challenge thatwe’ve had at Ernst & Young with ERPsystems is the management changethat is required to really make it work.It’s getting people to think and workdifferently, which in turn leads toprocess re-engineering and othermajor benefits. Of course, the ben-efits of such systems are almost al-ways oversold to begin with. Buteven just to get half or a third of thepromised benefits takes major changesin the way people behave.

GLASSMAN: So it’s not just an ITinitiative, but a total company initia-tive. We see much the same thing inour EVA practice. EVA is often mistak-enly thought of as just a financialmeasure for setting goals, evaluatingperformance, and then hammeringexecutives that don’t meet those ob-jectives. In reality, it’s a different wayof viewing most of the activities thatare performed by virtually everybodyinside a company. It’s a different wayof managing and making decisions.And because it has the potential toaffect everybody’s decision-making,implemementing an EVA system re-quires company-wide training, insome cases all the way down to theshop floor.

So, for both EVA and outsourcingimplementations, the concept maysound relatively simple and straight-forward. But, really making them workright is a thought- and labor-intensiveactivity requiring a major commit-ment from the top of the organization.This is the only way you’re going toget the value-adding transformationof behavior that is promised by bothof these change processes.

Real Options and the Evaluationof Outsourcing Projects

GLASSMAN: This leads me to anotherissue in project evaluation. When youwork with the financial part of theorganization to justify a project likeoutsourcing, you are typically askedto come up with a discounted cashflow (DCF) analysis, and maybe anIRR. Now, for the commodity-typedeals, this might be a fairly straightfor-ward calculation: just project the twosets of costs, and the amount ofcapital tied up in each alternative, andthen compare the NPV of each. Butevaluation of the more value-addeddeals is more complicated. There youneed some way to quantify the ben-efits from any new strategic capabili-

ties that are expected to develop as aresult of the outsourcing partnership.

But to capture these kind of ben-efits, most of which are not clearlyforseeable when the project starts,requires a dynamic as opposed to theconventional “static” DCF analysiswhere you just project the cash flowsand discount them at the cost ofcapital. Such a dynamic approachmeans thinking about the risks thatcould jeopardize execution of thefirm’s business plan. There are risksinside the firm that concern its abilityto execute certain initiatives, and thenthere are risks outside the firm withrespect to the way markets and thecompetition develop over the nexttwo or three years. This kind of analy-sis needs to take into considerationthe different things that might happenif the firm chooses outsourcing versuskeeping the activity.

As we have already discussed,outsourcing gives management anumber of sources of flexibility—or“real options,” as academics haverecently taken to calling them. Onevaluable option that is effectively builtinto outsourcing arrangements, assuggested earlier, is the right to switchtechnologies in response to majortechnological change. Another im-portant option—at least in the case ofthe value-added, partnership-typetransactions—is the right to makeadditional investment in stages ratherthan making a single large upfrontcommitment; that is, it is the right towait and see how the partnershipworks out and, if things go exception-ally well, to ramp up the investmentto seize an opportunity.

One of the most interesting andimportant implications of real optionstheory is that the greater the amountof uncertainty—whether it be uncer-tainty about technology or about prod-uct markets—the larger is the value ofthe real options that outsourcing pro-vides. And even though there are no


expected cash flows associated withreal options when the outsourcingproject is first being evaluated for ago/no-go decision, such options havecurrent value—and it’s important toat least try to quantify that value at thebeginning. Otherwise you’re stuck inthe “linear” way of thinking, in whichvalue depends on everything work-ing out just as planned.

So, one question managementneeds to ask in evaluating anoutsourcing project is what kinds offlexibility does the project give thefirm. The dynamic real options ap-proach can provide a much richer, andmore realistic, analysis and representa-tion of the benefits of the proposition.And, the more strategic the outsourcingproject, the more appropriate the realoptions approach becomes.THOMPSON: Consistent with thatapproach, we like to tell our clientsthat you have to build your planknowing that the plan will turn out tobe wrong. The point of making theplan is to organize your capabilitieswith the expectation that somethingwill cause results to deviate from theplan, and you need to have a baselinethat allows you to be ready to adjustto the change…and quickly.TYNDALL: We try to capture thevalue of some of these real optionsthrough a kind of scenario planning.The world changes so fast these daysthat it’s become virtually impossibleto plan two or three years ahead,much less seven. So I don’t know howyou can possibly evaluate an invest-ment without using scenarios.

At the same time, though, gettingexecutives to assign a positive valueto such uncertainty—which is a keypoint in real options theory—is avery tough sell. The idea that greaterrisk means more value is counter-intuitive, to say the least. But I thinkit’s an important idea. The scenariosare broader than ever before—andso are the range of possible re-

sponses. Although you may be con-sidering only a commodity-typeoutsourcing deal at the outset, youmay end up with a totally new kindof entity—a spin-off or a start-upwith a venture firm. And what willhave opened up these possibilitieswill have been the initial decision tooutsource a fairly mundate activityonce performed inside the firm.McGUIRE: It also might make senseto think of an outsourcing provider’sR&D capability as providing a realoption. One of IBM’s competitiveadvantages in the outsourcing busi-ness is its ability to bring its pureresearch capability to bear on some ofthese deals. That’s going to provide itwith a long-term competitive advan-tage that most competitors can’t match.THOMPSON: That’s true. And oneexample that I like to cite is the caseof Monsanto. At IBM we have thislarge pool of research resources—people performing exploratory as wellas applied research. Although no oneenvisioned an intersect of IBM re-search with Monsanto needs, throughinvestigation of IBM’s portfolio it wasdiscovered that IBM had an importantapplication for Monsanto’s researchon genetic engineering and seed ger-mination. That research capabilitybecame an important selling pointalong with a joint initiative on SAP (anERP system). And there have been anumber of other cases where ourresearch helped differentiate IBMenough to give us the strongest valueproposition for a customer.TYNDALL: It would also be nice tofind a way to share that value addedwith the customer.THOMPSON: Your comment makesme think of another case where wecould have provided a different kindof real option if the client had chosento do the deal. In that case, thecompany had about a billion dollar’sworth of equipment spread all aroundthe world. And the key was “around

the world”—they weren’t sure whereit was. And because they didn’t knowwhere the equipment was, wheneverthey were considering purchase ofanother piece of equipment the com-pany already owned, they had twochoices. They could try to find oneinside the company that wasn’t beingused, or they could go out and buyone. And one of the interesting dis-coveries in this process is that, be-cause of all the tariffs, it is sometimesmuch cheaper to get a piece of equip-ment from far away than from thecountry next door.

My idea for solving this problemwas that IBM could team up withRyder Logistics to build a kind ofglobal positioning device that wouldidentify all of a company’s majorpieces of equipment around the worldand the extent to which they are beingused. And this information could becombined with Ryder’s ability to tellthe company the most cost-effectiveway to get the equipment from itscurrent location to where it is needed.And I think you could price this kindof service not as a commodity, but asa value-added service. But, again, thekey to creating this kind of service isgetting outsourcing suppliers like IBMand Ryder to team up and worktogether.

Using Contract Design to AlignIncentives

GLASSMAN: Getting back to thediscussion of contracts we got intoearlier, what are the contractualchallenges of setting up a Dell-type partnership between a com-pany and its suppliers or outsourcingproviders? It seems to me there are atleast two major kinds of uncertaintythat you want to address in thesecontracts: technological change andfluctuations in demand for your prod-uct. How do you keep your relation-ship with your manufacturers while


still preserving the option to cut pro-duction during downturns? And whathappens if technological changesmakes it possible to produce some-thing more cheaply? Can you canwrite these contingencies into a con-tract? How do you make that kind ofthing work, Denny?McGUIRE: In the case of commoditymainframe outsourcing, you can tiethe contract to simple measures likeCPU cycles and costs per minute. But,in the case of strategic sourcing, theperformance criteria and metrics willbe very different. In those cases, thecontract is more likely to reflect acommitment not only to reducingcosts at some level per year but alsoto increasing functionality in variousways. I would also expect to see somemetrics in outsourcing contracts thatare now used to evaluate corporateinvestments in things like marketingand R&D. For example, investmentsin marketing can influence how anindustry or business will grow.

In fact, a lot of people in IToutsourcing would like to base theirdeals on business metrics. The prob-lem in doing this, however, is thatvery little pure IT really affects thebusiness. But if you’re talking aboutstrategic sourcing, then you’re talkingabout relationships that can truly af-fect the business revenues and prof-its. Those are the cases where the useof business metrics in contractingcould really provide strong incentivesand add a lot of value.TYNDALL: I agree with you that “stra-tegic” is a great word to describe theway Dell and Cisco use outsourcing.Cisco created “supplier councils,”where their partner suppliers meetmonthly in a room like this and talkopenly about problems and best prac-tices. And it’s important to keep inmind that Cisco’s suppliers are oper-ating not just as contractual suppliers,but as partners that share in the gains.So, along with sharing gains and the

costs arising from problems, theyshare knowledge and information andexamples of best practices. It’s a prettyremarkable thing—and it’s also inter-esting to note that supplier councils isan old idea, it’s been around a longtime. But Cisco has made it work. Andthey’ve made it work through partner-ships, not through 600-page contracts.McGUIRE: One interesting new kindof collaboration is the trade exchangerecently announced by GM, Ford,and DaimlerChrysler. The impetus forthat arrangement actually came fromthe suppliers, who said, “Surely you’renot going to cause us all to have threedifferent kinds of procurement sys-tems with different standards. Whydon’t you three get together.” Now, Inever thought I would live to see GMand Ford agree to collaborate onsomething like this. They can’t evenagree to go to lunch together. But thiswhole issue of how to take money outof the supply chain is so importantthat they are not only are teamingtogether, but they’ve created an entitythat will have $30 to $100 billionworth of market cap if they pull it off.

But, again, it was the suppliers whopushed the idea. So, it’s not anadversarial relationship or a matter ofjust extracting cost from the supplier.The question is, how do you helpyour supplier succeed so that bothparties become more profitable?GLASSMAN: So, you’re saying thatalthough cost reduction is part of theprocess, outsourcing is not abouttrying to transfer costs to suppliers;it’s not a zero-sum game. It’s aboutcreating more value that can be sharedby both parties to the deal. And that’sespecially true of strategic deals. So,for example, Ford may end up decid-ing that it wants to be in productdevelopment, sales and marketing,and the service business, but not inmanufacturing. Yet even if they de-cide there’s no way they can addvalue in manufacturing, they will still

have a strong interest in helping theirsuppliers be successful—if only be-cause their own success will dependon it. And, in this fashion, anoutsourcing decision could end upleading to a different business model,a new way of delivering products andservices to the marketplace.McGUIRE: That’s right. Although youmay begin with the intent of beatingyour suppliers down by another per-cent or two on their costs, you mayend up coming to the realization thatif you actually work with them to seehow you can integrate them into yourprocesses, you’re likely to find thatthere are significant additional sav-ings that can be shared. Coming tothis realization would be a big changein mindset for a lot of companies.

The Importance of Trust

GLASSMAN: The importance of build-ing trust has been mentioned severaltimes in this discussion. If there’s onecritical success factor to makingoutsourcing work, that might be it. It’strust that might enable you to havesomewhat less rigid contracts that canaccommodate change. Tell me a littlebit about the building of trust. Howlong does it take? How is that done?What is it that might undermine trustbetween the parties?THOMPSON: There are at least threeimportant dimensions to building trust.One of them, as we were just discuss-ing, is reaching an agreement that’struly a win-win agreement—one inwhich both parties get significantbenefits. It’s important that TPI andthe customers know when they’vepushed about as far as they shouldbefore they have created a fractureddeal that has no chance to survive.

Second, when the deal moves intoexecution, both parties have to liveup to the spirit of the agreement; theyhave to walk the walk, to make goodon their commitments. Now, IBM


rarely has problems with customersacknowledging the strength or cred-ibility of its general principles. Ourprinciples are very clear and they’reregarded by most outsiders as provid-ing a good model. But, when it comesto execution, there can be problemssometimes for any service providereven when they start with a goodcontract and the best of intentions.For example, someone in yourcompany’s organization may havepromised a deliverable that was go-ing to be done by a certain date, thedeadline’s missed, and it becomes aproblem for the customer. In thiscase, the key question becomes: Howdo you behave in crisis? Is there anorderly process for speedy resolu-tion? Is there a sense of leadership insolving the problem—one that pro-vides closure that links back into theirbusiness? Does the process lead to aworking relationship and businessmodel that is far better than the cus-tomer was expecting? Is there some-one responsible for working closelywith the client to ensure that apparentchaos doesn’t turn into real chaos, butjust a problem to be managed through?

Customers watch very carefully howyou respond in problem situations.Creating that sense of calm as youwork through it and doing it fast isimportant. For, as much as any ser-vice provider would hate to havethese things happen, they do happen.

Another important factor in build-ing trust is continuous communica-tion between the two parties. And, ifyour contract isn’t so inflexible thatyou have to behave like a commodityprovider, the outsourcing providercan start to be pro-active in workingon improvements identified by thecustomer, or by consultants that arebrought in periodically to help link ITwith the business activities. But if youhave an inflexible contract, you willnever get to that value-added part ofthe process.

GLASSMAN: Denny, do you think EVAcould be used to play a role in organiz-ing some of those conversations?McGUIRE: If you’re doing commod-ity-type IT transactions, there are al-ready established metrics. But, as wemove toward business process andmore value-added kinds ofoutsourcing—toward transactions thatinvolve revenues as well as costs—then I agree that we need a new set ofmetrics to evaluate performance. EVAseems like an excellent candidate forthe job. You can take that measuredown to project managers who, al-though they have historically justmanaged by costs, could be encour-aged to make decisions based on thebroader view provided by EVA.GLASSMAN: As I said earlier, it seemsto me that, when you try to selloutsourcing to companies that arealready using EVA, you might have aneasier sell. EVA could provide a com-mon language to use in thinkingabout these deals.TYNDALL: Having a common busi-ness language would greatly helpboth processes—both in making theclient see the benefits and in negoti-ating the division of those benefitsbetween the provider and the cus-tomer. I can’t tell you how manytimes I have been sitting around atable, and I just know the client is notgetting it, not seeing the benefits.And this is particularly true whendealing in foreign cultures, wherepeople are not accustomed to think-ing in terms of shareholder valueadded. So providing a common busi-ness language would be a very im-portant accomplishment.

And let me say that I really like theidea of approaching the negotiationby setting out a picture of the totalgains and then finding the best shar-ing arrangement. That kind of gain-sharing is what you want in a part-nership. But you won’t get that re-sult in an adversarial contracting pro-

cess. In those cases, where there isalmost no upside possibility, thesupplier’s main interest is just to pro-tect its margin. But if you can paint acredible picture of a deal with sig-nificant upside, then you can have areally fruitful negotiating process—one that is likely to reveal opportu-nities. But, again, both parties haveto approach the deal in the spirit ofmaximizing the size of the prize.GLASSMAN: In so doing, you’relikely to get much higher total gainsthan you expected in the first place.That’s the magic of a well-designedpartnership.

Outsourcing Joint Ventures: TheCase of Bass Ale

GLASSMAN: Several people havementioned problems with the con-tracts, and the conflicts and divisive-ness that can arise from their lack offlexibility and incentives for coopera-tion. You’ve all suggested that whatwe want to create here are partner-ships, not contractual arrangementspitting one party’s interest against theother’s. So, what about the possibilityof joint ventures as a way of aligningthe incentives of both parties? Thisway, you actually get a formal part-nership with not only gain-sharing,but joint equity ownership.

This idea first occurred to me whenI was on a panel discussion at alogistics conference in Toronto lastfall. There was a gentleman from acompany called Exel Logistics, and hewas describing a logistics joint ven-ture that they took on with Bass, theEnglish brewing company. I’m notsure I have all my facts right, butapparently what happened is that theU.K. passed legislation which saidthat the breweries could no longerown the pubs that they were supply-ing. So, as part of the process ofselling its pubs, Bass entered into ajoint venture with Exel Logistics that


took over from Bass the whole logis-tics component of their deliveries tothe pubs and other customers. Andthat operation has proved so success-ful that the JV is now providing essen-tially the same services to other bev-erage companies.

So, what began as essentially acost center, performing a prettymundate set of tasks, has now beentransformed into a source of profitfor both companies. Simply by chang-ing the form of the organization, thecompanies have created an entirelynew business—and it accomplishedthis using many of the same peoplethat may have been performing in anot-so-great fashion under the oldstructure. What the new structuredoes is to give these people both ahigher level of accountability, prob-ably more-decision-making author-ity, but also much higher expectedpayoffs. So people’s incentives havechanged dramatically. They now getprofit-sharing, or maybe even eq-uity, in a small business where theycan see the payoff from their ownefforts. And, to the extent we canjudge from this case, this kind ofchange in organization structure andincentives can really energize people.And I’m not suggesting that thepeople before the deal were justgoing through the motions, but I’msure that after the deal they werethinking a lot more about how toimprove the operation.

So, it seems to me that if you’reworried about becoming a providerof commodity services, one answer isto use changes in organizational de-sign to craft an entirely different valueproposition. That is, just by thinkingmore about the organizational struc-ture of the deal, you might be able tocreate real value-adding partnerships.And I’m wondering if we can expectto see more of these outsourcing jointventures, if only because it’s some-times difficult to get gain-sharing into

contracts in ways that can’t be gamedby either party to the deal.TYNDALL: Several years ago, when Iwas still at Ernst & Young, we took alook at the possibility of getting intoIT outsourcing. For a number of rea-sons, we came to the conclusion thatwe could not compete, or at least notusing the conventional contractualarm’s-length deal. But we created anumber of joint ventures involving IT,including E & Y’s global JV with Shellin the U.K. and a JV with Farmland,which is the largest farmers’ coopera-tive in the U.S. Now what this meant—and I’ll use the second example toillustrate my point—was that we tookall the IT out of Farmland and bothparties contributed equity to the ven-ture. Instead of having two sets ofbooks and trying to work together,which is what happens in conven-tional outsourcing deals, there is onebook and it’s open to both parties. Sothere’s one set of financials, and thepartners share the profits from thisorganization. And people like theGartner Group have pointed to thisdeal, and others like it, and called itthe model of the future.

Unfortunately, JVs have not caughton that much in logistics. You men-tioned the one with Exel and Bass, butthere aren’t many other examples. AtRyder, we are now having discus-sions with a few select companiesabout JVs. But, as I said, in logisticsthe concept has not caught on.THOMPSON: My involvement in IBMwith joint ventures has been limited.They are very scarce in the U.S., butin Australia and New Zealand bothIBM and EDS are working on JV-typedeals. My main observation aboutsuch deals—again, based on my lim-ited involvement—is that they arehard to manage, and hard to keepalive. Our success rate has not beengreat. And the reasons I would givefor our lack of success are the clashingof cultures and the divergence of

interests. That’s why I think identify-ing compatible cultures and makingsure you really understand the gover-nance model, strategy, and tactics arecritical to success in these deals.

But we are using venture capitalistsas one vehicle for many of our e-business transactions. IBM has set upa fund that will invest over $500million with different venture capital-ists to expand our reach.McGUIRE: I would agree with Phil onthis. My experience has been thatprobably 95% of the outsourcing JVshave failed. But, interestingly enough,I think we’re going to see a lot moreof them going forward. I see noalternative, in large part because ofthe problem David mentioned ear-lier—it’s very difficult to get gain-sharing written into conventionaloutsourcing agreements that canmanage conflicts when things changeand interests diverge. The joint own-ership provided by a JV is likely to bethe best answer to this problem in alot of cases. And, as David also sug-gested, these are the value-addingcases where we would all like to begrowing our business.

I also think that many of these pastJV failures were designed by IT peoplewith very little business acumen. Theydidn’t realize that you need marketingexpertise, R&D, and administrativeand management support. Further-more, they did not realize that cost ofservices should be 25% to 50% ofrevenues, not 95%. But joint venturesand alliances are happening in allaspects of business, and they will besuccessful in outsourcing, too.GLASSMAN: Putting those deals to-gether is a different capability fromthe ones in most large corporations.And Phil’s idea of delegating this jobto venture capitalists sounds like agood one.McGUIRE: It’s not only a differentcapability, but really a differentmindset that’s required to set up these


deals. The risk aversion of corporatemanagers is another important rea-son why you don’t see manyoutsourcing joint ventures. The JVsyou do see generally involve a newgeneration of deal makers—peoplewho are used to taking risks andentering new markets.

The Internet and the Future ofOutsourcing

TYNDALL: We earlier touched onsomething that’s a concern for suppli-ers of large companies, and that is thetrading exchanges, the auction pro-cess in which suppliers we’ll be askedto compete for business based solelyon price. We’ve been talking aboutthe importance of building and sus-taining partnerships. But now we’recoming into this new world where, intheory at least, people can buy andsell things entirely on the Web. Sowhat happens to the idea of partner-ships? Does it just disappear?McGUIRE: Well, I think that the auc-tion process will help us finish mak-ing the commodity-type changes inthe supply chain. And what is consid-ered a value-adding kind of servicetoday will be considered a commod-ity in a year or two, as the bar iscontinually raised. The trade ex-changes that are now being set up invirtually every industry are going tosqueeze some obvious inefficienciesout of the system. But there will stillbe plenty of room for value-addingpartnerships that will be based onfactors other than price.

But, having said that, some suppli-ers are looking at some pretty scaryconsequences from this new Web-based price competition.GLASSMAN: Do you have a predic-tion on how this is all going to besorted out? For example, how willhigher quality suppliers be able todistinguish their product if the com-petition is only on price?

TYNDALL: Well, the auction purchas-ing process for most companies be-gins with fairly simple, commodity-type goods, with things that aren’tessential to the business. But the nextstep is that manufacturers start usingthis process to buy components fortheir own products. Now, I have noidea how far this is going to take us.We’ve always been wrong in ourpredictions about the Internet world.But my sense is these auctions aregoing to account for a larger andlarger fraction of the buying and sell-ing among businesses. I believe tradeexchanges are here to stay and theywill do nothing but grow.

So, we have to learn to live withthese trade exchanges. One responseby some companies to this new trad-ing platform has been to bring theirsuppliers with them. For example,companies like Cisco and Dell willcontinue to maintain their strong re-lations with their partner-suppliers bybringing them to the exchanges. Andalthough some of the auctions areopen to all qualified buyers and sup-pliers, there are also “private” ex-changes. This is what both GeneralMotors and Ford were doing prior totheir coming together withDaimlerChrysler.

So the exchanges will grow, andthis means that people have to bevery careful when providing servicesthat they do not become commodi-ties. And this will be a challenge forus at Ryder, where we will have tokeep finding new ways to add valuein logistics. We keep working on ourvalue proposition to differentiate ourservice, much as IBM does in IT.And, in fact, we use IT to differenti-ate our services.McGUIRE: Although I am very skep-tical about the price levels of manyInternet companies, I do think thesenior executives of all large compa-nies ought to go to a one-week work-shop on what the Internet and glo-

balization are doing to their busi-ness. I think they realize that theInternet is going to have a substantialimpact on their business; but, formany, I don’t see a real plan or senseof urgency. Look at the way thechemicals industry is changing. Andthe same is true of steel and paper,too. Once something becomes a com-modity, the Internet changes every-thing. People have compared theimportance of the Internet to theinvention of electricity, but I think abetter analogy is the creation of roadsduring the Roman empire.

For the past few years, a lot ofcompanies have been able to do littlemore than hold their own. And I havedoubts about their ability to survive,much less prosper in this new world.For many industries, increased reli-ance on outsourcing and other kindsof partnerships is going to be a keystrategy for survival.TYNDALL: But even if this is a newtechnology, it is is an old lesson. TheJapanese taught us the importance ofsupply chain management in the 1970swhen they started their just-in-timemanufacturing concepts. When I vis-ited Japan and Korea back then, Ifound several competitors all sharingthe same supplier. The benefit wasnot only getting customized compo-nents, but also in sharing costs on thedownside. That is, if the economyturned down for one firm’s product,the others might be doing well enoughpick up the slack. It was a essentiallya nationalistic approach, a coinsur-ance scheme that also turned out tostabilize profits in the process.

But let me say that I completelyagree with Denny’s point that, if ev-erything goes commodity, it’s goingto be tough. The U.S. has the onlyreally open market in the world. Andso if the other economies turn down,everyone will try to dump their sur-plus in the U.S.—and the Web willhelp them do that. In their home


markets, they will keep the prices oftheir products high, but they’ll use theWeb to gain market share in the U.S.and try to drive out U.S. competitors.And having observed the consumerelectronics business in the U.S. for acouple of years, I can tell you that it’sjust a dog-eat-dog environment.

So, as a result of the Web, we’llhave an infiltration of products madefrom cheap labor. And the wholeeconomy is going to be transformedin the process; the changes are goingto be more extreme than anything wehave experienced in the past.McGUIRE: There’s been very littlediscussion of the social consequencesof the new economy, but they’regoing to be dramatic. And, in fact, Ithink the changes are going to bemuch more dramatic in Japan and inEurope than in the U.S. In Japan, theproducts are so expensive because, inthe interest of full employment, thereare so many redundant people in thesupply chain. Now, if you think aboutwhat e-businesses and the aging popu-lation will end up doing in Japan, youcan come up with some pretty fright-ening scenarios.TYNDALL: I personally think thatJapan will be very slow to change.All of these middlemen in the sup-ply chain will be very hard to dis-

lodge. But change is coming. Withthe Internet, Japan is going to haveto change.GLASSMAN: Stern Stewart openedan office in Tokyo about two yearsago, and we are seeing a lot ofinterest in EVA principles. Sony isone of our clients. And I believe thatIBM has closed a couple of bigoutsourcing deals in Japan as well.So change might be coming soonerthan we think.THOMPSON: Perhaps, but we shouldnot lose sight of the fact that it takessubstantial time and resources to reachthe point of having just a signedcontract. Outsourcing is a major cul-tural change for them, just as it hasbeen in the U.S. And the issue of whathappens to their employees is a criti-cal one. We have hired most of thepeople that worked in the Japanesecompany’s IT operation that we werereplacing.McGUIRE: And I’ll bet you guaran-teed them pretty much lifetime em-ployment. And so the major ben-efits you sometimes get fromoutsourcing in terms of culturalchange and flexibility will be diffi-cult to achieve in Japan.TYNDALL: Having spent a year inKorea working with Samsung, I thinkthe Koreans move much faster than

the Japanese. And that’s why theKorean economy has responded sowell after the Asian crisis in ’98. Thateconomy has really been turnedaround, in large part because they’vebeen quicker to embrace free-marketprinciples. So, while I agree that Ja-pan is changing, I’m not sure they’rechanging as quickly as they should.We keep asking, “At the rate they’regoing, is there enough time time toget it all changed?”McGUIRE: I don’t think there isenough time. In the United Stateswe’ve gone through a 20-year pe-riod of deregulation in which com-panies have been forced to downsizeand restructure and reorganize. Withthe globalization that’s now goingon, and especially the Internet,Europe is going to have to accom-plish in three years the changeswe’ve done in 20?

So outsourcing in Europe will bedramatic. But how do you change thatfast? There’s going to be big challengesin getting deals done in Europe, butalso tremendous opportunities.GLASSMAN: Well, that sounds likethe end of our discussion. I want tothank each of you for agreeing toparticipate and making it so livelyand informative. Thank you verymuch.

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stern stewart roundtable on eva and corporate outsourcing

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